option trading strategies

FINANCIAL DERIVATIVES

Option Trading Strategies

An analysis of various strategies and their applicability in various situations

Akshit Kumar GuptaOmkar Sushil Samvatsar

Sudesh JainVedank Parashar

20-Sep-10

ContentsObjective & basics.......................................................................................................................................3

Introduction to Option Strategies................................................................................................................3

Long Combo.............................................................................................................................................3

Long Straddle...........................................................................................................................................4

Short Straddle..........................................................................................................................................4

Long Strangle...........................................................................................................................................5

Short Strangle..........................................................................................................................................5

Collar.......................................................................................................................................................6

Bull Call Spread Strategy..........................................................................................................................7

Long Call Butterfly...................................................................................................................................7

Short Call Butterfly..................................................................................................................................8

Long Call Condor......................................................................................................................................9

Short Call Condor.....................................................................................................................................9

The Flow....................................................................................................................................................10

The Model.................................................................................................................................................11

Understanding the Document...................................................................................................................11

Views & Strategies.....................................................................................................................................13

Case 1....................................................................................................................................................13

Short Strangle....................................................................................................................................13

Short Straddle....................................................................................................................................14

Long Call Butterfly..............................................................................................................................14

Long Call Condor................................................................................................................................16

Wrong View - Case 1..........................................................................................................................18

Case 2....................................................................................................................................................19

Bear Put Spread.................................................................................................................................19

Bear Call Spread.................................................................................................................................20

Wrong View - Case 2..........................................................................................................................20

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Case 3....................................................................................................................................................22

Bull Put Spread..................................................................................................................................22

Bull Call Spread..................................................................................................................................22

Long Combo.......................................................................................................................................23

Collar.................................................................................................................................................24

Wrong View - Case 3..........................................................................................................................25

Case 4....................................................................................................................................................27

Case 4A..............................................................................................................................................27

Case 4 B.............................................................................................................................................32

Wrong View - Case 4..........................................................................................................................37

General conclusion – Case 4..............................................................................................................38

Case 5....................................................................................................................................................39

Long Straddle.....................................................................................................................................39

Long Strangle.....................................................................................................................................40

Short Call Butterfly.............................................................................................................................41

Short Call Condor...............................................................................................................................42

Wrong View - Case 5..........................................................................................................................44

Case 6....................................................................................................................................................46

Short Strangle....................................................................................................................................46

Short Straddle....................................................................................................................................47

Long Call Butterfly..............................................................................................................................47

Long Call Condor................................................................................................................................49

Wrong View - Case 6..........................................................................................................................51

Conclusion.................................................................................................................................................52

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Objective & basicsObjective is to apply different option strategies based on the views & validate the results. Also, understanding the significance/insignificance of view when adopting strategy is to be done.

Different views have been taken at different points of time. Based on them, different option strategies have been tested on actual data from NSE. We have considered only Index Options as they are European i.e for study our underlying asset is NIFTY index.

Introduction to Option Strategies

(Source: The description of the various option strategies has been taken directly from the NCFM modules from the NSE website. (Link: http://www.nseindia.com/content/ncfm/sm_otsm.zip))

‘Fundamentals of Futures and Options Markets’ - John C. Hull (Ch- 10) has also been referred for understanding of the trading strategies.

Long ComboSell OTM Put, Buy OTM Call

A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move up he can do a

Long Combo strategy. It involves selling an OTM (lower strike) Put and buying an OTM (higher strike)

Call. This strategy simulates the action of buying a stock (or a future) but at a fraction of the stock price.

It is an inexpensive trade, similar in pay-off to Long Stock, except there is a gap between the strikes

(please see the payoff diagram). As the stock price rises the strategy starts making profits.

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http://www.nseindia.com/content/ncfm/sm_otsm.zip)

Long StraddleBuy call; Buy put with same maturity

A Straddle is a volatility strategy and is used when the stock price / index is expected to show large

movements. This strategy involves buying a call as well as put on the same stock / index for the same

maturity and strike price, to take advantage of a movement in either direction, a soaring or plummeting

value of the stock / index. If the price of the stock / index increases, the call is exercised while the put

expires worthless and if the price of the stock / index decreases, the put is exercised, the call expires

worthless. Either way if the stock / index show volatility to cover the cost of the trade, profits are to be

made. With Straddles, the investor is direction neutral. All that he is looking out for is the stock / index

to break out exponentially in either direction.

