S&P 500® Options Strategies
1
About NSE
National Stock Exchange of India Limited (NSE) is an electronic exchange with a
nationwide presence. It offers trading facility through its fully automated, screen
based trading system. A variety of financial instruments, which includes, equities,
debentures, government securities, index futures, index options, stock futures, stock
options, currency futures, Interest rate Futures etc. are traded on its electronic
platform.
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equities and in derivatives (equities/equity indices/currency). It is also one of the
leading global exchanges. NSE uses a state of the art telecommunication network to
provide investors an efficient and transparent market.
NSE has created new benchmarks in technology infrastructure, risk management
systems, clearing and settlement systems, investor services and best market
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derivatives and also new asset classes for the investors to choose from.
2
How to use this booklet
Each strategy has an accompanying graph at
lower right hand corner showing profit and
loss at expiration. The vertical axis shows the
profit/loss scale.
When pay-off line is below the horizontal axis
it represents the loss/outlay for the strategy.
The portion of the pay-off line above the
horizontal axis represents a credit or profit for
the position.
The intersection of the pay-off line and the
horizontal axis is the break-even point (BEP)
not including transaction costs, commissions,
taxes, margin costs etc.
Profit (`)
Net Pay-off
Profit
S&P 500
USD/INR
Loss
Breakeven
Point
Loss (`)
An illustrative example for the explained
strategy and a pay-off table based on example
are also provided for better understanding.
Each contract used in the following examples
has a lot size of 250 S&P 500
3
Bullish Strategy : Long Call
•
•
•
•
•
•
View : Very bullish on S&P 500
Strategy : Buy call option
Risk: Limited to premium
Reward : Unlimited
Breakeven :Strike price + Premium
Profit, when: S&P 500 goes up and option
exercised
• Loss, when: S&P 500 does not go up and
option expires unexercised
S&P 500 on
expiry (`)
Premium
Pay-off (`)
Exercise
Pay-off (`)
Net Payoff (`)
1300.00
-8897.50
0.00
-8897.50
1350.00
-8897.50
5000.00
-3897.50
1365.59
-8897.50
8897.50
0.00
1400.00
-8897.50
17500.00
8602.50
1450.00
-8897.50
30000.00
21102.50
Net Pay-off
15000
Example: Buy 1 Call Option*
Profit (`)
10000
S&P 500
Spot Price (`)
1320.00
5000
Break Even (`)
1365.59
-10000
-15000
Loss (`)
4
1420
1410
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
-5000
1290
0
1280
35.59
S&P 500
1270
Premium (`)
1330.00
1260
Strike Price (`)
1250
*Lot size
1 Contract =
250 S&P 500
Bullish Strategy : Short Put
S&P 500
on expiry
•
•
•
•
•
•
View : Bullish on S&P 500
Strategy : Sell put option
Risk: Unlimited
Reward : Limited to premium
Breakeven :Strike price – Premium
Profit, when: S&P 500 does not go down and
option expires unexercised
• Loss, when: S&P 500 goes down and option
exercised
10000
Example: Sell 1 Put Option*
Net Pay-off
-275000.00
-20225.00
1250
7275.00
-15000.00
-7725.00
1280.90
7275.00
-7275.00
0.00
1300
7275.00
-2500.00
4775.00
1350
7275.00
0.00
7275.00
(`)
Net Pay-off
Profit (`)
8000
4000
2000
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
29.10
S&P 500
0
1290
1310.00
6000
1280
1320.00
-2000
Premium (`)
7275.00
1270
Strike Price (`)
1200
1260
*Lot size
1 Contract =
250 S&P 500
Spot Price (`)
