HDFC Securities Ltd.
Derivatives Strategy Guide
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HDFC Securities Ltd. 1 Strategy Guide - Table Market Outlook Bullish Neutral Bearish Volatility Estimate Long Call Long Straddle Long Put Call Ratio Backspread Long Strangle Put Ratio Backspread Rising Long Strap Long Strip Long Futures Long Condor Short Futures Long Semi Futures Short Condor Short Semi Futures Neutral Bull Call Spread Long Butterfly Bear Put Spread Bull Put Spread Short Butterfly Bear Call Spread Short Put Short Straddle Short Call Short Strangle Falling Short Strap & Strip Put & Call Ratio Spread
All the above strategies have same expiration HDFC Securities Ltd. 2 Risk – Return Profile
Return Limited Unlimited Risk
Bull Call Spread (18) Long Call & Put (4 & 72) Bull Put Spread (21) Call Ratio Backspread (8) Long & Short Condor (44 & 50) Long Straddle & Strangle (28 & Limited Long & Short Butterfly (41 & 47) 31) Bear Put Spread (86) Long Strap & Strip (35 & 38) Bear Call Spread (89) Put Ratio Backspread (76)
Short Put & Call (24 & 92) Long Futures (11) Short Straddle & Strangle (53 & Long Semi Futures ( 15) 56) Short Futures ( 79) Unlimited Short Strap & Strip (60 & 63) Short Semi Futures ( 83) Put Ratio Spread (69) Call Ratio Spread (66)
Figures in brackets are page numbers HDFC Securities Ltd. 3 Long Call
View Comment Profit Unlimited, Increases as the spot price increases Loss Limited to the premium paid Breakeven Strike price + premium Time Decay Hurts Use Very bullish outlook Volatility Volatility increase helps the position Margin No
HDFC Securities Ltd. 4 Long Call - Payoff Profit
Strike Price
Premium Break Even
Loss
HDFC Securities Ltd. 5 Long Call – Variant Protective Put • Have Underlying or Long Futures, and Buy Put (Downside Risk is hedged)
Max. Loss : If Futures < Put strike = Premium - (Strike – Futures) If Futures > Put strike = (Futures - Strike) + premium
Breakeven = Put Strike + Max. Loss
HDFC Securities Ltd. 6 Protective Put – Payoff Profit Long Futures Long Call
Strike Price
Max. Loss Break Even
Long Put
Loss HDFC Securities Ltd. 7 Call Ratio Backspread
View Comment Profit Increases as the spot price increases Loss (B – A) + (debit premium) or – (credit premium) Breakeven B + Max. Loss Time Decay Hurts Use Market is near B and outlook is bullish Volatility Volatility increase helps the position Margin Yes
HDFC Securities Ltd. 8 Call Ratio Backspread (CRB)
Formation • Sell a lower strike (A) call and, Buy 2 higher strike (B) calls
Variant • Sell a lower strike (A) put, Buy 2 higher strike (B) calls and, Short Futures
HDFC Securities Ltd. 9 Call Ratio Backspread - Payoff Profit
Short Call
B Net Premium (Credit) Breakeven A Max. Loss Long Calls
Loss HDFC Securities Ltd. 10 Long Futures
View Comment Profit Increases as the spot price increases Loss Increases as the spot price decreases Breakeven Purchase price + Brokerage Time Decay No impact Use Very bullish outlook Volatility No impact Margin Yes
HDFC Securities Ltd. 11 Long Futures – Payoff Profit
Purchase Price
Loss HDFC Securities Ltd. 12 Long Futures – Variant
Formation Buy Call A and Sell Put A
Going Long at A + Call Premium – Put Premium
HDFC Securities Ltd. 13 Long Futures – Variant Payoff
Profit Long Futures
Short Put
A Long Call
Loss
HDFC Securities Ltd. 14 Long Semi – Futures View Comment Profit Increases as the spot price increases Loss Increases as the spot price decreases Breakeven Call Strike (B) + Premium debit or Put Strike (A) - Premium credit Time Decay Mixed – Hurts for Long Call and helps for Short Put Use Bullish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 15 Long Semi – Futures
Formation • Sell Put A and, Buy Call B
Variant • Sell Call A, Buy Futures and, Buy Call B
HDFC Securities Ltd. 16 Long Semi Futures – Payoff
Profit
Short Put
A B Breakeven Long Call
Loss HDFC Securities Ltd. 17 Bull Call Spread