Short StraddleSell Call; sell put with same maturity

A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels

the market will not show much movement. He sells a Call and a Put on the same stock / index for the

same maturity and strike price. It creates a net income for the investor. If the stock / index do not move

much in either direction, the investor retains the Premium as neither the Call nor the Put will be

exercised. However, incase the stock / index moves in either direction, up or down significantly, the

investor’s losses can be significant. So this is a risky strategy and should be carefully adopted and only

when the expected volatility in the market is limited. If the stock / index value stays close to the strike

price on expiry of the contracts, maximum gain, which is the Premium received is made.

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Long StrangleBuy OTM put and buy OTM call

A Strangle is a slight modification to the Straddle to make it cheaper to execute. This strategy involves

the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money

(OTM) call of the same underlying stock / index and expiration date. Here again the investor is

directional neutral but is looking for an increased volatility in the stock / index and the prices moving

significantly in either direction. Since OTM options are purchased for both Calls and Puts it makes the

cost of executing a Strangle cheaper as compared to a Straddle, where generally ATM strikes are

purchased. Since the initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be

higher. However, for a Strangle to make money it would require greater movement on the upside or

downside for the stock / index than it would for a Straddle. As with a Straddle, the strategy has a limited

downside (i.e. the Call and the Put premium) and unlimited upside potential.

Short StrangleSell OTM put; Sell OTM call

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A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the

trade for the Seller of the options by widening the breakeven points so that there is a much greater

movement required in the underlying stock / index, for the Call and Put option to be worth exercising.

This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) put and a slightly

out-of-the-money (OTM) call of the same underlying stock and expiration date. This typically means that

since OTM call and put are sold, the net credit received by the seller is less as compared to a Short

Straddle, but the break even points are also widened. The underlying stock has to move significantly for

the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement,

the seller of the Strangle gets to keep the premium.

CollarBuy ATM put, sell OTM call

A Collar is similar to Covered Call (Strategy 6) but involves another leg – buying a Put to insure against

the fall in the price of the stock. It is a Covered Call with a limited risk. So a Collar is buying a stock,

insuring against the downside by buying a Put and then financing (partly) the Put by selling a Call.

The put generally is ATM and the call is OTM having the same expiration month and must be equal in

number of shares. This is a low risk strategy since the Put prevents downside risk. However, do not

expect unlimited rewards since the Call prevents that. It is a strategy to be adopted when the investor is

conservatively bullish.

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Bull Call Spread StrategyBuy ITM Call Option, Sell OTM Call Option

A bull call spread is constructed by buying an in-the-money (ITM) call option, and selling another out-of-

the-money (OTM) call option. Often the call with the lower strike price will be in-the-money while the

Call with the higher strike price is out-of-the-money. Both calls must have the same underlying security

and expiration month. The net effect of the strategy is to bring down the cost and breakeven on a Buy

Call (Long Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish,

because the investor will make a profit only when the stock price / index rise. If the stock price falls to

the lower (bought) strike, the investor makes the maximum loss (cost of the trade) and if the stock price

rises to the higher (sold) strike, the investor makes the maximum profit.

Long Call ButterflySell 2 ATM Call Options, Buy 1 ITM Call Option And Buy 1 OTM Call Option.

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A Long Call Butterfly is to be adopted when the investor is expecting very little movement in the stock

price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good

risk / reward ratio, together with low cost. A long butterfly is similar to a Short Straddle except your

losses are limited. The strategy can be done by selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM

Call options (there should be equidistance between the strike prices). The result is positive incase the

stock / index remains range bound. The maximum reward in this strategy is however restricted and

takes place when the stock / index is at the middle strike at expiration. The maximum losses are also

limited.

Short Call ButterflyBuy 2 ATM Call Options, Sell 1 ITM Call Option And Sell 1 OTM Call Option.

A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call Butterfly, which is a

range bound strategy. The Short Call Butterfly can be constructed by Selling one lower striking in-the-

money Call, buying two at-the-money Calls and selling another higher strike out-of-the-money Call,

giving the investor a net credit (therefore it is an income strategy). There should be equal distance

between each strike. The resulting position will be profitable in case there is a big move in the stock /

index. The maximum risk occurs if the stock / index is at the middle strike at expiration. The maximum

profit occurs if the stock finishes on either side of the upper and lower strike prices at expiration.