Exercise
Pay-off (`)
(`)
1250
S&P 500
Premium
Pay-off (`)
-4000
-6000
Break Even (`)
1280.90
-8000
-10000
Loss (`)
5
Bullish Strategy : Call Spread
• View : Moderately bullish on S&P 500
• Strategy : Buying ITM Call and selling OTM call
thereby reducing cost and breakeven of ITM call
• Risk: Limited to net premium paid
• Reward : Limited to the difference between the two
strikes minus net premium paid
• Breakeven :Strike price of purchased call + Net
premium paid
• Max profit, when: both options exercised
• Max loss, when: both option unexercised
S&P 500
on expiry
(`)
Pay-off from
ITM Call
purchased (`)
Pay-off
from OTM
Call sold
Net Payoff (`)
(`)
1280.00
-11460.00
8897.50
-2562.50
1310.00
-11460.00
8897.50
-2562.50
1320.25
-8897.50
8897.50
0.00
1340.00
-3960.00
6397.50
2437.50
1370.00
3540.00
-1102.50
2437.50
Pay-off from ITM Call purchased
Pay-off from OTM Call sold
OTM Call Strike Price(`)
Call Premium (`)
Break Even (`)
1330.00
35.59
1390
1380
1370
1360
1350
1340
-5000
1330
45.84
1320
Call Premium (`)
0
1310
1310.00
1300
ITM Call Strike Price (`)
1290
*Lot size
1 Contract =
250 S&P 500
5000
1280
1320.00
Net Pay-off
1270
Spot Price (`)
1260
S&P 500
10000
1250
Example: Buy 1 ITM Call Option and Sell 1 OTM Call
Option *
Profit (`)
S&P 500
-10000
1320.25
-15000
Loss (`)
6
Bullish Strategy : Put Spread
S&P 500
• View : Moderately bullish on S&P 500
on expiry
• Strategy : Sell OTM Put and buy further OTM put to
(`)
protect downside
1260.00
• Risk: Limited to the difference between the two strikes
1280.00
minus net premium received
1303.88
• Reward : Limited to net premium received
1320.00
• Breakeven :Strike Price of short put -Net premium
received
1340.00
• Max profit, when: both options unexercised
• Max loss, when: both options exercised
Profit (`)
8000
S&P 500
Spot Price (`)
1320.00
4000
*Lot size
1 Contract =
250 S&P 500
Sell OTM Put strike price (`)
1310.00
Buy OTM Put strike price(`)
Put Premium (`)
Break Even (`)
1755.00
-3470.00
-225.00
-3245.00
-3470.00
5745.00
-5745.00
0.00
7275.00
-5745.00
1530.00
7275.00
-5745.00
1530.00
Pay-off from Put purchased
2000
1360
1350
1340
1330
1320
1310
1300
1290
1280
-4000
1270
1290.00
1260
0
-2000
1303.88
-5225.00
6000
29.10
22.98
Net Payoff (`)
Net Pay-off
1250
Put Premium (`)
Pay-off from
Put
purchased (`)
Pay-off from Put sold
10000
Example: Sell 1 OTM Put Option and Buy 1 OTM Put
Option *
Pay-off
from Put
sold(`)
S&P 500
-6000
-8000
-10000
Loss (`)
7
Bullish Strategy : Synthetic Call
S&P 500
on expiry
• View : Conservatively bullish on S&P 500
• Strategy : Buy future and buy put option to protect
against unexpected fall
• Risk: Limited to Future Price + Put Premium – Put
Strike Price
• Reward : Unlimited
• Breakeven :Future Price + Put Premium
• Profit, when: S&P 500 goes up
• Max loss, when: S&P 500 goes down and option
exercised
(`)
Pay-off
from
Futures
purchased
Pay-off
from Put
options
Net Payoff (`)
(`)
(`)
1300.00
-10000.00
-4775.00
-14775.00
1350.00
2500.00
-7275.00
-4775.00
1369.10
7275.00
-7275.00
0.00
1400.00
15000.00
-7275.00
7725.00
1450.00
27500.00
-7275.00
20225.00
Pay-off from Future purchased
Example: Buy 1 Future and 1 Put Option*
Pay-off from Put purchased
25000
S&P 500
Future Price (`)
1340.00
Profit (`)
Net Pay-off
20000
15000
10000
Strike Price (`)
1310.00
5000
29.10
-5000
Break Even (`)
1369.10
-15000
1420
1410
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
1290
1280
-10000
1270
Premium (`)
1260
0
1250
*Lot size
