VIII: Options
25: Options Strategies II
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collar
Hedging strategy on long shares Long 10,000 GE
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Long 10,000 GE
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
0 10 20 30 40 50 60 70 80
Value
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collar
Hedging strategy on long shares Long 10,000 GE Place a Protective Put
below the current market price of GE(out-of-the-money puts) 100 $30 June Put contracts @ 0.75
$7500.
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Long GE with a Protective Put
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
0 10 20 30 40 50 60 70 80
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collar
Hedging strategy on long shares Long 10,000 GE Place a Protective Put Generate $7500 by writing an out-of-the-
money call $45 June Call @ $1.75 Short 43 contracts
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Long GE with a Collar
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
0 10 20 30 40 50 60 70 80
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collar strategies
Should the collar use a $45 or $60 Call? Generate $7500 by writing an out-of-the-
money call $45 June Call contracts @ $1.75
43 contracts → $7525 $60 June Call contracts @ $0.75
100 contracts → $7500
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Long GE with a Collar
43 $45 collar
100 $60 collar
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
0 10 20 30 40 50 60 70 80
Chapter 25: Options Strategies
Other Options
© Oltheten & Waspi 2012
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Interest Rate Options
StrikePrice
Call PutsDec Jan Mar Dec Jan Mar
40 5.70 6.45 6.50 .95 .25
45 3.30 1.95 2.30 .50 0.60 .75
50 .90 .25 1.15 3.60 3.20 1.80
55 .35 .10 1.85 3.00 8.50 4.00
60 .35 0.65 8.00 13.20
65 .65 18.40
70 .10 23.60
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Interest Rate Options
Buy March 60 call @ 0.65 Pay $65 ($100 * 0.65)
-$500
$0
$500
$1,000
$1,500
$2,000
4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Barings Bank
Queen’s Bank Bankrupt and collapsed in February 1995
due to the actions of one derivatives trader in Barings Securities Singapore
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Index Options
Index options are contracts defined as money times an index. $100 * S&P500 (CBOE) Nikkei 225 index Options
SIMEX (Singapore) OSE (Osaka)
Index Options are generally European
© Oltheten & Waspi 2012
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Nikkei 225 Option Example
Buy a 14,000 Jan call at 12 Pay ¥12,000 ($120) for the right to purchase
the Nikkei at ¥14,000,000 ($140,000) in January
If in January the Nikkei 225 is at 14,200 Exercise (profit of ¥200,000 ($2,000))
If in January the Nikkei 225 is at 13,900 Expires worthless
© Oltheten & Waspi 2012
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Nikkei 225 Call
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
13600 13800 14000 14200 14400
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Nikkei 225 Option Example
Buy a 14,000 Jan put at 12 Pay ¥12,000 ($120) for the right to purchase
the Nikkei at ¥14,000,000 ($140,000) in January
If in January the Nikkei 225 is at 14,200 Expires worthless
If in January the Nikkei 225 is at 13,900 Exercise (profit of ¥100,000 ($1,000))
© Oltheten & Waspi 2012
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Nikkei 225 Put
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
13600 13800 14000 14200 14400
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collapse of Barings Bank
Futures
Options (Write Straddle)
17500 18000 18500 19000 19500 20000 20500
Chapter 25: Options Strategies © Oltheten & Waspi 2012
Collapse of Barings Bank
Arrested in Frankfurt in March 1995
Extradited to Singapore December 1995
Sentenced to 6 ½ years
Released July 1999
Currently lives in Ireland and trades only his own money
Options III