View Comment Profit Limited, Max. Profit = (B – A) - Net Premium Loss Limited, Max. Loss = Net Premium Breakeven Strike A + Max. Loss Time Decay Mixed – Hurts for Long Call and helps for Short Call Use Bullish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 18 Bull Call Spread
Formation • Buy Call A and, Sell Call B
Variant • Buy Call A, Sell Put B and, Short Futures
HDFC Securities Ltd. 19 Bull Call Spread – Payoff
Profit
Short Call
A B Breakeven Long Call
Loss
HDFC Securities Ltd. 20 Bull Put Spread
View Comment Profit Limited, Max. Profit = Net Premium Loss Limited, Max. Loss = (B – A) – Net Premium Breakeven Strike A + Max. Loss Time Decay Mixed – Hurts for Long Put and helps for Short Put Use Bullish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 21 Bull Put Spread
Formation • Buy Put A and, Sell Put B
Variant • Buy Put A, Sell Call B and Long Futures
HDFC Securities Ltd. 22 Bull Put Spread – Payoff Profit
Short Put
A B
Long Put Breakeven
Loss HDFC Securities Ltd. 23 Short Put
View Comment Profit Limited to the premium received Loss Unlimited, increases as the spot price decreases Breakeven Strike price – Premium Time Decay Helps Use Bullish outlook Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 24 Short Put – Payoff Profit
Premium received Breakeven
Strike
Loss HDFC Securities Ltd. 25 Short Put – Variant Covered Call • Have Underlying or Buy Futures, and Write a Call
Max. Profit : Futures < Strike = Prem. + (Strike – Futures) Futures > Strike = Prem. – (Futures – Strike)
Breakeven = Call Strike – Max. Profit
HDFC Securities Ltd. 26 Short Put Variant – Payoff Profit Long Futures
Short Call Premium received Breakeven
Strike A
Loss HDFC Securities Ltd. 27 Long Straddle View Comment Profit Unlimited Loss Limited to the net premium paid Breakeven Low BEP = Strike price – net premium High BEP = Strike price + net premium Time Decay Hurts Use Expecting a large breakout, Uncertain about the direction Volatility Volatility increase improves the position Margin No
HDFC Securities Ltd. 28 Long Straddle
Formation • Buy Call A and, Buy Put A
Variant • Buy 2 Calls A & Short Futures or • Buy 2 Puts A & Long Futures
HDFC Securities Ltd. 29 Long Straddle – Payoff Profit
Common Strike A Low Breakeven High Breakeven
Max. Loss Long Put Long Call Long Straddle
Loss HDFC Securities Ltd. 30 Long Strangle View Comment Profit Unlimited Loss Limited, Premium – (B – A), if Call Strike is A Limited to premium, if Call Strike is B Breakeven Low BEP = A – Loss High BEP = B + Loss Time Decay Hurts Use Expecting a large breakout, Uncertain about the direction Volatility Volatility increase improves the position Margin No
HDFC Securities Ltd. 31 Long Strangle Formation • Buy Call A and Buy Put B
Variants • Buy Put A and Buy Call B • Buy Put A, Buy Put B and Long Futures • Buy Call A, Buy Call B and Short Futures
HDFC Securities Ltd. 32 Long Strangle – Payoff Profit
Low Breakeven High Breakeven
AB
Long Call Long Put
Loss Call Strike = A, Put Strike B HDFC Securities Ltd. 33 Long Strangle – Payoff Profit
Low BreakevenAB High Breakeven
Long Call Long Put
Loss Call Strike = B, Put Strike A HDFC Securities Ltd. 34 Long Strap View Comment Profit Unlimited Loss Limited to the net premium paid Breakeven Low BEP = Strike price – net premium High BEP = Strike price + (net premium / 2) Time Decay Hurts Use Expecting a large breakout, Uncertain about the direction. Increase in the stock more likely. Volatility Volatility increase improves the position Margin No
HDFC Securities Ltd. 35 Long Strap Formation • Buy 2 Calls A and, Buy Put A
Variant • Buy 3 Calls A & Short Futures
HDFC Securities Ltd. 36 Long Strap – Payoff Profit
Common Strike A Low Breakeven High Breakeven Long Put Long Call Max. Loss
Loss
HDFC Securities Ltd. 37 Long Strip View Comment Profit Unlimited Loss Limited to the net premium paid Breakeven Low BEP = Strike price – (net premium / 2) High BEP = Strike price + net premium Time Decay Hurts Use Expecting a large breakout, Uncertain about the direction. Decrease in the stock more likely. Volatility Volatility increase improves the position Margin No