1 Contract =
250 S&P 500
S&P 500
-20000
-25000
Loss (`)
8
Bullish Strategy: Covered Call with Futures
• View : Moderately Bullish on existing long future in
portfolio
• Strategy : Sell OTM call option to earn premium
• Risk: Unlimited if S&P 500 falls. Benefit to the extent of
premium
• Reward : Limited to Strike price- Future Price Paid +
Premium received
• Breakeven :Future price paid –Premium Received
• Max profit, when: S&P 500 goes up and option exercised
• Loss, when: S&P 500 goes down
Premium (`)
Break Even (`)
31.10
1308.90
-12500.00
7775.00
-4725.00
1308.90
-7775.40
7775.00
0.00
1330.00
-2500.00
7775.00
5275.00
1350.00
2500.00
5275.00
7775.00
1370.00
7500.00
275.00
7775.00
Profit (`)
Net Pay-off
10000
5000
1390
1380
1370
1360
1350
1340
-5000
1330
0
1320
1340.00
1290.00
1310
Strike Price (`)
-9725.00
1300
1340.00
7775.00
1290
Future Price (`)
(`)
-17500.00
1280
1320.00
(`)
Net Payoff (`)
1270.00
1270
Spot Price (`)
Pay-off
from
Call sold
Pay-off from Call sold
15000
1260
S&P 500
*Lot size
1 Contract =
250 S&P 500
(`)
Pay-off
from
Futures
Pay-off from Future
1250
Example: Existing 1 Long Future and Sell 1 OTM
Call Option*
S&P 500
on expiry
-10000
S&P 500
-15000
-20000
-25000
Loss (`)
9
Bullish Strategy : Collar
• View : Conservatively bullish
• Strategy : Buy futures, buy put to insure downside, sell
call option to partly finance put
• Risk: Limited
• Reward : Limited
• Breakeven :Purchase price of futures – Call premium +
Put premium
• Max profit, when: S&P 500 goes up and call option
exercised
• Max loss, when: S&P 500 goes down and put option
exercised
15000
Future Price (`)
1340.00
*Lot size
1 Contract =
250 S&P 500
Put Strike Price (`)
1300.00
5000
Call Premium (`)
Breakeven (`)
Net Payoff (`)
-17500.00
1250.00
8750.00
-7500.00
1290.00
-12500.00
-3750.00
8750.00
-7500.00
1310.00
-7500.00
-6250.00
8750.00
-5000.00
1330.00
-2500.00
-6250.00
8750.00
0.00
1350.00
2500.00
-6250.00
8750.00
5000.00
1370.00
7500.00
-6250.00
3750.00
5000.00
Pay-off from Call sold
Profit (`)
Net Pay-off
1390
1380
1370
1360
1350
1340
1330
1320
1310
-15000
1300
35.00
1290
-10000
1280
1350.00
1270
-5000
1260
0
25.00
1330.00
Pay-off
from
Call
sold (`)
Pay-off from Put purchased
S&P 500
Call Strike Price (`)
Pay-off
from Put
purchased
(`)
Pay-off from Future purchased
10000
Put Premium (`)
Pay-off
from
Futures
purchased
(`)
1270.00
1250
Example: Buy 1 Future and 1Put Option Contract
and Sell 1 Call Option Contract*
S&P 500 on
expiry (`)
S&P 500
-20000
-25000
Loss (`)
10
Bullish Strategy : Long Combo
•
•
•
•
•
•
View : Bullish on S&P 500
Strategy : Sell OTM put and buy OTM call option
Risk: Unlimited
Reward : Unlimited
Breakeven :Call strike + Net premium
Profit, when : S&P 500 goes up and call option
exercised
• Loss, when : S&P 500- INR goes down and put option
exercised
Example: Sell 1 OTM Put Option and Buy 1
OTM Call Option*
Spot Price (`)
1320.00
15000
*Lot size
1 Contract =
250 S&P 500
Put Strike Price (`)
1310.00
10000
Call Premium (`)
Break Even (`)
(`)
Pay-off
from Call
purchased
Net Payoff (`)
(`)
1290.00
750.00
-8250.00
-7500.00
1310.00
5750.00
-8250.00
-2500.00
1330.00
5750.00
-8250.00
-2500.00
1350.00
5750.00
-5750.00
0
1370.00
5750.00
-750.00
5000.00
1390.00
5750.00
4250.00
10000.00
Pay-off from Call purchased
Net Pay-off
-15000
-20000
Loss (`)
1410
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
-10000
1300
33.00
1290
-5000
1280
1340.00
1270
0
1260
5000
23.00
1350.00
Profit (`)
1250
Call Strike Price(`)
