A Note On Investment Strategies Involving Options
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EXHIBIT I Contd..
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Example:
A three month put and call option contract are available at the
exercise price of Rs. 240 (Xt1) and Rs. 280 (Xt2) respectively.
An investor trades in a 3-month call and put options contract as
follows:
| |
Bought (Rs. |
Sold (Rs.) |
Premium (Paid)/Recd. |
| Call |
240 |
280 |
|
| Premium |
-28 |
20 |
-8 |
| |
|
|
|
| Put |
280 |
240 |
|
| Premium |
-28 |
20 |
-8 |
| Total |
|
|
-16 |
The investor has created a box spread by
using a bull spread and a bear spread. He will have a
constant payoff of Rs. 40 and a net profit of Rs. 24,
irrespective of the fluctuations in the market price. For
example, if the spot price is Rs. 220, the call options will
not be exercised and only put options would be exercised.
The investor will have to honor the put option sold at Rs.
240 while he will exercise the put option bought by him at
Rs. 280, thus giving him a payoff of Rs. 40 and a net profit
of Rs. 24 (payoff minus premium paid). If the spot price
increases to Rs. 300, only call options will be exercised.
In such a situation, the investor will buy a call option at
Rs. 240, and sell one at Rs. 280 thus, getting a payoff of
Rs. 40 and a net profit of Rs. 24.
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ADDITIONAL READINGS & REFERENCES:
1.Options, Futures and Other
Derivatives, John C. Hull, Prentice-Hall of India Private Limited, February
1999.
2.Konstandatos, Otto A Brief History of Options, www.maths.usyd.edu.au,
November 3, 2000.
3.Summa, John E. The Importance of Time-Value, February 13, 2001.
4.Jhaveri, Hiten Options Trading Strategy Guide: Introduction to Basics,
Stock Whizo, June 29, 2001.
5.Options: Some basic terminology, The Hindu Business Line, July 22, 2001.
6.Financial Risk Management, IUP, October 2001.
7.Yates, Len Using Combinational Option Strategies, www.optionvue.com.
8.Yates, Len Choosing the Best Option to Purchase, www.optionvue.com.
9.Options Basics: Why Use Options?, www.investopedia.com.
10.20 Investments Every Investor Should Know, www.investopedia.com.
11.Venkatesh, B. Option value Vs Option price, The Hindu Business Line,
September 15, 2002
12.A Primer on Options – What is an option?, The Hindu Business Line,
October 06, 2002..
13.Strong A., Robert Derivatives – An Introduction, South-Western
Publishers, 2002.
14.www.mrstock.com
15.www.amex.com
16.www.numa.com/derivs
17.www.investopedia.com
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