HDFC Securities Ltd. 38 Long Strip
Formation • Buy 2 Puts A and, Buy Call A
Variant • Buy 3 Puts A & Long Futures
HDFC Securities Ltd. 39 Long Strip – Payoff Profit
Common Strike A Low Breakeven High Breakeven Long Call Max. Loss Long Put
Loss
HDFC Securities Ltd. 40 Long Butterfly View Comment Profit Limited to [(B – A) or (C – B)] – Net premium Loss Limited to the net premium paid Breakeven Low BEP = Middle Strike – Profit High BEP = Middle Strike + Profit Time Decay Neutral Use Large stock price movement unlikely. Often used as a follow up strategy Volatility Neutral Margin Yes
HDFC Securities Ltd. 41 Long Butterfly
Formation • Buy Call A, Sell 2 Calls B, Buy Call C
Variants • Buy Put A, Sell 2 Puts B, Buy Put C • Buy Call A, Sell Put & Call B, Buy Put C • Buy Put A, Sell Put & Call B, Buy Call C
HDFC Securities Ltd. 42 Long Butterfly – Payoff Profit
Common Strike B
Low Breakeven High Breakeven
AC
Loss
HDFC Securities Ltd. 43 Long Condor
View Comment Profit Limited, Maximum when spot is between B & C Loss Limited, Maximum when spot is < A & > D Breakeven Low BEP = B – Profit High BEP = C + Profit Time Decay Neutral Use Large stock price movement unlikely. Often used as a follow up strategy Volatility Neutral Margin Yes
HDFC Securities Ltd. 44 Long Condor
Formation • Buy Call A, Sell Call B & C, Buy Call D
Variants • Buy Put A, Sell Put B & C, Buy Put D • Buy Put A, Sell Put B & Call C, Buy Call D • Buy Call A, Sell Call B & C, Buy Put D
HDFC Securities Ltd. 45 Long Condor – Payoff Profit
BC
Low Breakeven High Breakeven
A D
Loss
HDFC Securities Ltd. 46 Short Butterfly View Comment Profit Limited to the net premium received Loss Limited to [(B – A) or (C – B)] – Net premium Breakeven Low BEP = Middle Strike – Loss High BEP = Middle Strike + Loss Time Decay Neutral Use Large stock price movement expected. Often used as a follow up strategy Volatility Neutral Margin Yes
HDFC Securities Ltd. 47 Short Butterfly Formation • Sell Call A, Buy 2 Calls B, Sell Call C
Variants • Sell Put A, Buy 2 Puts B, Sell Put C • Sell Put A, Buy Put & Call B, Sell Call C • Sell Call A, Buy Put & Call B, Sell Put C
HDFC Securities Ltd. 48 Short Butterfly – Payoff Profit
A C
Low Breakeven High Breakeven
B
Loss
HDFC Securities Ltd. 49 Short Condor View Comment Profit Limited, Maximum when spot is < A & > D Loss Limited, Maximum when spot is between B & C Breakeven Low BEP = B – Loss High BEP = C + Loss Time Decay Neutral Use Large stock price movement expected. Often used as a follow up strategy Volatility Neutral Margin Yes
HDFC Securities Ltd. 50 Short Condor
Formation • Sell Call A, Buy Call B & C, Sell Call D
Variants • Sell Put A, Buy Put B & C, Sell Put D • Sell Put A, Buy Put B & Call C, Sell Call D • Sell Call A, Buy Call B & Put C, Sell Put D
HDFC Securities Ltd. 51 Short Condor – Payoff Profit
A D
Low Breakeven High Breakeven
BC
Loss
HDFC Securities Ltd. 52 Short Straddle
View Comment Profit Limited to the net premium received Loss Unlimited Breakeven Low BEP = Strike price – net premium High BEP = Strike price + net premium Time Decay Helps Use Expecting a tight sideways movement Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 53 Short Straddle
Formation • Sell Call A and, Sell Put A
Variant • Sell 2 Calls A & Long Futures or • Sell 2 Puts A & Short Futures
HDFC Securities Ltd. 54 Short Straddle – Payoff Profit Common Strike A
Sell Call Sell Put
Low Breakeven High Breakeven
Loss
HDFC Securities Ltd. 55 Short Strangle View Comment Profit Limited, Premium – (B – A), if Call Strike is A Limited to premium, if Call Strike is B Loss Unlimited Breakeven Low BEP = A – Profit High BEP = B + Profit Time Decay Helps Use Expecting a moderate sideways movement. Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 56 Short Strangle Formation • Sell Call A and Sell Put B
