A Note On Investment Strategies Involving Options

INVESTMENT STRATEGIES INVOLVING OPTIONS Contd..

Table 13: Payoff using Strap

Payoff when S  Xt, (Xt – S)
Payoff when S > Xt, 2 (S –Xt)
Net profit = Payoff minus (C+P)

In this case, investors make profit when prices are significantly lower or higher than the current market price. The profit will be more when the rise in price of stock is huge as is also evident from the payoff diagram.

CONCLUSION:

This concept note deals in detail with the important investment strategies using options and explains how an investor can make profits not only from a rise in stock prices but also when the prices fall. If used judiciously, options can prove to be useful tools to hedge positions in shares. Moreover, buying an option involves a lower cost then actually acquiring the shares. However, options as an investment strategy is highly complex requiring a close watch and more than a basic knowledge of stock markets. Some other commonly used investment strategies have been described in Exhibit I.

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