DOCSLIB.ORG

Options Trading

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text

Load more

OPTIONS TRADING: THE HIDDEN REALITY RI$K DOCTOR GUIDE TO POSITION ADJUSTMENT AND HEDGING Charles M. Cottle ● OPTIONS: PERCEPTION AND DECEPTION and ● COULDA WOULDA SHOULDA revised and expanded www.RiskDoctor.com www.RiskIllustrated.com Chicago © Charles M. Cottle, 1996-2006 All rights reserved. No part of this publication may be printed, reproduced, stored in a retrieval system, or transmitted, emailed, uploaded in any form or by any means, electronic, mechanical photocopying, recording, or otherwise, without the prior written permission of the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author or the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. Published by RiskDoctor, Inc. Library of Congress Cataloging-in-Publication Data Cottle, Charles M. Adapted from: Options: Perception and Deception Position Dissection, Risk Analysis and Defensive Trading Strategies / Charles M. Cottle p. cm. ISBN 1-55738-907-1 ©1996 1. Options (Finance) 2. Risk Management 1. Title HG6024.A3C68 1996 332.63’228__dc20 96-11870 and Coulda Woulda Shoulda ©2001 Printed in the United States of America ISBN 0-9778691-72 First Edition: January 2006 To Sarah, JoJo, Austin and Mom Thanks again to Scott Snyder, Shelly Brown, Brian Schaer for the OptionVantage Software Graphics, Allan Wolff, Adam Frank, Tharma Rajenthiran, Ravindra Ramlakhan, Victor Brancale, Rudi Prenzlin, Roger Kilgore, PJ Scardino, Morgan Parker, Carl Knox and Sarah Williams the angel who revived the Appendix and Chapter 10. Extra Special thanks to Yehudah Grundman of The Kabbalah Centre International, for his support and guidance. Options Trading: The Hidden Reality v PRAISE "Having attended many options seminars I can honestly say that The Ri$k Doctor Webinars have been revolutionary to my options education. Unlike many other so called "options gurus" you do not try to attract people by promising them astronomical returns in fact you almost say the opposite...which is that if I am not prepared to put in the work to educate myself about the pitfalls in options trading it can be a very expensive mistake and I should better forget about trading options altogether. This was the first time I had heard anyone say this to me. The bottom line is that as an ex-market maker and trader you have practiced what you preach......unlike many people out there who have never traded but are more than happy to sell people courses on how to trade. .The way you examine, dissect and manage your risk in your trades has given my trading a significant edge. The weekly Webinars provide a great interactive platform to discuss and review new and old trades directly with you every week! I only wish I had found out about you sooner. In the past I have paid a lot more money to learn a lot less than what you have taught me.” THANK YOU! Tharma London, England “When I think back to my first discussion with Charles in 2001, I like to think that I had "Bambi Legs" as an options trader. I had worked as a clerk on an options floor, attended the expensive seminars, and had a decent grasp of the fundamentals. I had also gone nowhere in 2 years of trading my account and was getting frustrated. What followed for the next several years was a robust education in defining my trading self. From understanding the synthetic relationships inherent in options positions, to managing myself as a trader, Charles was critical in my development. The biggest takeaway for me to this day lies in the fact that Charles was the first teacher or coach who didn't set me up for failure by giving me unrealistic profit expectations. New traders need to define themselves, their risk tolerance, and what strategies mesh with those characteristics. If you've got baseless profit expectations, you'll never find these critical attributes. Charles always had me think about my positions and adjustments constantly in the present by asking: "If I had no position on right now, what would I want." Having a professional in my corner like Charles gave me the confidence to truly discover my trading personality and potential. I don't think I'd be trading for a hedge fund had I not worked with Charles. Don't find yourself asking Coulda Woulda Shoulda!” Justin California ©1996-2006 Charles M. Cottle [email protected] vi Praise “My goal this past year was to master and gain a deeper understanding of options. I am a practicing physician and a trader. It was a stroke of luck to come across the Ri$k Doctor, Charles Cottle, a true genius of options. RD’s approach to options brings to mind a series of analogies and similarities to the field of medicine as follows. As a medical doctor uses the CAT Scan or MRI to view potential human disease at the tissue or submicroscopic level, the Risk Doctor’s laser-like perception sees below the surface of an option strategy and reveals its true nature. “Primum non nocere” (first do no harm) is one of the most important dictums taught about patient management. Similarly, in his Webinars, the Ri$k Doctor teaches traders to first see and limit downside risks, while developing profitable option strategies, with and without an underlying stock or contract. He does this by teaching his followers to “card up” simple and complex options positions and then to use a variety of synthetic tools to see the true nature and position risks before entering a trade. Floor traders, whom RD has also instructed, sometimes use these very same valuable tools. Lastly, as a surgeon shows how to handle complications, so the RD teaches how to adjust to changing conditions in the real market on an ongoing basis. In the ongoing RD3 Webinar series, the Ri$k Doctor teaches by example, following the market real-time on a day-by-day basis and then posting his adjustments for each strategy as the market moves. He ultimately throws his followers into the fray and challenges each of them to construct an option strategy and make adjustments on their own that are appropriate for the perpetually changing market. In this unique scenario, his students have the opportunity of experiencing an almost real-live market trading experience, of putting their egos and emotions on the line, and then of learning from mistakes and oversights without risking hard-earned money. It’s as real as can be! For those who are serious about perfecting their option trading skills, RD’s Webinar series is like an exciting roller-coaster ride through the ups and downs of the options markets. I do not know of any other place that offers such a unique market ride. It is a sensational training experience!” Murph, MD New Jersey www.RiskDoctor.com www.RiskIllustrated.com Options Trading: The Hidden Reality vii PREFACE WHY ANOTHER OPTIONS BOOK? Dear Fellow Trader / Investor / Hedger, I wrote this book so that you will come to understand that options are either for you or they are not. For those beginners who understand basic options material, this is a good starting point. For those readers who are having problems trading options, this book will help you to determine where the problems lie, and whether you may be successful with options, or whether you should stay away from them. My mom, dad and most of my relatives don’t trade options because options are not for them. I have a cousin who trades options. He came to work for me when he left college. I am going to teach you the same way that I taught him. By learning how to avoid the pot holes and surviving long enough to put together a personal game plan, he has gone on to be one of the most exceptional options traders that the industry has ever known. Experience in the markets will teach you more than I will, just as it taught my cousin and thousands of other people who I have shared this content with over the last 25 years. It starts here and it can end here too, without losing a nickel because you will be able to answer the question, “Are options for me?” There is a lot of material in this book from my first book, “Options: Perception and Deception” (OPD), which was geared towards professional Market Makers who provide liquidity to the markets by bidding and offering every strike and month. My second book, “Coulda Woulda Shoulda” (CWS) kept a lot of OPD, but added content necessary for retail investors because it was given to clients of an electronic brokerage firm which I co-founded. “Options Trading: The Hidden Reality” merges the information in each of those books, because retail type traders, are now hungry for Market Maker techniques, and are much more sophisticated than industry leaders (exchanges and brokerage houses) give them credit for. Most of the people reading this book know something about puts and calls. To be able to trade puts and calls profitably, one needs a full grasp of the concepts. The market takes no prisoners. It simply deletes those who do not have enough knowledge and/or are hesitant to make decisions. You may be wondering how this book is different from other books on options trading. The essence of my educational work is to demonstrate where investors contradict themselves.
Recommended publications

