Friday, October 12, 2012

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.