Strategies with Options
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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. -
Introduction to Options
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options|the so-called plain vanilla options. We consider the payoffs to these options for holders and writers and describe both the time vale and intrinsic value of an option. We explain why options are traded and examine some of the properties of put and call option prices. We shall show that longer dated options typically have higher prices and that call prices are higher when the strike price is lower and that put prices are higher when the strike price is higher. Keywords: Put, call, strike price, maturity date, in-the-money, time value, intrinsic value, parity value, American option, European option, early exer- cise, bull spread, bear spread, butterfly spread. 1 Options Options are derivative assets. That is their payoffs are derived from the pay- off on some other underlying asset. The underlying asset may be an equity, an index, a bond or indeed any other type of asset. Options themselves are classified by their type, class and their series. The most important distinc- tion of types is between put options and call options. A put option gives the owner the right to sell the underlying asset at specified dates at a specified price. A call option gives the owner the right to buy at specified dates at a specified price. Options are different from forward/futures contracts as a put (call) option gives the owner right to sell (buy) the underlying asset but not an obligation. The right to buy or sell need not be exercised. -
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. -
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. -
Are Defensive Stocks Expensive? a Closer Look at Value Spreads
Are Defensive Stocks Expensive? A Closer Look at Value Spreads Antti Ilmanen, Ph.D. November 2015 Principal For several years, many investors have been concerned about the apparent rich valuation of Lars N. Nielsen defensive stocks. We analyze the prices of these Principal stocks using value spreads and find that they are not particularly expensive today. Swati Chandra, CFA Vice President Moreover, valuations may have limited efficacy in predicting strategy returns. This piece lends insight into possible reasons by focusing on the contemporaneous relation (i.e., how changes in value spreads are related to returns over the same period). We highlight a puzzling case where a defensive long/short strategy performed well during a recent two- year period when its value spread normalized from abnormally rich levels. For most asset classes, cheapening valuations coincide with poor performance. However, this relationship turns out to be weaker for long/short factor portfolios where several mechanisms can loosen the presumed strong link between value spread changes and strategy returns. Such wedges include changing fundamentals, evolving positions, carry and beta mismatches. Overall, investors should be cognizant of the tenuous link between value spreads and returns. We thank Gregor Andrade, Cliff Asness, Jordan Brooks, Andrea Frazzini, Jacques Friedman, Jeremy Getson, Ronen Israel, Sarah Jiang, David Kabiller, Michael Katz, AQR Capital Management, LLC Hoon Kim, John Liew, Thomas Maloney, Lasse Pedersen, Lukasz Pomorski, Scott Two Greenwich Plaza Richardson, Rodney Sullivan, Ashwin Thapar and David Zhang for helpful discussions Greenwich, CT 06830 and comments. p: +1.203.742.3600 f: +1.203.742.3100 w: aqr.com Are Defensive Stocks Expensive? A Closer Look at Value Spreads 1 Introduction puzzling result — buying a rich investment, seeing it cheapen, and yet making money — in Are defensive stocks expensive? Yes, mildly, more detail below. -
Chapter 2 Roche Holding: the Company, Its