  • Here We Go Again

    2015, 2016 MDDC News Organization of the Year! Celebrating 161 years of service! Vol. 163, No. 3 • 50¢ SINCE 1855 July 13 - July 19, 2017 TODAY’S GAS Here we go again . PRICE Rockville political differences rise to the surface in routine commission appointment $2.28 per gallon Last Week pointee to the City’s Historic District the three members of “Team him from serving on the HDC. $2.26 per gallon By Neal Earley @neal_earley Commission turned into a heated de- Rockville,” a Rockville political- The HDC is responsible for re- bate highlighting the City’s main po- block made up of Council members viewing applications for modification A month ago ROCKVILLE – In most jurisdic- litical division. Julie Palakovich Carr, Mark Pierzcha- to the exteriors of historic buildings, $2.36 per gallon tions, board and commission appoint- Mayor Bridget Donnell Newton la and Virginia Onley who ran on the as well as recommending boundaries A year ago ments are usually toward the bottom called the City Council’s rejection of same platform with mayoral candi- for the City’s historic districts. If ap- $2.28 per gallon of the list in terms of public interest her pick for Historic District Commis- date Sima Osdoby and city council proved Giammo, would have re- and controversy -- but not in sion – former three-term Rockville candidate Clark Reed. placed Matthew Goguen, whose term AVERAGE PRICE PER GALLON OF Rockville. UNLEADED REGULAR GAS IN Mayor Larry Giammo – political. While Onley and Palakovich expired in May. MARYLAND/D.C. METRO AREA For many municipalities, may- “I find it absolutely disappoint- Carr said they opposed Giammo’s ap- Giammo previously endorsed ACCORDING TO AAA oral appointments are a formality of- ing that politics has entered into the pointment based on his lack of qualifi- Newton in her campaign against ten given rubberstamped approval by boards and commission nomination cations, Giammo said it was his polit- INSIDE the city council, but in Rockville what process once again,” Newton said.
  • Up to EUR 3,500,000.00 7% Fixed Rate Bonds Due 6 April 2026 ISIN