However, this strategy offers very small returns when compared to straddles, strangles with only slightly

less risk.

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Long Call Condor Buy 1 ITM Call Option (Lower Strike), Sell 1 ITM Call Option (Lower Middle), Sell 1 OTM Call Option (Higher Middle) and Buy 1 OTM Call Option (Higher Strike)

A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two middle sold

options have different strikes. The profitable area of the pay off profile is wider than that of the Long

Butterfly (see pay-off diagram). The strategy is suitable in a range bound market. The Long Call Condor

involves buying 1 ITM Call (lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call (higher

middle) and buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that

the risk is capped on both the sides. The resulting position is profitable if the stock / index remains range

bound and shows very little volatility. The maximum profits occur if the stock finishes between the

middle strike prices at expiration.

Short Call Condor

Short 1 ITM Call Option (Lower Strike), Long 1 ITM Call Option (Lower Middle), Long 1 OTM Call Option (Higher Middle), Short 1 OTM Call Option (Higher Strike).

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A Short Call Condor is very similar to a short butterfly strategy. The difference is that the two middle

bought options have different strikes. The strategy is suitable in a volatile market. The Short Call Condor

involves selling 1 ITM Call (lower strike), buying 1 ITM Call (lower middle), buying 1 OTM call (higher

middle) and selling 1 OTM Call (higher strike). The resulting position is profitable if the stock / index

shows very high volatility and there is a big move in the stock / index. The maximum profits occur if the

stock / index finish on either side of the upper or lower strike prices at expiration.

The FlowI. Six different views on the NIFTY index were taken.

1. No significant movement in index from current value2. Bearish 3. Bullish 4. Highly Volatile, uncertain about the direction5. Index expected to lie outside certain range 6. Index expected to lie within certain range

II. The Nifty index values were analyzed to identify the periods where these views were actually valid.

III. All the strategies corresponding/suitable to these views were taken and payoffs calculated for these strategies using actual data for option prices (See the section on ‘The Model’). The view was taken for the expiry date for which the option is available.

IV. For each of the views taken, opposite view was also assumed for the corresponding period & one of the strategies suitable for this opposite view was implemented and tested.

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The Model

A modular approach has been taken where programmable excel model for calculating payoffs for call and put option were created. These models for the calculation of payoffs were used in the calculation of overall payoffs for different strategies used in accordance to the views. The following are the prototype models made for calculating the payoffs in call and put option.

Prototype for Call Option Prototype for Put Option

The spot price of the NIFTY index value on the particular date is entered and the option

price on the particular date for a particular strike price is entered. The strike price is chosen according to the requirements of the strategy which requires

the call or put to be in-the-money or out-of-the-money. Buy or sell is indicated by the binary value of 0 and 1 where buy is indicated by entering

0 and sell by indicating 1. It then calculates the profit value by using the excel formula.

Strategies that have been used are combination of put options, call options and underlying market index. These have been created by using above mentioned prototypes.

Understanding the Document

The following part of the document is structured into 6 cases as mentioned above. For each case following structure has been followed (Words in italics here indicate various sections in each case)

View:

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Call Option Spot Price

2697.05

Strike Price

4850

Option Price

19.95

Buy or Sell

0

Profit -19.95

Put OptionSpot Price

2697.05

Strike Price

3750

Option Price

47.05

Buy or Sell

1

Profit -1005.9

This indicates the view taken.

Time T0= XYZ: S&P CNX NIFTY Index = XYZ

Here T0 indicates the time when view and position will be taken. S&P CNX Nifty Index at T0 is mentioned alongside.

Applicable option strategy

This section denotes the strategies that are applicable for the mentioned view. Alongside this available and applicable option with their strike prices & option prices at T0 have been mentioned.

The table that follows shows the actual implementation of the strategy using the prototypes mentioned above.

Time T1= XYZ: S&P CNX NIFTY Index = XYZ

Time T1 indicates the expiration date of the option.

The table that follows shows the actual implementation of the strategy using the prototypes mentioned above.

For each case wrong view & one strategy implementation based on this wrong view has been done. Based on these conclusions have been drawn.

