HDFC Securities Ltd.

Derivatives Strategy Guide

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HDFC Securities Ltd. 1 Strategy Guide - Table Market Outlook Bullish Neutral Bearish Estimate Call Long Long Put Call Ratio Long Put Ratio Backspread Rising Long Strap Long Strip Long Futures Long Condor Futures Long Semi Futures Short Condor Short Semi Futures Neutral Bull Call Spread Long 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

All the above strategies have same 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 + premium Time Decay Hurts Use Very bullish outlook Volatility Volatility increase helps the No

HDFC Securities Ltd. 4 Long Call - Payoff Profit

Strike Price

Premium Break Even

Loss

HDFC Securities Ltd. 5 Long Call – Variant • 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 • 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 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