    Up to EUR 3,500,000.00 7% Fixed Rate Bonds Due 6 April 2026 ISIN

    Up to EUR 3,500,000.00 7% Fixed Rate Bonds due 6 April 2026 ISIN IT0005440976 Terms and Conditions Executed by EPizza S.p.A. 4126-6190-7500.7 This Terms and Conditions are dated 6 April 2021. EPizza S.p.A., a company limited by shares incorporated in Italy as a società per azioni, whose registered office is at Piazza Castello n. 19, 20123 Milan, Italy, enrolled with the companies’ register of Milan-Monza-Brianza- Lodi under No. and fiscal code No. 08950850969, VAT No. 08950850969 (the “Issuer”). *** The issue of up to EUR 3,500,000.00 (three million and five hundred thousand /00) 7% (seven per cent.) fixed rate bonds due 6 April 2026 (the “Bonds”) was authorised by the Board of Directors of the Issuer, by exercising the powers conferred to it by the Articles (as defined below), through a resolution passed on 26 March 2021. The Bonds shall be issued and held subject to and with the benefit of the provisions of this Terms and Conditions. All such provisions shall be binding on the Issuer, the Bondholders (and their successors in title) and all Persons claiming through or under them and shall endure for the benefit of the Bondholders (and their successors in title). The Bondholders (and their successors in title) are deemed to have notice of all the provisions of this Terms and Conditions and the Articles. Copies of each of the Articles and this Terms and Conditions are available for inspection during normal business hours at the registered office for the time being of the Issuer being, as at the date of this Terms and Conditions, at Piazza Castello n.
  • Mergers and Acquisitions - Collar Contracts

    Mergers and Acquisitions - Collar Contracts

    Mergers and Acquisitions - Collar Contracts An Chen University of Bonn joint with Christian Hilpert (University of Bonn) Seminar at the Institute of Financial Studies Chengdu, June 2012 Introduction Model setup and valuation Value change through WA Welfare analysis Traditional M&A deals Traditional M&A deals: two main payment methods to the target all cash deals: fixed price deal stock-for-stock exchange: fixed ratio deal Risks involved in traditional M&A transactions: Pre-closing risk: the possibility that fluctuations of bidder and target stock prices will affect the terms of the deal and reduce the likelihood the deal closes. Post-closing risk: after the closing the possible failure of the target to perform up to expectations, thus resulting in overpayment ⇒ major risk for the shareholders of the bidder An Chen Mergers and Acquisitions - Collar Contracts 2 Introduction Model setup and valuation Value change through WA Welfare analysis Pre-closing instruments: Collars Collars were introduced to protect against extreme price fluctuations in the share prices of bidder and target: Fixed price collars and fixed ratio collars Collar-tailored M&A deals have both characteristics of traditional all-cash or stock-for-stock deals. Collars can be used by bidders to cap the payout to selling shareholders An Chen Mergers and Acquisitions - Collar Contracts 3 Introduction Model setup and valuation Value change through WA Welfare analysis Fixed price collar (taken from Officer (2004)) First Community Banccorp Inc. - Banc One Corp., 1994, with K = 31.96$, U = 51$, L = 47$, a = 0.6267, and b = 0.68. 34 33 32 Payoff 31 30 29 44 46 48 50 52 54 Bidder stock price An Chen Mergers and Acquisitions - Collar Contracts 4 Introduction Model setup and valuation Value change through WA Welfare analysis Fixed ratio collar (taken from Officer (2004)) BancFlorida Financial Corp.
  • Tracking and Trading Volatility 155