Risk Takers Uses and Abuses of Financial Derivatives John E. Marthinsen Babson College PEARSON Addison Wesley Boston San Francisco New York London Toronto Sydney Tokyo Singapore Madrid Mexico City Munich Paris Cape Town Hong Kong Montreal Preface xiii Parti 1 Chapter 1 Employee Stock Options: What Every MBA Should Know 3 Introduction 3 Employee Stock Options: A Major Pillar of Executive Compensation 6 Why Do Companies Use Employee Stock Options 6 Aligning Incentives 7 Hiring and Retention 7 Postponing the Timing of Expenses 8 Adjusting Compensation to Employee Risk Tolerance Levels 8 Tax Advantages for Employees 9 Tax Advantages for Companies 9 Cash Flow Advantages for Companies 10 Option Valuation Differences and Human Resource Management 12 Problems with Employee Stock Options 26 Employee Motivation 26 The Share Price of "Good" Companies 27 Motivation of Undesired Behavior 28 vi Contents Performance Improvement 28 Absolute Versus Relative Performance 29 Some Innovative Solutions to Employee Stock Option Problems 29 Premium-Priced Stock Options 30 Index Options 30 Restricted Shares 34 Omnibus Plans 34 Conclusion 35 Review Questions 36 Bibliography 38 Chapter 2 Roche Holding: The Company, Its Financial Strategy, and Bull Spread Warrants 41 Introduction 41 Roche Holding AG: Transition from a Lender to a Borrower 43 Loss of the Valium Patent in the United States 43 Rapid Increase in R&D Costs, Market Growth, and Industry Consolidation 43 Roche's Unique Capital Structure 44 Roche Brings in a New Leader and Replaces Its Management Committee -
Evidence from SME Bond Markets
Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria September 2020 September Number 1292 Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria Number 1292 - September 2020 The papers published in the Temi di discussione series describe preliminary results and are made available to the public to encourage discussion and elicit comments. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank. Editorial Board: Federico Cingano, Marianna Riggi, Monica Andini, Audinga Baltrunaite, Marco Bottone, Davide Delle Monache, Sara Formai, Francesco Franceschi, Salvatore Lo Bello, Juho Taneli Makinen, Luca Metelli, Mario Pietrunti, Marco Savegnago. Editorial Assistants: Alessandra Giammarco, Roberto Marano. ISSN 1594-7939 (print) ISSN 2281-3950 (online) Printed by the Printing and Publishing Division of the Bank of Italy ASYMMETRIC INFORMATION IN CORPORATE LENDING: EVIDENCE FROM SME BOND MARKETS by Alessandra Iannamorelli†, Stefano Nobili†, Antonio Scalia† and Luana Zaccaria‡ Abstract Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on creditworthiness affect firms’ decisions to issue debt securities. Surprisingly, our evidence supports positive (rather than adverse) selection. Holding public information constant, firms with better private fundamentals are more likely to access bond markets. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. These results are consistent with a model where banks offer more flexibility than markets during financial distress and firms may use market lending to signal credit quality to outside stakeholders. -
Module 6 Option Strategies.Pdf
zerodha.com/varsity TABLE OF CONTENTS 1 Orientation 1 1.1 Setting the context 1 1.2 What should you know? 3 2 Bull Call Spread 6 2.1 Background 6 2.2 Strategy notes 8 2.3 Strike selection 14 3 Bull Put spread 22 3.1 Why Bull Put Spread? 22 3.2 Strategy notes 23 3.3 Other strike combinations 28 4 Call ratio back spread 32 4.1 Background 32 4.2 Strategy notes 33 4.3 Strategy generalization 38 4.4 Welcome back the Greeks 39 5 Bear call ladder 46 5.1 Background 46 5.2 Strategy notes 46 5.3 Strategy generalization 52 5.4 Effect of Greeks 54 6 Synthetic long & arbitrage 57 6.1 Background 57 zerodha.com/varsity 6.2 Strategy notes 58 6.3 The Fish market Arbitrage 62 6.4 The options arbitrage 65 7 Bear put spread 70 7.1 Spreads versus naked positions 70 7.2 Strategy notes 71 7.3 Strategy critical levels 75 7.4 Quick notes on Delta 76 7.5 Strike selection and effect of volatility 78 8 Bear call spread 83 8.1 Choosing Calls over Puts 83 8.2 Strategy notes 84 8.3 Strategy generalization 88 8.4 Strike selection and impact of volatility 88 9 Put ratio back spread 94 9.1 Background 94 9.2 Strategy notes 95 9.3 Strategy generalization 99 9.4 Delta, strike selection, and effect of volatility 100 10 The long straddle 104 10.1 The directional dilemma 104 10.2 Long straddle 105 10.3 Volatility matters 109 10.4 What can go wrong with the straddle? 111 zerodha.com/varsity 11 The short straddle 113 11.1 Context 113 11.2 The short straddle 114 11.3 Case study 116 11.4 The Greeks 119 12 The long & short straddle 121 12.1 Background 121 12.2 Strategy notes 122 12..3 Delta and Vega 128 12.4 Short strangle 129 13 Max pain & PCR ratio 130 13.1 My experience with option theory 130 13.2 Max pain theory 130 13.3 Max pain calculation 132 13.4 A few modifications 137 13.5 The put call ratio 138 13.6 Final thoughts 140 zerodha.com/varsity CHAPTER 1 Orientation 1.1 – Setting the context Before we start this module on Option Strategy, I would like to share with you a Behavioral Finance article I read couple of years ago. -
