CALENDAR SPREAD

CALENDAR SPREAD

SELL NEAR MONTH OPTION

BUY FAR MONTH OPTION

As it name suggests it spreads over the calendar month, hence it is known as calendar spread. The logic behind calendar spread is, near month options price will fluctuate more than far month. So, in calendar spread we take benefit out of this.

Calendar spread can be of many types. If it has made using call option it is called Calendar Call Spread, same way for put it is known as Calendar Put Spread. If the Calendar Spread is made of different month’s expiry and same strike price is called Horizontal Calendar Spread. At the same time options with different strike price is known as Vertical Calendar Spread.

Market Scenario: Neutral

Risk: Limited

Reward: Limited

EXAMPLE:

The example of Calendar spread is given below. Here we are using the same strike price so it is Horizontal Calendar Spread.

SPOT	5000
STRIKE	5100

Current Expiry is Oct. So we are Buying the option of Dec i.e. Far Month and Selling the Option of Nov i.e. Near Month.

	NOV - BUY	DEC – SELL
5100	198.13	252.48
Time to Expiry	2 Month	3 Month
Spread	54.35

Here after one month of purchase, the position of options will be like this:

	OCT	NOV
5100	124.95	198.13
Time to Expiry	1 Month	2 Month
Spread	68.18

Here our Spread has been increased from 54.35 to 68.18 considering the same spot.

RATIO SPREAD

RATIO SPREAD

BUY ONE ITM CALL

SELL TWO OTM CALL

The ratio spread is a neutral strategy. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Market Scenario: Neutral

Risk: Unlimited

Reward: Limited

BEP:

Maximum Profit = Strike Price of Short Call - Strike Price of Long Call + Net Premium Received

Upper BEP = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls)

Entry:

SPOT

5000

	STRIKE	PREMIUM
BUY 1 ITM CALL	4900	221
SELL 2 OTM CALL	5100	124

BEP Calculation:

Max. Profit = 5100 – 4900 + 27 = 227                      BEP = 5100 + (227/1) = 5327

On Exit if:

SPOT	BUY 1 ITM	SELL 2 OTM	STRATEGY PAY-OFF
4700	-221	248	27
4800	-221	248	27
4900	-221	248	27
5000	-121	248	127
5100	-21	248	227
5200	79	48	127
5300	179	-152	27
5327	206	-206	0
5400	279	-352	-73
5500	379	-552	-173

Ratio Spread - Strategy Pay-Off

Above diagram shows that the maximum profit we can get from this ratio spread is 227. At the same time the maximum loss possible is unlimited. 

CALL-PUT PARITY

CALL-PUT PARITY

It is an option pricing concept. According to call-put parity the price of underlying, call option, put option and future should be in equilibrium. If they are not in equilibrium then call-put parity exits and we can take arbitrage opportunities.

The basic formula for checking call-put parity is as follows:

C - P – F = 0

                                                                                                                                                                                                                                                            Where, C = Call price

                                                                                                            P = Put price

                                                                                                            F = Future price

                                                                                                            X= exercise price

Here, in this formula we are taking assumption that there are no carrying costs for options.

ADVANCED OPTION STRATEGIES

ADVANCED OPTION STRATEGIES

VOLATILITY SPREAD

Ø  Volatility spread is a volatility based strategy.

Ø  Volatility Spread is a Delta neutral strategy.

Ø   In Volatility spread, we buy an option of X strike and sell an option of Y strike of same underlying.

Ø  It reduces volatility risk significantly.

Ø  In Volatility Spread we buy call with higher volatility and sell call of lower volatility. At the same time we keep delta neutral using future.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	16 %	29	0.6635	663.5	157.71
Call	5600	5700	(1000)	14 %	29	(0.334)	(334.0)	(47.74)
						0.3295	329.5	109.97
Future	5600		(327)			(1)	(327)
						0.0004	0.4

In above example, the volatility of the long call is 16 % and volatility of short call is 14 %. Moreover for Volatility spread we keep delta neutral using future. Here the spread is 109.97. Now we will see the impact of volatility change. 

If volatility of long call changes to 17%.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	17 %	29	0.6831	683.1	163.49
Call	5600	5700	(1000)	14 %	29	(0.334)	(334.0)	(47.74)
						0.3274	327.4	115.75

Here, if volatility of long call is increase by 1 % the spread has increased to 115.75 from 109.97.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	16 %	29	0.6635	663.5	157.71
Call	5600	5700	(1000)	13 %	29	(0.3557)	(355.7)	(42.04)
						0.3274	327.4	115.67

Here, if volatility of short call is decrease by 1 % the spread has increased to 115.67 from 109.97.