    Tracking and Trading Volatility 155

    ffirs.qxd 9/12/06 2:37 PM Page i The Index Trading Course Workbook www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page ii Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, visit our web site at www.WileyFinance.com. www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page iii The Index Trading Course Workbook Step-by-Step Exercises and Tests to Help You Master The Index Trading Course GEORGE A. FONTANILLS TOM GENTILE John Wiley & Sons, Inc. www.rasabourse.com ffirs.qxd 9/12/06 2:37 PM Page iv Copyright © 2006 by George A. Fontanills, Tom Gentile, and Richard Cawood. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com.
  • (NSE), India, Using Box Spread Arbitrage Strategy

    (NSE), India, Using Box Spread Arbitrage Strategy

    Gadjah Mada International Journal of Business - September-December, Vol. 15, No. 3, 2013 Gadjah Mada International Journal of Business Vol. 15, No. 3 (September - December 2013): 269 - 285 Efficiency of S&P CNX Nifty Index Option of the National Stock Exchange (NSE), India, using Box Spread Arbitrage Strategy G. P. Girish,a and Nikhil Rastogib a IBS Hyderabad, ICFAI Foundation For Higher Education (IFHE) University, Andhra Pradesh, India b Institute of Management Technology (IMT) Hyderabad, India Abstract: Box spread is a trading strategy in which one simultaneously buys and sells options having the same underlying asset and time to expiration, but different exercise prices. This study examined the effi- ciency of European style S&P CNX Nifty Index options of National Stock Exchange, (NSE) India by making use of high-frequency data on put and call options written on Nifty (Time-stamped transactions data) for the time period between 1st January 2002 and 31st December 2005 using box-spread arbitrage strategy. The advantages of box-spreads include reduced joint hypothesis problem since there is no consideration of pricing model or market equilibrium, no consideration of inter-market non-synchronicity since trading box spreads involve only one market, computational simplicity with less chances of mis- specification error, estimation error and the fact that buying and selling box spreads more or less repli- cates risk-free lending and borrowing. One thousand three hundreds and fifty eight exercisable box- spreads were found for the time period considered of which 78 Box spreads were found to be profit- able after incorporating transaction costs (32 profitable box spreads were identified for the year 2002, 19 in 2003, 14 in 2004 and 13 in 2005) The results of our study suggest that internal option market efficiency has improved over the years for S&P CNX Nifty Index options of NSE India.
  • How Options Implied Probabilities Are Calculated

    How Options Implied Probabilities Are Calculated

    No content left No content right of this line of this line How Options Implied Probabilities Are Calculated The implied probability distribution is an approximate risk-neutral distribution derived from traded option prices using an interpolated volatility surface. In a risk-neutral world (i.e., where we are not more adverse to losing money than eager to gain it), the fair price for exposure to a given event is the payoff if that event occurs, times the probability of it occurring. Worked in reverse, the probability of an outcome is the cost of exposure Place content to the outcome divided by its payoff. Place content below this line below this line In the options market, we can buy exposure to a specific range of stock price outcomes with a strategy know as a butterfly spread (long 1 low strike call, short 2 higher strikes calls, and long 1 call at an even higher strike). The probability of the stock ending in that range is then the cost of the butterfly, divided by the payout if the stock is in the range. Building a Butterfly: Max payoff = …add 2 …then Buy $5 at $55 Buy 1 50 short 55 call 1 60 call calls Min payoff = $0 outside of $50 - $60 50 55 60 To find a smooth distribution, we price a series of theoretical call options expiring on a single date at various strikes using an implied volatility surface interpolated from traded option prices, and with these calls price a series of very tight overlapping butterfly spreads. Dividing the costs of these trades by their payoffs, and adjusting for the time value of money, yields the future probability distribution of the stock as priced by the options market.
  • Interest-Rate Caps, Collars, and Floors

