Trading Strategies Involving
Options
Chapter 10
Options, Futures, and Other Derivatives, 7th International Edition,
Copyright © John C. Hull 2008
1
Types of Strategies
Take a position in the option and the
underlying
Take a position in 2 or more options of
the same type (A spread)
Combination: Take a position in a
mixture of calls & puts (A combination)
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
2
Positions in an Option & the Underlying
(Figure 10.1, page 220)
Profit
Profit
K
K
ST
ST
(a)
(b)
Profit
Profit
K
ST
(c)
K
ST
(d)
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
3
Bull Spread Using Calls
(Figure 10.2, page 221)
Profit
ST
K1
K2
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
4
Bull Spread Using Puts
Figure 10.3, page 222
Profit
K1
K2
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
5
Bear Spread Using Puts
Figure 10.4, page 223
Profit
K1
K2
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
6
Bear Spread Using Calls
Figure 10.5, page 225
Profi
t
K1
K2
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
7
Box Spread
A combination of a bull call spread and a bear
put spread
If all options are European a box spread is
worth the present value of the difference
between the strike prices
If they are American this is not necessarily so.
(See Business Snapshot 10.1)
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
8
Butterfly Spread Using Calls
Figure 10.6, page 227
Profit
K1
K2
K3
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
9
Butterfly Spread Using Puts
Figure 10.7, page 228
Profit
K1
K2
K3
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
10
Calendar Spread Using Calls
Figure 10.8, page 228
Profit
ST
K
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
11
Calendar Spread Using Puts
Figure 10.9, page 229
Profit
ST
K
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
12
A Straddle Combination
Figure 10.10, page 230
Profit
K
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
ST
13
Strip & Strap
Figure 10.11, page 231
Profit
Profit
K
Strip
ST
K
ST
Strap
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
14
A Strangle Combination
Figure 10.12, page 232
Profit
K1
K2
ST
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008
15