Options Trading Strategies

Long stock – Long Put:

1. Consider an investor who buys a share for Rs. 100. To guard against the risk of the loss
from a fall in the price, he buys a put option Rs. 16 for an Exercise price of Rs. 110.
Explain how his position will perform in different price scenarios on expiration.

2. An investor holds a long positon in 1000 shares of a JSW Steels Ltd. He bought these
shares at 210 each. Fearing a fall in the market, he has bought a put option contract
involving 1000 shares with exercise price of Rs. 212 at a premium of Rs. 7.80 per share.
Explain how this position will perform in different price scenarios on expiration.

Short Stock - Long Call:

3. An investor shorts a share at Rs. 100 and buys a call option for Rs. 4 with a strike price of
Rs. 105. How will this position perform?

4. An investor has a short positon of 500 shares at Rs. 412 each. Expecting a rise in the
market he decides to hedge his position by way of buying call option contracts at Rs. 410
by the way of paying premium of Rs. 5. Each contract consists of 250 shares. How will
this position perform in case of different share price below and above Rs. 410?

Long Stock – Short Call:

5. An investor who has bought a share for Rs. 100, and who writes a call with an exercise
price of Rs. 105, and receives a premium of Rs. 3. How will this positon perform?

6. Mr. Shukla holds 1000 shares of Kotak Bank Ltd., which he acquired at an average price
of Rs. 210 each. Anticipating a fall in the market, he decides to sell call options on Kotak
at the level of Rs. 210 for a premium of Re. 1. Each contract consists of lot size of 1000
shares so he decides to short one call option contract. Explain how his position will
perform in various price scenarios.

Short stock - Short put:

7. An investor shorts a share art Rs. 100 and writes a put option for Rs. 3, having an
exercise price at Rs. 100. Prepare a profit/loss profile for this position.

OPTIONS SPREADS
Bull Spread: Using Call Options
Taking a positon in two or more options of the same type.
This strategy involves buying a call option at lower exercise price with higher premium and
selling another call at higher exercise price with lower premium.
The main reason why you would use this spread is to try and profit from an asset increasing in
price. You would typically use it when you expected the price of an asset to increase
significantly, but not dramatically (as the profit potential is limited).
The strategy is basically designed to reduce the upfront costs of buying calls so that less capital
investment is required, and it can also reduce the effect of time decay. And perfectly suitable
for beginners.

8. Mr. Prasanna decides to create a Bull Spread by way of buying a Feb., 2020 call option
on a stock, with an exercise price of Rs. 100 for Rs. 5 and selling a call option on it
involving an exercise price of Rs. 110 for Rs. 2. Find out how much profit/loss he makes
in each of the following conditions:
 On settlement day, the price of the underlying stock is Rs. 95 per share.
 On settlement day, the price of the underlying stock is Rs. 106 per share.
 On settlement day, the price of the underlying stock is Rs. 113 per share.

9. A trader buys for Rs. 42 a call with a strike price of Rs. 610 and sells for Rs. 26 a call with
a strike price of Rs. 690. The possible price range of the underlying stock is:
Rs. 450; Rs. 560; Rs. 620; Rs. 680; Rs. 750; Rs. 850
 What is the cost of the strategy?
 What is the net pay off for each of the possible price range?

10. Mr. Surya want to create a Bear Spread. He buys a call option on Deewan Fertilizers Ltd.
of Rs. 110 for a premium of Rs. 5. Also, he sells an identical call option at the exercise
price of Rs. 100 for a premium of Rs. 9. Find out the new profit/loss that Mr. Surya will
make in each of the following conditions:
 If the settlement rate is Rs. 90.
 If the settlement rate is Rs. 108.
 If the settlement rate is Rs. 119.

Bull Spread: Using Put options

Buying a put at the lower strike price with lower premium and selling another put at higher
exercise price with higher premium.

11. Mr. Hariharan decides to create a Bull Spread by the way of buying a put option on
Larsen and Toubro Ltd. at an exercise price of Rs. 90 for Rs. 5 and sell/write an identical
put option at an exercise price of Rs. 100 for Rs. 8. Find out how much profit/loss he will
make in each of the following conditions.
 On settlement day, the price of L&T is Rs. 85.
 On the settlement day, the price of L&T is Rs. 96.
 On the settlement day, the price of L&T is Rs. 110.
 12. An investor buys a put option on Bharti Airtel Ltd. at Rs. 60 for Rs. 6. Simultaneously he
sells the put option on the same stock at Rs. 50 for a premium of Rs. 3. Calculate the pay
off when prices ranges from 40 to 70 (with a break of Rs. 10).