    Interest-Rate Caps, Collars, and Floors

    November 1989 Interest-Rate Caps, Collars, and Floors Peter A. Abken As some of the newest interest-rate risk management instruments, caps, collars, and floors are the subject of increasing attention among both investors and analysts. This article explains how such instruments are constructed, discusses their credit risks, and presents a new approach for valuing caps, collars, and floors subject to default risk. 2 ECONOMIC REVIEW, NOVEMBER/DECEMBER 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis November 1989 ince the late 1970s interest rates on all types of fixed-income securities have What Is an Interest-Rate Cap? Sbecome more volatile, spawning a va- riety of methods to mitigate the costs associ- An interest-rate cap, sometimes called a ceil- ated with interest-rate fluctuations. Managing ing, is a financial instrument that effectively interest-rate risk has become big business and places a maximum amount on the interest pay- an exceedingly complicated activity. One facet ment made on floating-rate debt. Many busi- of this type of risk management involves buying nesses borrow funds through loans or bonds on and selling "derivative" assets, which can be which the periodic interest payment varies used to offset or hedge changes in asset or according to a prespecified short-term interest liability values caused by interest-rate move- rate. The most widely used rate in both the caps ments. As its name implies, the value of a de- and swaps markets is the London Interbank rivative asset depends on the value of another Offered Rate (LIBOR), which is the rate offered asset or assets.
  • Risk Management Strategies for Cattlemen

    Risk Management Strategies for Cattlemen

    RISK MANAGEMENT STRATEGIES FOR CATTLEMEN Kurtis Ward – President/CEO www.kisokc.com As a former agricultural loan officer, I witnessed first-hand the effects that the Dairy Herd Buyout Program had on the Cattle Market of 1986. During this time, I became intrigued by cattlemen who used some form of risk management (Futures, Options, Forward Contracting, etc.) as compared to those who did nothing but speculate on the cash market. It didn’t take long to observe which group made better financial and marketing decisions (perhaps that “hedging stuff” that my college professors were teaching was really important after all). This market event caused my loan officer career to be transformed into a new profession as a commodity futures broker who specialized in risk management strategies for cattlemen. However, my naïve belief back then was that everyone else was having this “illumination” about cattle hedging at the same time. In the 1980’s, it was said that less than 5% of cattlemen were involved in risk management. Fifteen years later, things haven’t changed much which is quite surprising when you look at the total dollars now at risk in any cattle operation. After what we’ve seen during the cattle market of the past two years, I truly believe that cattlemen cannot afford to be just cattlemen any longer. Rather, they must first be “businessmen” who incidentally invest their, time, money and livelihood in a cattle operation. Therefore, the purpose of this article is to quickly review the basics of several risk management strategies in a way that is very simplistic so that the foundational hedging precepts can be easily understood.
  • Caps and Floors (MMA708)

    Caps and Floors (MMA708)

    School of Education, Culture and Communication Tutor: Jan Röman Caps and Floors (MMA708) Authors: Chiamruchikun Benchaphon 800530-4129 Klongprateepphol Chutima 820708-6722 Pongpala Apiwat 801228-4975 Suntayodom Thanasunun 831224-9264 December 2, 2008 Västerås CONTENTS Abstract…………………………………………………………………………. (i) Introduction…………………………………………………………………….. 1 Caps and caplets……………………………………………………………...... 2 Definition…………………………………………………………….……. 2 The parameters affecting the cap price…………………………………… 6 Strategies …………………………………………………………………. 7 Advantages and disadvantages..…………………………………………. 8 Floors and floorlets..…………………………………………………………… 9 Definition ...……………………………………………………………….. 9 Advantages and disadvantages ..………………………………………….. 11 Black’s model for valuation of caps and floors……….……………………… 12 Put-call parity for caps and floors……………………..……………………… 13 Collars…………………………………………..……….……………………… 14 Definition ...……………………………………………………………….. 14 Advantages and disadvantages ..………………………………………….. 16 Exotic caps and floors……………………..…………………………………… 16 Example…………………………………………………………………………. 18 Numerical example.……………………………………………………….. 18 Example – solved by VBA application.………………………………….. 22 Conclusion………………………………………………………………………. 26 Appendix - Visual Basic Code………………………………………………….. 27 Bibliography……………………………………………………………………. 30 ABSTRACT The behavior of the floating interest rate is so complicate to predict. The investor who lends or borrows with the floating interest rate will have the risk to manage his asset. The interest rate caps and floors are essential tools
  • Tax Treatment of Derivatives