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Views & Strategies

Case 1View: No significant movement in index from current value in next 15 days

Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15

Applicable option strategy: Short Strangle, Short Straddle, Long Call Butterfly, Long Call Condor

(Time T1=29-07-2010: S&P CNX NIFTY Index = 5408.9)

Short StrangleTime T0=14-07-2010: S&P CNX NIFTY Index = 5386.15

Available options: Call Option X= 5400, Option price= 64.95

Put Option X= 5300, Option price=43.20

This strategy involves simultaneous selling of out of money put and call on the same underlying asset. So the above mentioned options have been selected.

Spot Price 5386.15

Call Option Put OptionSpot Price 5386.15 Spot Price 5386.15Strike Price 5400 Strike Price 5300Option Price 64.95 Option Price 43.2Buy or Sell 1 Buy or Sell 1Profit 64.95 Profit 43.2


Spot Price 5408.9


Net Profit 99.25

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Short StraddleTime T0=14-07-2010: S&P CNX NIFTY Index = 5386.15



Call and put on the same underlying asset needs to be sold & hence above mentioned options have been selected.

Spot Price 5386.15Strike Price 5400 Same Strike Price


Time T1=29-07-2010:S&P CNX NIFTY Index = 5408.9



Net Profit 134.2

Long Call ButterflyTime T0=14-07-2010: S&P CNX NIFTY Index = 5386.15

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Call Option X= 5100, Option price= 296.25


The strategy involves selling 2 ATM calls, buying one ITM call & buying 1 OTM call option. Based on this above mentioned options have been selected.

Spot price 5386.15

Call Option

Spot Price 5386.15Strike Price 5400Option Price 64.95 Strike Price 5400Buy or Sell 1 Option Price 64.95Profit 64.95 2 call options sell

Call OptionSpot Price 5386.15Strike Price 5400Option Price 64.95Buy or Sell 1Profit 64.95

Call Option Call OptionSpot Price 5386.15 Spot Price 5386.15Strike Price 5100 Strike Price 5700Option Price 296.25 Option Price 2.4Buy or Sell 0 Buy or Sell 0Profit -10.1 Profit -2.4

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Spot price 5408.9

Call Option



Call Option Call OptionSpot Price 5408.9 Spot Price 5408.9Strike Price 5100 Strike Price 5700Option Price 296.25 Option Price 2.4Buy or Sell 0 Buy or Sell 0Profit 12.65 Profit -2.4

Net Profit 122.35

Long Call CondorTime T0=14-07-2010: S&P CNX NIFTY Index = 5386.15



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This strategy involves buying 1 ITM call(lower strike), selling 1 ITM call(lower middle), selling 1 OTM call (higher middle) and buying 1 OTM call (higher call). Hence above mentioned options have been selected.

Spot price 5386.15

Call Option Call OptionSpot Price 5386.15 Spot Price 5386.15Strike Price 5000 Strike Price 5200Option Price 393.25 Option Price 207.1Buy or Sell 0 Buy or Sell 1Profit -7.1 Profit 20.95



Spot price 5408.9



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Net Profit 32.3

Wrong View - Case 1View: Significant movement in index from current value in next 15 days


Applicable option strategy: Long Strangle, Long Straddle, Short Call Butterfly, Short Call Condor

Implemented option strategy: Long Strangle


Long StrangleTime T0=14-07-2010: S&P CNX NIFTY Index = 5386.15



Spot Price 5386.15

Call Option Put OptionSpot Price 5386.15 Spot Price 5386.15Strike Price 5400 Strike Price 5300Option Price 64.95 Option Price 43.2Buy or Sell 0 Buy or Sell 0Profit -64.95 Profit -43.2


Spot Price 5408.9


Net Profit -99.25

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Case 2View: Decline in index expected in next one & half month.


Applicable option strategy: Bear Call Spread, Bear Put Spread


Bear Put Spread Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05

Available options: Put option X= 3750, Option price= 47.05

Put Option X= 4850, Option price=700

This strategy involves buying 1 ITM put option & selling 1 OTM put option. Hence above mentioned options have been selected.