307439 Ferdig Master Thesis
Master's Thesis Using Derivatives And Structured Products To Enhance Investment Performance In A Low-Yielding Environment - COPENHAGEN BUSINESS SCHOOL - MSc Finance And Investments Maria Gjelsvik Berg P˚al-AndreasIversen Supervisor: Søren Plesner Date Of Submission: 28.04.2017 Characters (Ink. Space): 189.349 Pages: 114 ABSTRACT This paper provides an investigation of retail investors' possibility to enhance their investment performance in a low-yielding environment by using derivatives. The current low-yielding financial market makes safe investments in traditional vehicles, such as money market funds and safe bonds, close to zero- or even negative-yielding. Some retail investors are therefore in need of alternative investment vehicles that can enhance their performance. By conducting Monte Carlo simulations and difference in mean testing, we test for enhancement in performance for investors using option strategies, relative to investors investing in the S&P 500 index. This paper contributes to previous papers by emphasizing the downside risk and asymmetry in return distributions to a larger extent. We find several option strategies to outperform the benchmark, implying that performance enhancement is achievable by trading derivatives. The result is however strongly dependent on the investors' ability to choose the right option strategy, both in terms of correctly anticipated market movements and the net premium received or paid to enter the strategy. 1 Contents Chapter 1 - Introduction4 Problem Statement................................6 Methodology...................................7 Limitations....................................7 Literature Review.................................8 Structure..................................... 12 Chapter 2 - Theory 14 Low-Yielding Environment............................ 14 How Are People Affected By A Low-Yield Environment?........ 16 Low-Yield Environment's Impact On The Stock Market........ -
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. -
Bond Futures Calendar Spread Trading
Black Algo Technologies Bond Futures Calendar Spread Trading Part 2 – Understanding the Fundamentals Strategy Overview Asset to be traded: Three-month Canadian Bankers' Acceptance Futures (BAX) Price chart of BAXH20 Strategy idea: Create a duration neutral (i.e. market neutral) synthetic asset and trade the mean reversion The general idea is straightforward to most professional futures traders. This is not some market secret. The success of this strategy lies in the execution. Understanding Our Asset and Synthetic Asset These are the prices and volume data of BAX as seen in the Interactive Brokers platform. blackalgotechnologies.com Black Algo Technologies Notice that the volume decreases as we move to the far month contracts What is BAX BAX is a future whose underlying asset is a group of short-term (30, 60, 90 days, 6 months or 1 year) loans that major Canadian banks make to each other. BAX futures reflect the Canadian Dollar Offered Rate (CDOR) (the overnight interest rate that Canadian banks charge each other) for a three-month loan period. Settlement: It is cash-settled. This means that no physical products are transferred at the futures’ expiry. Minimum price fluctuation: 0.005, which equates to C$12.50 per contract. This means that for every 0.005 move in price, you make or lose $12.50 Canadian dollar. Link to full specification details: • https://m-x.ca/produits_taux_int_bax_en.php (Note that the minimum price fluctuation is 0.01 for contracts further out from the first 10 expiries. Not too important as we won’t trade contracts that are that far out.) • https://www.m-x.ca/f_publications_en/bax_en.pdf Other STIR Futures BAX are just one type of short-term interest rate (STIR) future. -
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.