Butterfly Spread
Buying one call at lower strike price (X1)
Selling two call options (half-way) (X2) [between X1 and X3]
Buying another call at higher exercise price (X3)

The butterfly spread is best used when the expectation is that the price of a security won't
move, or that it will only move by a very small amount.  It makes the most profit when the price
of a security doesn't move at all, and it will return a loss if the price of the security moves
substantially in either direction.
Unlike some neutral trading strategies, the losses are limited, which means it's worth
considering when you do believe that the price of the security will stay the same but have some
concerns it could possible move substantially. It's a strategy that is more suited to experienced
traders than beginners, because it's complex and requires a fairly high trading level.
How to create?

Example:
 Company X stock is trading at $50, and your expectation is that the price will remain
fairly close to that price.
 You buy 1 contract (100 options, $4 each) of in the money calls (strike $47) for a $400
cost. This is Leg A.
 You buy 1 contract (100 options, $.50 each) of out of the money calls (strike $53) for a
$50 cost. This is Leg B.
 You write 2 contracts (200 options, $2 each) of at the money calls (strike $50) for a
credit of $400. This is Leg C.
 You have created a butterfly spread for a total cost of $50.

13. The following data is given to you about the call options on a share which is currently
traded at Rs. 54 with the multiplier of Rs. 800.
Exercise price Rs. 50 55 60
Call price Rs. 8 4.5 2
Determine the profit or loss from this strategy when the share price is Rs. 42, Rs. 55, Rs.
58 and Rs. 59 respectively.

14. The following call options are traded in the market at present with the same maturity:
Option Exercise Price Call Premium
1 Rs. 60 Rs. 7
2 Rs. 75 Rs. 5
3 Rs. 90 Rs. 4
 Draw his pay off diagram. Explain his profit/loss if the spot price at maturity is i) Rs. 55;
ii) Rs. 70; iii) Rs. 80; and iv) Rs. 95.

15. The following information is available on call options involving 1,100 shares with two
months expiration dates on a stock:
Strike Price Rs. 170 Rs. 180 Rs. 190
Premium Rs. 21.10 Rs.14 Rs. 8
Find the pay-off for the investor at various ranges of stock prices as Rs. 168; Rs. 176; Rs.
185; Rs. 189 and Rs. 198.

16. A stock is currently selling for Rs. 400. The price of call option expiring six month are as
follows:
Strike price Rs. 350 Call price Rs. 15
Strike price Rs. 390 Call price Rs. 11
Strike price Rs. 425 Call price Rs. 8
Investor feels it is unlikely that stock price will move significantly in next six months.
Draw a butterfly spread with the given options.

17. Determine the profits from the butterfly spread based on the following data and
interpret the result:
i. First purchase of call option at Rs. 320 at a premium of Rs. 40.
ii. Second purchase of call option at Rs. 400 at a premium of Rs. 20.
iii. Sell both the call option at Rs. 360 at a premium of Rs. 30.
iv. The price on the due date is 270, 300, 360, 400, 450 or 500.

Straddle:
This strategy involves buying a call option and buying a put option with the same
exercise price and same expiration date.
The long straddle is a suitable strategy for a volatile market, because it can make
potentially unlimited profits if the price of a security moves dramatically. This basically
means you should consider using it when you believe that a security will move
significantly in price, but you are not sure in which direction.
This is a limited risk strategy and is very straightforward, so it's a good choice for
beginner traders. You don't need a high trading level to apply it.
Example of Long Straddle:
 Company X stock is trading at $50, and you believe the price will make a significant
move, but you are unsure in which direction.
 At the money calls (strike $50) are trading at $2. You buy 1 contract of these
(containing 100 options), at a cost of $200. This is Leg A.
 At the money puts (strike $50) are trading at $2. You also buy 1 contract of these,
at a further cost of $200. This is Leg B.
  You have created a long straddle for a net debit of $400.

The short straddle is a suitable strategy when your outlook on a security is neutral:
meaning that you do not believe the price will either go up much or go down much. It
should only be used when you are very confident that the price of the security will not
move significantly in either direction, because the potential loss if that does happen can
be very substantial.
You will require a high trading level to create this spread, so it is not likely to be possible
for you if you are relatively new to options trading.
Example of Short Straddle:
 Company X stock is trading at $50, and your expectation is that it will stay trading at
close to that $50 for a period of time.
 At the money calls (strike $50) are trading at $2. You write 1 contract of these
(containing 100 options), for a credit of $200. This is Leg A.
 At the money puts (strike $50) are trading at $2. You also write 1 contract of these,
for a further credit of $200. This is Leg B.
 These two transactions combined have created a short straddle, with a total upfront
credit of $400.