Pay-off
from Put
sold (`)
Pay-off from Put sold
20000
S&P 500
Put Premium (`)
S&P 500
on expiry
S&P 500
11
Bearish Strategy : Long Put
•
•
•
•
•
•
View : Bearish on S&P 500
Strategy : Buy put option
Risk: Limited to premium
Reward : Unlimited
Breakeven :Strike Price – Premium
Profit, when: S&P 500 goes down and option
exercised
• Max loss, when: S&P 500 goes up and option not
exercised
Example: Buy 1 Put Option*
8000
S&P 500
on expiry
Premium
Pay-off
Exercise
Pay-off
(`)
(`)
(`)
Net Payoff (`)
1250.00
-7275.00
15000.00
7725.00
1270.00
-7275.00
10000.00
2725.00
1280.90
-7275.00
7275.00
0.00
1300.00
-7275.00
2500.00
-4775.00
1320.00
-7275.00
0.00
-7275.00
Net Pay-off
Profit (`)
6000
1280.90
1340
S&P 500
-4000
Break Even (`)
1330
-2000
1320
29.10
0
1310
Premium (`)
2000
1300
1310.00
1290
Strike Price (`)
1280
*Lot size
1 Contract =
250 S&P 500
4000
1270
1320.00
1260
Spot Price (`)
1250
S&P 500
-6000
-8000
Loss (`)
12
Bearish Strategy : Short Call
•
•
•
•
•
•
View : Very bearish on S&P 500
Strategy : Sell call option
Risk: Unlimited
Reward : Limited to premium
Breakeven :Strike Price + Premium
Max Profits, when: S&P 500 goes down and option
not exercised
• Loss, when: S&P 500 goes up and option exercised
S&P 500
on expiry
Premium
Pay-off
Exercise
Pay-off
(`)
(`)
(`)
Net Payoff (`)
1320.00
8897.50
0.00
8897.50
1340.00
8897.50
2500.00
6397.50
1365.59
8897.50
-8897.50
0.00
1380.00
8897.50
-12500.00
-3602.50
1400.00
8897.50
17500.00
-8602.50
Net Pay-off
15000
Example: Sell 1 Call Option*
Profit (`)
10000
1320.00
5000
Break Even (`)
1365.59
1420
1390
1380
1370
1360
1350
1340
1330
1320
-5000
1310
35.59
0
1300
Premium (`)
1330.00
1290
Strike Price (`)
1280
*Lot size
1 Contract =
250 S&P 500
S&P 500
1410
Spot Price (`)
1400
S&P 500
-10000
-15000
Loss (`)
13
Bearish Strategy : Call Spread
S&P 500
on expiry
• View : Mildly Bearish on S&P 500
• Strategy : Sell ITM Call and buy OTM Call option to
protect against unexpected rise
• Risk: Limited to the difference between the two strikes
minus net premium
• Reward : Limited to the net premium received
• Breakeven :Strike Price of Short call + Net premium
received
• Max profit, when: S&P 500 goes down and both options
not exercised
• Max loss, when: S&P 500 goes up and both options
exercised
10000
8897.50
-7775.00
1122.50
1290.00
8897.50
-7775.00
1122.50
1314.49
7775.00
-7775.00
0.00
1330.00
3897.50
-7775.00
-3877.50
1350.00
-1102.50
-5275.00
-6377.50
1370.00
-6102.50
-275.00
-6377.50
Payoff from OTM Call Purchased
Net Pay-off
4000
31.10
-6000
1314.49
-8000
-10000
1380
1370
1360
1340
1330
-4000
1320
1340.00
1310
0
-2000
1300
35.59
1350
S&P 500
2000
1290
1310.00
1280
Sell ITM Call Strike Price (`)
1270
*Lot size
1 Contract =
250 S&P 500
6000
1260
1320.00
Break Even (`)
1270.00
Profit (`)
1250
Spot Price (`)
Call Premium (`)
Net Payoff (`)
(`)
8000
S&P 500
Buy OTM Call Strike Price(`)
(`)
Pay-off
from
OTM Call
Purchased
Pay-off from ITM Call Sold
Example: Sell 1 ITM Call Option and Buy 1 OTM Call
Option*
Call Premium (`)
Pay-off
from
ITM Call
Sold (`)
Loss (`)
14
Bearish Strategy : Put Spread
• View : Moderately Bearish on S&P 500
• Strategy : Buy ITM Put and sell OTM Put option to reduce
cost and breakeven of ITM Put
• Risk: Limited to net premium paid
• Reward : Limited to the difference between the two strikes
minus net premium paid
• Breakeven :Strike price of long Put -Net premium paid
• Max profit, when: S&P 500 goes down and both options
exercised
