FUTURES & OPTIONS PRESENTATION ON ADVANCE OPTIONS STRATEGIES

Presented by Group - 8

Tolani Institute of Management Studies

MONEY SPREAD USING CALLS

Question:
SBI currently selling at INR 1897. There are two calls of it.

1st call with an exercise price of INR 2000 at INR 15 with maturity date on 27th September, 2012
2nd call with an exercise price of INR 1900 at INR 48 with maturity date on 27th September, 2012
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Strike Price (INR) on 27th September, 2012

Long Call Value Short Call Value (INR) S.P. = 1900 (INR) S.P. = 2000

Value of the money spread (INR)

Assumed
1500 1600 -48 -48 15 15 -33 -33

1700
1800 1900

-48
-48 -48

15
15 15

-33
-33 -33

2000
2100 2200 2300

52
152 252 352

15
-85 -185 -285

67
67 67 67
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Break Even point for money spread = INR 1933

This strategy will give maximum profit of INR 67 if strike price is greater than INR 1933 and will give maximum loss of INR 33 if strike price is less than 1933. This strategy will be adopted in Bullish market The implications of this strategy would be constant profit if both calls are in-the-money and constant loss if both calls are out-of-money.
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Money Spread Using Call

400

300

200

Long Call Value

100

Short Call Value Gain/Loss

0 1500 1600 1700 1800 1900 2000 2100 2200 2300

Value of the money spread

-100

-200

-300

-400

Stock Price

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STRADDLES

Question:

TATA Motors currently selling at INR 245.

A call option with an exercise price of INR 250 at INR 6 with maturity date on 27th September, 2012 A put option with an exercise price of INR 250 at INR 8 with maturity date on 27th September, 2012

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Stock Price (INR)

Gain from call (INR)

Gain from Put (INR)

Gain from the Straddle (INR)

180
200 220

-6
-6 -6

62
42 22

56
36 16

240
250 260

-6
-6 4

2
-8 -8

-4
-14 -4

280
300 320

24
44 64

-8
-8 -8

16
36 56
7

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The investor will make a loss as long as the TATA Motors share price is within the range of INR 236 to INR 264. If the price is below INR 236 or above INR 264, this strategy will result in a profit. The more the price moves away from INR 236 or INR 264, the higher are the gains. A long straddle strategy is appropriate if an investor expects a large movement in the stock price but is not sure about the direction of the stock price.
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Gain from a Straddle

70

60

50

40

30

Gain from call (INR) Gain from Put (INR) Gain from the Straddle (INR)

Gain/Loss
20

10

0 180 -10 200 220 240 250 260 280 300 320

-20

Stock Price

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STRANGLES

Question:

HUL stock is currently trading at INR 540.

A call option with an exercise price of INR 560, selling for INR 4 A put option with an exercise price of INR 520, selling for INR 3.

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Stock Price (INR)

Gain from the Long Call (INR) S.P. = 560

Gain from the Long Put (INR) S.P. = 520 117 77 37 -3 -3 -3

Gain from the Strangle (INR)

400 440 480 520 560 600

-4 -4 -4 -4 -4 36

113 73 33 -7 -7 33

640 680

76 116

-3 -3

73 113
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Strangle is similar to a straddle in the sense that the investor is not sure about the direction of the stock price. strangle strategy will result in a maximum loss of INR 7 as long as the stock price is in the range of the two exercise prices. investor will make a profit only if the stock price is below INR 513 or above INR 567.
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This

The

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Gain from a Strangle

140

120

100

80

Gain from the Long Call (INR) Gain from the Long Put (INR) Gain from the Strangle (INR)

Gain / Loss

60

40

20

0 400 -20 440 480 520 560 600 640 680

Stock price 13

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