Put Option Put OptionSpot Price 4223.0

5Spot Price 4223.05

Strike Price 3750 Strike Price 4850Option Price 47.05 Option Price 700Buy or Sell 1 Buy or Sell 0Profit 47.05 Profit -73.05

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Put Option Put OptionSpot Price 2697.05 Spot Price 2697.05Strike Price 3750 Strike Price 4850Option Price 47.05 Option Price 700Buy or Sell 1 Buy or Sell 0Profit -1005.9 Profit 1452.95

Net Profit 447.05

Bear Call Spread


Available options: Call Option X= 4850, Option price=19.95

Call Option X= 3850, Option price=376.1

This strategy involves buying one OTM call option & selling one ITM call option.



Net Profit 356.15

Wrong View - Case 2View: Rise in index expected in next one & half month.


Applicable option strategy: Bull Call Spread, Bull Put Spread, Long Combo, Collar

Implemented option strategy: Bull Put Spread


Bull Put Spread Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05

Available options: Put option X= 3750, Option price= 47.05


Spot Price 4223.05

Put Option Put OptionSpot Price 4223.05 Spot Price 4223.05Strike Price 4000 Strike Price 3750Option Price 103.2 Option Price 47.05Buy or Sell 1 Buy or Sell 0Profit 103.2 Profit -47.05

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Spot Price 2697.05

Put Option Put OptionSpot Price 2697.05 Spot Price 2697.05Strike Price 4000 Strike Price 3750Option Price 103.2 Option Price 47.05Buy or Sell 1 Buy or Sell 0Profit -1199.75 Profit 1005.9

Net Profit -193.85

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Case 3View: Increase in index expected in next 2 months


Applicable option strategy: Bull Call Spread, Bull Put Spread, Long Combo, Collar


Bull Put Spread


Available options: Put Option X= 4000, Option price= 57.1


For this strategy lower strike put purchased is further OTM than higher strike put. Based on this above mentioned options have been selected.




Net Profit 52.6

Bull Call Spread Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90

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Available options: Call Option X= 3000, Option price= 1550


Here 1 ITM call should be bought and 1 OTM call be sold. Options above have been selected accordingly.

Call Option Call OptionSpot Price 4563.9 Spot Price 4563.9Strike Price 3000 Strike Price 5500Option Price 1550 Option Price 10.15Buy or Sell 0 Buy or Sell 1Profit 13.9 Profit 10.15


Call Option Call OptionSpot Price 5201.05 Spot Price 5201.05Strike Price 3000 Strike Price 5500Option Price 1550 Option Price 10.15Buy or Sell 0 Buy or Sell 1Profit 651.05 Profit 10.15

Net Profit 661.2

Long ComboTime T0=03-11-2009: S&P CNX NIFTY Index = 4563.90


Put Option X= 2500, Option price=2

Here OTM put (lower strike) be sold & OTM call (higher strike) be bought. Based on this above option prices have been selected. (Here the design should be such that strike price selected is less than expected rise in the index)

Call Option Put OptionSpot Price 4563.9 Spot Price 4563.9Strike Price 5000 Strike Price 2500Option Price 59.8 Option Price 2Buy or Sell 0 Buy or Sell 1

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Profit -59.8 Profit 2


Call Option Put OptionSpot Price 5201.05 Spot Price 5201.05Strike Price 5000 Strike Price 2500Option Price

59.8 Option Price

2

Buy or Sell 0 Buy or Sell 1Profit 141.25 Profit 2

Net Profit 143.25

CollarTime T0=03-11-2009: S&P CNX NIFTY Index = 4563.90

Available options: Call Option X= 5800, Option price= .3


Stock price = 4563.9 (same as Nifty index value)

Strategy requires ATM put & OTM call. Hence above mentioned options have been selected.

Stock Call Option Put OptionPurchase Price of Stock 4563.9 Spot Price 4563.9 Spot Price 4563.9Profit 0 Strike Price 5800 Strike Price 4600

Option Price 0.3 Option Price 217.5Buy or Sell 1 Buy or Sell 0Profit 0.3 Profit -181.4


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Stock Call Option Put OptionPurchase Price of Stock 4563.9 Spot Price 5201.05 Spot Price 5201.05Profit 637.15 Strike Price 5800 Strike Price 4600

Option Price 0.3 Option Price 217.5Buy or Sell 1 Buy or Sell 0Profit 0.3 Profit -217.5

Total Investment 4781.1

Profit 419.95

Wrong View - Case 3View: Decrease in index expected in next 2 months


Applicable option strategy: Bear Call Spread, Bear Put Spread

Implemented option strategy: Bear Put Spread


Bear Put SpreadTime T0=03-11-2009: S&P CNX NIFTY Index = 4563.90

Available options: Put Option X= 4000, Option price= 57.1


Spot Price 4563.9



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Spot Price 5201.05


Net Profit -432.5

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Case 4View: High uncertainty expected.

