Chapter 12

Trading Strategies Involving

Options

Options, Futures, and Other Derivatives, 9th Edition,

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Strategies to be Considered
Bond plus option to create principal
protected note
Stock plus option
Two or more options of the same type (a
spread)
Two or more options of different types (a
combination)

Options, Futures, and Other Derivatives, 9th Edition,

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Principal Protected Note
Allows investor to take a risky position without
risking any principal
Example: $1000 instrument consisting of
3-year zero-coupon bond with principal of $1000
3-year at-the-money call option on a stock portfolio
currently worth $1000

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Principal Protected Notes continued
Viability depends on
Level of dividends
Level of interest rates
Volatility of the portfolio
Variations on standard product
Out of the money strike price
Caps on investor return
Knock outs, averaging features, etc

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Positions in an Option & the Underlying
(Figure 12.1, page 257)

Profit Profit

K
K ST ST
(a)
(b
Profit Profit )

K
ST K ST

(c (d
Options,)Futures, and Other Derivatives, 9th Edition, )
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Options, Futures, and Other Derivatives, 9th Edition,
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Bull Spread Using Calls
(Figure 12.2, page 258)

Profit

ST
K1 K2

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Bull Spread Using Puts
Figure 12.3, page 259

Profit

K1 K2 ST

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Bear Spread Using Puts
Figure 12.4, page 260

Profit

K1 K2 ST

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Bear Spread Using Calls
Figure 12.5, page 261
Profit

K1 K2 ST

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Box Spread
A combination of a bull call spread and
a bear put spread
If all options are European a box spread
is worth the present value of the
difference between the strike prices
If they are American this is not
necessarily so (see Business Snapshot
11.1)
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Butterfly Spread Using Calls
Figure 12.6, page 262
Profit

K1 K2 K3 ST

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Butterfly Spread Using Puts
Figure 12.7, page 264

Profit

K1 K2 K3 ST

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Calendar Spread Using Calls
Figure 12.8, page 265

Profit

ST
K

Options, Futures, and Other Derivatives, 9th Edition,

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Calendar Spread Using Puts
Figure 12.9, page 266

Profit

ST
K

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A Straddle Combination
Figure 12.10, page 267

Profit

K ST

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Strip & Strap
Figure 12.11, page 268

Profit Profit

K ST K ST

Strip Strap
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A Strangle Combination
Figure 12.12, page 269

Profit

K1 K2
ST

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Other Payoff Patterns
When the strike prices are close together a
butterfly spread provides a payoff consisting
of a small “spike”
If options with all strike prices were available
any payoff pattern could (at least
approximately) be created by combining the
spikes obtained from different butterfly
spreads

Options, Futures, and Other Derivatives, 9th Edition,

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