Variants • Sell Put A and Sell Call B • Sell Put A, Sell Put B and Short Futures • Sell Call A, Sell Call B and Long Futures
HDFC Securities Ltd. 57 Short Strangle – Payoff Profit
Short Call Short Put
Low Breakeven High Breakeven AB
Loss Call Strike = A, Put Strike B HDFC Securities Ltd. 58 Short Strangle – Payoff Profit
Short Call Short Put
Low BeP High BeP AB
Loss Call Strike = B, Put Strike A HDFC Securities Ltd. 59 Short Strap View Comment Profit Limited to the net premium received Loss Unlimited Breakeven Low BEP = Strike price – net premium High BEP = Strike price + (net premium / 2) Time Decay Helps Use Expecting a tight sideways movement. Decrease in the stock more likely. Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 60 Short Strap
Formation • Sell 2 Calls A and, Sell Put A
Variant • Sell 3 Calls A & Long Futures
HDFC Securities Ltd. 61 Short Strap – Payoff Profit
Short Calls
Short Put
Low BeP High BeP
Common Strike A
Loss
HDFC Securities Ltd. 62 Short Strip View Comment Profit Limited to the net premium received Loss Unlimited Breakeven Low BEP = Strike price – (net premium / 2) High BEP = Strike price + net premium Time Decay Helps Use Expecting a tight sideways movement. Increase in the stock more likely. Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 63 Short Strip Formation • Sell 2 Puts A and, Sell Call A
Variant • Sell 3 Puts A & Short Futures
HDFC Securities Ltd. 64 Short Strip – Payoff Profit
Short Puts
Short Call
Low BeP High BeP
Common Strike A
Loss
HDFC Securities Ltd. 65 Call Ratio Spread
View Comment Profit (B – A) - (debit premium) or + (credit premium) Loss Increases as the spot price increases Breakeven B + Profit Time Decay Helps Use Expecting a tight sideways movement. Biased towards a decrease in stock price. Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 66 Call Ratio Spread
Formation • Buy Call A & Sell 2 Calls B
Variant • Buy Put A, Sell 2 Calls B & Long Futures
HDFC Securities Ltd. 67 Call Ratio Spread – Payoff Profit
Short Calls
Max. Profit
Net Premium (Credit) Breakeven
AB
Long Call
Loss HDFC Securities Ltd. 68 Put Ratio Spread
View Comment Profit (B – A) - (debit premium) or + (credit premium) Loss Increases as the spot price decreases Breakeven If credit premium = [A – (B – A)] – premium If debit premium = [A + (B – A)] – premium Time Decay Helps Use Expecting a tight sideways movement. Biased towards an increase in stock price. Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 69 Put Ratio Spread Formation • Sell 2 Puts A & Buy Put B
Variant • Sell 2 Puts A, Buy Call B & Short Futures
HDFC Securities Ltd. 70 Put Ratio Spread Profit
Short Puts
Max. Profit
Breakeven Net Premium (Credit) AB
Long Put
Loss HDFC Securities Ltd. 71 Long Put
View Comment Profit Unlimited, Increases as the spot price decreases Loss Limited to the premium paid Breakeven Strike price - premium Time Decay Hurts Use Very bearish outlook Volatility Volatility increase helps the position Margin No
HDFC Securities Ltd. 72 Long Put – Payoff Profit
Strike Price Break Even Premium
Loss HDFC Securities Ltd. 73 Long Put - Variant Protective Call • Sell Underlying or Sell Futures, and Buy Call (Upside Risk is hedged) Max. Loss: If Futures < Strike = (Strike – Futures) + Premium If Futures > Strike = Premium – (Futures - Strike) Breakeven = Call Strike - Max. Loss Margin required for position in Futures
HDFC Securities Ltd. 74 ProfitLong Put – Variant Payoff Futures Long Put
Strike Price
Break Even Max. Loss
Long Call
Loss HDFC Securities Ltd. 75 Put Ratio Backspread
View Comment Profit Increases as the spot price decreases Loss (B – A) + (debit premium) or – (credit premium) Breakeven A - Loss Time Decay Hurts Use Market is near A and outlook is bearish Volatility Volatility increase helps the position Margin Yes
HDFC Securities Ltd. 76 Put Ratio Backspread Formation • Buy 2 lower strike (A) puts & Sell a higher strike (B) put.