To study this case, we will take two subcases where index increased from current value & decreased from current value

Case 4AHigh uncertainty is expected till announcement of results (16-05-2009) – Actual index increased

Time T0=31-03-2009 :S&P CNX NIFTY Index = 3020.95

Applicable option strategy: Long straddle, Long strangle, Short call butterfly, Short call condor


Long StraddleTime T0=31-03-2009:

S&P CNX NIFTY Index = 3020.95

Available options:

Call Option Bought X= 3000, Option price= 202.65

Put Option Bought X= 3000, Option price=192.7

Strategy involves buying a call as well as a put on the same index at the same strike price.

Spot Price 3020.95

Strike Price 3000 Same Strike Price



Spot Price 4337.1

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Call Option Put OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 3000 Strike Price 3000Option Price 202.65 Option Price 192.7Buy or Sell 0 Buy or Sell 0Profit 1134.45 Profit -192.7

Net Profit 941.75

Long Strangle

Time T0=31-03-2009:


Available options:



Strategy involves 1 OTM put and 1 OTM call.

Spot Price 3020.95



Spot Price 4337.1

Call Option Put OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 3700 Strike Price 2500Option Price 51.1 Option Price 52.4

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Buy or Sell 0 Buy or Sell 0Profit 586 Profit -52.4

Net Profit 533.6

Short Call Butterfly

Time T0=31-03-2009:


Available options:

Two Call Options bought X= 3000, Option price=202.65

Sold Call Option X= 2800, Option price=339.85

Sold Call Option X=3200, Option price=109.80

This is constructed by selling one lower striking ITM call, buying two ATM calls and selling another OTM call. Based on this above options have been selected.

Spot price 3020.95

Call Option

Spot Price 3020.95Strike Price 3000Option Price 202.65 Strike Price 3000Buy or Sell 0 Option Price 202.65Profit -181.7 2 call options bought

Call OptionSpot Price 3020.95Strike Price 3000Option Price 202.65Buy or Sell 0Profit -181.7

Call Option Call Option

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Spot Price 3020.95 Spot Price 3020.95Strike Price 2800 Strike Price 3200Option Price 339.85 Option Price 109.8Buy or Sell 1 Buy or Sell 1Profit 118.9 Profit 109.8


Spot price 4337.1

Call Option

Spot Price 4337.1Strike Price 3000Option Price 202.65 Strike Price 3000Buy or Sell 0 Option Price 202.65Profit 1134.45 2 call options bought



Net Profit 44.35

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Short Call CondorTime T0=31-03-2009:


Available options:

Sold Call OptionX= 2800, Option price=339.85

Bought Call Option X= 2900, Option price=289.95



This strategy requires selling 1 ITM call, buying 1 ITM call, buying 1 OTM call and selling 1 OTM call.

Spot price 3020.95

Call Option Call OptionSpot Price 3020.95 Spot Price 3020.95Strike Price 2800 Strike Price 2900Option Price 339.85 Option Price 289.95Buy or Sell 1 Buy or Sell 0Profit 118.9 Profit -169



Spot price 4337.1

Call Option Call OptionSpot Price 4337.1 Spot Price 4337.1

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Strike Price 2800 Strike Price 2900Option Price 339.85 Option Price 289.95Buy or Sell 1 Buy or Sell 0Profit -1197.25 Profit 1147.15


Net profit 5.5

Case 4 BView: High uncertainty is expected till announcement of results (13-05-2004) – Actual index decreased

Time T0=20-04-2004 : S&P CNX NIFTY Index = 1844.25

Applicable option strategy: Long straddle, Long strangle, Short call butterfly, Short call condor


Long StraddleTime T0=20-04-2004


Available options:

Call Option bought X= 1900, Option price= 33.2

Put Option Bought X= 1900, Option price=90

Spot Price 1844.25


Call Option Put OptionSpot Price 1844.25 Spot Price 1844.25Strike Price 1900 Strike Price 1900Option Price 33.2 Option Price 90Buy or Sell 0 Buy or Sell 0

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Profit -33.2 Profit -34.25



Call Option Put OptionSpot Price 1586.4 Spot Price 1586.4Strike Price 1900 Strike Price 1900Option Price 33.2 Option Price 90Buy or Sell 0 Buy or Sell 0Profit -33.2 Profit 223.6

Net Profit 190.4

Long Strangle

Time T0=20-04-2004


Available options:



Spot Price 1844.25



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Spot Price 1586.4

Call Option Put OptionSpot Price 1586.4 Spot Price 1586.4Strike Price 1900 Strike Price 1800Option Price 33.2 Option Price 35.75Buy or Sell 0 Buy or Sell 0Profit -33.2 Profit 177.85

Net Profit 144.65


Time T0=20-04-2004


Available options:




Spot price 1844.25

Call Option



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Call Option Call OptionSpot Price 1844.25 Spot Price 1844.25Strike Price 1790 Strike Price 1890Option Price 117.05 Option Price 117.2Buy or Sell 1 Buy or Sell 1Profit 62.8 Profit 117.2


Spot price 1586.4

Call Option



Call Option Call OptionSpot Price 1586.4 Spot Price 1586.4Strike Price 1790 Strike Price 1890Option Price 117.05 Option Price 117.2Buy or Sell 1 Buy or Sell 1Profit 117.05 Profit 117.2

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Net Profit 114.55

Short Call CondorTime T0=20-04-2004


Available options:

Sold Call Option X= 1750, Option price=135

Bought Call Option X= 1780, Option price=58



Spot price 1844.25

Call Option Call OptionSpot Price 1844.25 Spot Price 1844.25Strike Price 1750 Strike Price 1780Option Price 135 Option Price 58Buy or Sell 1 Buy or Sell 0Profit 40.75 Profit 6.25



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Spot price 1586.4

Call Option Call OptionSpot Price 1586.4 Spot Price 1586.4Strike Price 1750 Strike Price 1780Option Price 135 Option Price 58Buy or Sell 1 Buy or Sell 0Profit 135 Profit -58


Net profit 68.6

Wrong View - Case 4View: Prices likely to continue at current range

Time T0=31-03-2009 : S&P CNX NIFTY Index = 3020.95

Applicable option strategy: Short straddle, Short strangle, Long call butterfly, Long call condor

Implemented option strategy: Short Straddle


Short StraddleTime T0=31-03-2009:


Available options:




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Net Profit -941.75

General conclusion – Case 4In either cases of extreme volatility (increase or decrease) investor can get positive returns.

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Case 5View: Index will not lie in the range 2100 to 3600

Time T0=: 31-03-2009 S&P CNX NIFTY Index = 3020.95

Applicable option strategy: Long Straddle, Long Strangle, Short call butterfly, Short call condor


Long StraddleTime T0=31-03-2009:


Available options:

Call Option bought X= 2500, Option price= 565

Put Option Bought X= 2500, Option price=52.4

Strategy involves buying a call as well as a put on the same index at the same strike price. Based on mentioned view range above options have been selected.


Call Option Put OptionSpot Price 3020.95 Spot Price 3020.95Strike Price 2500 Strike Price 2500Option Price 565 Option Price 52.4Buy or Sell 0 Buy or Sell 0Profit -44.05 Profit -52.4



Call Option Put OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 2500 Strike Price 2500Option Price 565 Option Price 52.4Buy or Sell 0 Buy or Sell 0

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Profit 1272.1 Profit -52.4

Net Profit 1219.7

Long Strangle

Time T0=31-03-2009:


Available options:



Strategy involves 1 OTM put and 1 OTM call. Based on mentioned view range above options have been selected.

Spot Price 3020.95



Spot Price 4337.1

Call Option Put OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 3200 Strike Price 2200Option Price 109.8 Option Price 25.9Buy or Sell 0 Buy or Sell 0Profit 1027.3 Profit -25.9

Net Profit 1001.4

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Time T0=31-03-2009:


Available options:




This is constructed by selling one lower striking ITM call, buying two ATM calls and selling another OTM call. Based on mentioned view range above options have been selected.