18. Create a short straddle from the given information:

Call strike price is Rs. 310 per share; Put strike price is Rs. 310 per share; Premium for
call Rs. 21 per share; Premium for put is Rs. 42 per share. Also show the net pay off
diagram and discuss its characteristics closing price on expiry data as follows:
220, 240, 260, 280, 300, 310, 320, 340, 360, 380 or 400

19. Create a long straddle from given information. Call strike price is Rs. 400; call premium is
Rs. 15; put strike price is Rs. 400, Put premium is Rs. 15. Closing prices are as follows:
300, 325, 375, 400, 425, 450, 475, 500 or 525

Strips and Straps:

 A strip strategy results when a long position in one call is coupled with long position
in 2 puts.
o Strip = 1 call + 2 put (all long positions)
o Same exercise price and same expiry date.
 A strap strategy results when a long position in two calls are coupled with long
positon in 1 put
o Strap = 2 calls + 1 put (all long positions)
o Same exercise price and same expiry date
20. Mr. RamMohan buys a call option on SKF Bearings Ltd. at Rs. 500 for Rs. 20. He also buys
2 put options on the same stock at the same price for Rs. 22. Calculate his payoff if he
prices are as follows:
510, 500, 490, 480, 470, 460, 450, 440, 430 or 420

21. An investor buys 2 call options on BHEL at Rs. 750 for a premium of Rs. 18.
Simultaneously he buys one put option on the same stock at the same price with
premium of Rs. 16. Calculate his pay-off, if prices are as under:
700, 725, 750, 775, 800, 825, 850, 875 or 900

Strangle
In a strangle, an investor buys a put option and a call option on the same stock at the
same expiry date but, the exercise price of the call option will be greater than the
exercise price of the put option.

The long strangle is classified as a volatile options trading strategy, because it's used to
make profits out of substantial price movements, regardless of the direction of those
movements. It's a strategy that is best used if you’re confident that the price of a
security will move significantly in one direction or the other, but cannot predict in which
direction.
This strategy has limited risk, it's easy to understand, and it only requires a low trading
margin with a broker, which makes it ideal for traders that are relatively inexperienced
as well as veterans.
Long Strangle Eg:
 Company X stock is trading at $50, and you believe the price will move significantly,
but you don't know which direction it will move in.
 Out of the money calls (strike $51) are trading at $1.50. You buy 1 contract of these
(containing 100 options), at a cost of $150. This is Leg A.
 Out of the money puts (strike $49) are trading at $1.50. You buy 1 contract of these,
at a further cost of $150. This is Leg B.
 You have now created a long straddle for a net debit of $300.

Short Strangle Eg:

 Company X stock is trading at $50, and your expectation is that the price will stay
close to $50.
 Out of the money call contracts (strike $54) are trading at $.50. You write 1 of these
(containing 100 options), for a credit of $50. This is Leg A.
 Out of the money put contracts (strike $46) are trading at $.50. You also write 1 of
these, for an additional credit of $50. This is Leg B.
 The short strangle has been created for a total credit of $100.
 22. A call option with an exercise price of Rs. 50 costs Rs. 2. A put option with a strike price
of Rs. 45 costs Rs. 3. Discuss how a ‘strangle’ can be created from these two options,
and show profit profile of strangle. Suppose stock price on expiration date is Rs. 60.

23. A call option on a share with exercise of Rs. 250 is priced at Rs. 15 and a put option on
the same share with an exercise price of Rs. 240 is priced at Rs. 10. Both the options
have one month to maturity. Create a long strangle using these option. Compute pay
offs assuming a range of spot prices on maturity and illustrate with a pay-off diagram.

24. What will be the pay-off profile for a trader who adopts a strangle given the data below:
Option Strike Price (Rs.) Premium
Put 1.71 0.19
Call 1.75 0.05

Condors
A condor is a strategy which involves 4 call options or 4 put options.
There are 2 types of condor
a) Long – Condor:
Buying a call @ lower Exercise price (E1)
Selling a call @ price closer to E1 (E2)
Selling a call @ price closer to E4 (E3)
Buying a call @ higher Exercise price (E4)
X1<X2<X3<X4

b) Short – Condor:
Selling a call @ X1
Buying a call @ X2
Buying a call @ X3
Buying a call @ X4

Box Spread
It is the combination of bull call spread and bear put spread.
Profit is made independent to the stock price change.

Explanation of the spreads

Source:

http://www.optionstrading.org/strategies/bullish-market/bull-call-spread/