Variant • Buy 2 lower strike (A) puts, Sell a higher strike (B) call & Long Futures
HDFC Securities Ltd. 77 Put Ratio Backspread – Payoff Profit Short Put
Breakeven Net Premium (Credit)
AB Max. Loss
Long Puts
Loss HDFC Securities Ltd. 78 Short Futures
View Comment Profit Increases as the spot price decreases Loss Increases as the spot price increases Breakeven Sell price + Brokerage Time Decay No impact Use Very bearish outlook Volatility No impact Margin Yes
HDFC Securities Ltd. 79 Short Futures Profit
Sale Price
Loss
HDFC Securities Ltd. 80 Short Futures – Variant Formation • Buy Put A & Sell Call A
Going Short at A + Call Premium – Put Premium
HDFC Securities Ltd. 81 Short Futures – Variant Payoff Profit
Short Call
Long Put A
Loss HDFC Securities Ltd. 82 Short Semi Futures View Comment Profit Increases as the spot price decreases Loss Increases as the spot price increases Breakeven Call Strike (B) + Premium credit or Put Strike (A) - Premium debit Time Decay Mixed – Hurts for Long put and helps for Short call Use Bearish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 83 Short Semi Futures Formation • Buy Put A & Sell Call B
Variant • Buy Put A, Sell Put B & Short Futures
HDFC Securities Ltd. 84 Short Futures – Payoff Profit
Short Call
Breakeven
AB Long Put
Loss HDFC Securities Ltd. 85 Bear Put Spread
View Comment Profit Limited, Max. Profit = (B – A) - Net Premium Loss Limited, Max. Loss = Net Premium Breakeven Strike B - Max. Loss Time Decay Mixed – Hurts for long put and helps for short put Use Bearish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 86 Bear Put Spread Formation • Buy Put B and Sell Put A
Variant • Buy Call B, Short Futures & Sell Put A
HDFC Securities Ltd. 87 Bear Put Spread – Payoff Profit
Short Put
A B Breakeven Long Put
Loss HDFC Securities Ltd. 88 Bear Call Spread
View Comment Profit Limited, Max. Profit = Net Premium Loss Limited, Max. Loss = (B – A) – Net Premium Breakeven Strike B - Max. Loss Time Decay Mixed – Hurts for long call and helps for short call Use Bearish outlook Volatility Neutral Margin Yes
HDFC Securities Ltd. 89 Bear Call Spread Formation • Buy Call B & Sell Call A
Variant • Buy Call B, Sell Put A & Short Futures
HDFC Securities Ltd. 90 Bear Call Spread – Payoff Profit
Short Call
B
Long Call A
Breakeven
Loss HDFC Securities Ltd. 91 Short Call
View Comment Profit Limited to the premium received Loss Unlimited, increases as the spot price increases Breakeven Strike price + Premium Time Decay Helps Use Bearish outlook Volatility Volatility decrease helps the position Margin Yes
HDFC Securities Ltd. 92 Short Call – Payoff Profit
Premium received Breakeven
Strike
Loss
HDFC Securities Ltd. 93 Short Call – Variant Covered Put • Short Futures, and Sell Put A
Max. Profit: If Futures < Strike = Premium - (Strike – Futures) If Futures > Strike = Premium + (Futures – Strike) Breakeven = Put Strike + Max. Profit
HDFC Securities Ltd. 94 Short Call – Variant Payoff Profit
Short Put
Premium received Breakeven
Strike A
Short Futures Loss HDFC Securities Ltd. 95 Thank You
HDFC Securities Ltd. 96