Spot price 3020.95

Call Option




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Spot price 4337.1

Call Option



Call Option Call OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 2300 Strike Price 3700Option Price 564.85 Option Price 51.1Buy or Sell 1 Buy or Sell 1Profit -

1472.25Profit -586

Net Profit 210.65

Short Call CondorTime T0=31-03-2009:

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Available options:




Sold Call Option X=3600, Option price=25

This strategy requires selling 1 ITM call, buying 1 ITM call, buying 1 OTM call and selling 1 OTM call. Based on mentioned view range above options have been selected.

Spot price 3020.95

Call Option Call OptionSpot Price 3020.95 Spot Price 3020.95Strike Price 2300 Strike Price 2900Option Price 564.85 Option Price 289.95Buy or Sell 1 Buy or Sell 0Profit -156.1 Profit -169

Call Option Call OptionSpot Price 3020.95 Spot Price 3020.95Strike Price 3100 Strike Price 3600Option Price 154.2 Option Price 25Buy or Sell 0 Buy or Sell 1Profit -154.2 Profit 25


Spot price 4337.1


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Call Option Call OptionSpot Price 4337.1 Spot Price 4337.1Strike Price 3100 Strike Price 3600Option Price 154.2 Option Price 25Buy or Sell 0 Buy or Sell 1Profit 1082.9 Profit -712.1

Net profit 45.7

Wrong View - Case 5View: Index will lie in the range 2100 to 3600


Applicable option strategy: Short Straddle, Short Strangle, Long call butterfly, Long call condor

Implemented option strategy: Short Strangle


Short StrangleS&P CNX NIFTY Index = 3020.95

Available options:



Spot Price 3020.95


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Spot Price 4377.1


Net Profit -1041.4

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Case 6View: Index will lie in the range 4500 to 5000


Applicable option strategy: Short Straddle, Short Strangle, Long call butterfly, Long call condor

(Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75)

Short StrangleTime T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85

Available options: Call Option X=5000, Option price=28.10


This strategy involves simultaneous selling of out of money put and call on the same underlying asset. Based on mentioned view range above options have been selected.

Spot Price 4826.85


Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75

Spot Price 4859.75


Net Profit 43.6

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Short StraddleTime T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85



Call and put on the same underlying asset needs to be sold. Based on mentioned view range above options have been selected.






Net Profit 124.1

Long Call ButterflyTime T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85




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The strategy involves selling 2 ATM calls, buying one ITM call & buying 1 OTM call option. Based on mentioned view range above options have been selected.

Spot price 4826.85

Call Option




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Spot price 4859.75

Call Option




Net Profit 69.8

Long Call CondorTime T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85





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This strategy involves buying 1 ITM call(lower strike), selling 1 ITM call(lower middle), selling 1 OTM call (higher middle) and buying 1 OTM call (higher call). Based on mentioned view range above options have been selected.

Spot price 4826.85




Spot price 4859.75



Net Profit 14.6

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Wrong View - Case 6View: Index will not lie in the range 4500 to 5000


Applicable option strategy: Long Straddle, Long Strangle, Short call butterfly, Short call condor

Implemented option strategy: Long Strangle

(Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75)

Long StrangleTime T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85

Available options: Call Option X=5000, Option price=28.10


Spot Price 4826.85



Spot Price 4859.75

Call Option Put OptionSpot Price 4859.75 Spot Price 4859.75Strike Price 5000 Strike Price 4500Option Price 28.1 Option Price 15.5Buy or Sell 0 Buy or Sell 0

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Profit -28.1 Profit -15.5

Net Profit -43.6

Conclusion

On observing net profit at T1 for each of the correct views & corresponding strategies we see positive values. So we conclude that testing the strategies on the actual option prices showed that, under different scenarios profit is obtained on applying strategies as applicable for the view.

Also when wrong views were taken losses were observed. So we conclude that when the strategies were applied for the opposite/wrong view and applicable strategies on the opposite views were adopted it led to loss.

This shows that if our view is right there will always be profits on applying the correct/appropriate strategy. But if the view is wrong the strategy leads to losses. It is not the derivatives, per say, which leads to losses but the wrong views which leads to a losses.

It is interesting to note that combination involving stocks and/or options can give very interesting payoffs which would be very useful if we have a very specific view of the future.

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option trading strategies

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