    Tax Treatment of Derivatives

    United States Viva Hammer* Tax Treatment of Derivatives 1. Introduction instruments, as well as principles of general applicability. Often, the nature of the derivative instrument will dictate The US federal income taxation of derivative instruments whether it is taxed as a capital asset or an ordinary asset is determined under numerous tax rules set forth in the US (see discussion of section 1256 contracts, below). In other tax code, the regulations thereunder (and supplemented instances, the nature of the taxpayer will dictate whether it by various forms of published and unpublished guidance is taxed as a capital asset or an ordinary asset (see discus- from the US tax authorities and by the case law).1 These tax sion of dealers versus traders, below). rules dictate the US federal income taxation of derivative instruments without regard to applicable accounting rules. Generally, the starting point will be to determine whether the instrument is a “capital asset” or an “ordinary asset” The tax rules applicable to derivative instruments have in the hands of the taxpayer. Section 1221 defines “capital developed over time in piecemeal fashion. There are no assets” by exclusion – unless an asset falls within one of general principles governing the taxation of derivatives eight enumerated exceptions, it is viewed as a capital asset. in the United States. Every transaction must be examined Exceptions to capital asset treatment relevant to taxpayers in light of these piecemeal rules. Key considerations for transacting in derivative instruments include the excep- issuers and holders of derivative instruments under US tions for (1) hedging transactions3 and (2) “commodities tax principles will include the character of income, gain, derivative financial instruments” held by a “commodities loss and deduction related to the instrument (ordinary derivatives dealer”.4 vs.
  • Energy-Related Commodity Futures

    Energy-Related Commodity Futures

    Universit¨atUlm Institut f¨urFinanzmathematik Energy-Related Commodity Futures Statistics, Models and Derivatives Dissertation zur Erlangung des Doktorgrades Dr. rer. nat. der Fakult¨at f¨urMathematik und Wirtschaftswissenschaften an der Universit¨at Ulm RSITÄT V E U I L N M U · · S O C I D E N N A D R O U · C · D O O C D E N vorgelegt von Dipl.-Math. oec. Reik H. B¨orger, M. S. Ulm, Juni 2007 ii . iii . Amtierender Dekan: Professor Dr. Frank Stehling 1. Gutachter: Professor Dr. R¨udiger Kiesel, Universit¨at Ulm 2. Gutachter: Professor Dr. Ulrich Rieder, Universit¨atUlm 3. Gutachter: Professor Dr. Ralf Korn, Universit¨at Kaiserslautern Tag der Promotion: 15.10.2007 iv Acknowledgements This thesis would not have been possible without the financial and scientific support by EnBW Trading GmbH. In particular, I received instructive input from Dr. Gero Schindlmayr. He suggested many of the problems that have been covered in this work. In numerous discussions he gave insight into physical and financial details of commodities and commodity markets. I also benefited from his suggestions on aspects of the mathematical models and their applicability to practical questions. I take the opportunity to thank my academic advisor Professor Dr. R¨udiger Kiesel who initiated the collaboration with EnBW from the university’s side and who supported my studies in every possible respect. I highly appreciate his confidence in my work and his encouragement which resulted in an enjoyable working environment that goes far beyond the usual conditions. I thank the members of the Institute of Financial Mathematics at Ulm University, in particular Gregor Mummenhoff, Clemens Prestele and Matthias Scherer, for the many mathematical and non-mathematical activities that enriched my time in Ulm.
  • 11 Option Payoffs and Option Strategies

    11 Option Payoffs and Option Strategies

    11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expira- tion for various stock prices. 73 74 CHAPTER 11 OPTION PAYOFFS AND OPTION STRATEGIES 2. Consider a put option with an exercise price of $80 and a cost of $4. Graph the profits and losses at expiration for various stock prices. ANSWERS TO QUESTIONS AND PROBLEMS 75 3. For the call and put in questions 1 and 2, graph the profits and losses at expiration for a straddle comprising these two options. If the stock price is $80 at expiration, what will be the profit or loss? At what stock price (or prices) will the straddle have a zero profit? With a stock price at $80 at expiration, neither the call nor the put can be exercised. Both expire worthless, giving a total loss of $9. The straddle breaks even (has a zero profit) if the stock price is either $71 or $89. 4. A call option has an exercise price of $70 and is at expiration. The option costs $4, and the underlying stock trades for $75. Assuming a perfect market, how would you respond if the call is an American option? State exactly how you might transact. How does your answer differ if the option is European? With these prices, an arbitrage opportunity exists because the call price does not equal the maximum of zero or the stock price minus the exercise price. To exploit this mispricing, a trader should buy the call and exercise it for a total out-of-pocket cost of $74.