• Max loss, when: S&P 500 goes up and both options
unexercised
15000
Break Even (`)
7275.00
6347.50
1320.00
-5927.50
7275.00
1347.50
1325.39
-7275.00
7275.00
0.00
1340.00
-8427.50
7275.00
-1152.50
1360.00
-8427.50
7275.00
-1152.50
Pay-off from Put purchased
Pay-off from Put sold
Net Pay-off
10000
5000
29.10
-5000
1360
0
1350
S&P 500
1300.00
1340
Put Premium (`)
-927.50
1330
Sell OTM Put Strike Price(`)
33.71
1300.00
1320
Put Premium (`)
6347.50
1310
1330.00
2275.00
1300
Buy ITM Put Strike Price (`)
(`)
1290
*Lot size
1 Contract =
250 S&P 500
(`)
Net Payoff (`)
4072.50
1280
1320.00
Pay-off
from
OTM
Put sold
1280.00
1270
Spot Price (`)
1260
S&P 500
(`)
Pay-off
from ITM
Put
purchased
Profit (`)
1250
Example: Buy 1 ITM Put Option and Sell 1 OTM Put
Option*
S&P 500
on
expiry
1325.39
-10000
Loss (`)
15
Bearish Strategy: Protective Call/Synthetic Long Put
• View : Bearish on S&P 500 but keep protected against
any unexpected rise
• Strategy : Sell futures, buy call option to protect
against rise in S&P 500
• Risk: Limited to Call strike price -Futures price +
Premium
• Reward : Unlimited
• Breakeven :Futures price -Call premium
• Profit, when: S&P 500 goes down and option not
exercised
• Max Loss, when: S&P 500 goes up and option
exercised
25000
Pay-off
from Call
purchased
(`)
Net Payoff (`)
1270.00
17500.00
-7775.00
9725.00
1290.00
12500.00
-7775.00
4725.00
1308.90
7775.00
-7775.00
0.00
1330.00
2500.00
-7775.00
-5275.00
1350.00
-2500.00
-5275.00
-7775.00
1370.00
-7500.00
-275.00
-7775.00
Pay-off from Future sold
Profit (`)
Pay-off from Call purchased
Net Pay-off
15000
S&P 500
Future Price (`)
1340.00
10000
*Lot size
1 Contract =
250 S&P 500
Buy Call Strike Price (`)
1340.00
5000
-10000
-15000
Loss (`)
16
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
1290
1280
1270
1308.90
-5000
1260
31.10
S&P 500
0
1250
Breakeven (`)
Pay-off on
Futures
sold (`)
20000
Example: Sell 1 Future and Buy 1 Call Option*
Call Premium (`)
S&P 500 on
expiry(`)
Bearish Strategy: Covered Put
• View : Neutral to Bearish on S&P 500
• Strategy : Sell futures, Sell OTM put option to
earn premium
• Risk: Unlimited
• Reward : Future price – Strike price + Put
premium
• Breakeven :Futures price + Premium received
• Max Profit, when: S&P 500 goes down and
option exercised
• Loss, when: S&P 500 goes up and option not
exercised
S&P 500
on expiry
(`)
Pay-off
from
Futures
sold(`)
Pay-off
from Put
sold (`)
Net Payoff (`)
1290.00
12500.00
2275.00
14775.00
1310.00
7500.00
7275.00
14775.00
1330.00
2500.00
7275.00
9775.00
1350.00
-2500
7275.00
4775.00
1369.10
-7275.00
7275.00
0.00
1390.00
-12500.00
7275.00
-5225.00
Pay-off from Future sold
25000
Profit (`)
Pay-off from Put sold
Net Pay-off
20000
Breakeven (`)
1369.10
1410
1400
1390
1380
1370
1360
-10000
1350
-5000
1340
29.10
1330
Put Premium (`)
S&P 500
0
1320
1310.00
1310
Put Strike Price (`)
5000
1300
*Lot size
1 Contract =
250 S&P 500
10000
1290
1340.00
1280
Future Price(`)
1270
S&P 500
15000
1260
Example: Sell 1 Future and Sell 1 Put Option *
-15000
-20000
Loss (`)
17
Neutral Strategy: Long Straddle
S&P 500 on
expiry (`)
• View : S&P 500 will experience significant volatility
• Strategy : Buy call and buy put option of same strike
price
• Risk: Limited to Premium paid
• Reward : Unlimited
• Breakeven :Upper BEP = Strike Price of Long Call +
Net Premium Paid
Lower BEP = Strike Price of Long Put - Net
Premium Paid
• Profit, when: One of the option exercised
• Max Loss, when: Both the option not exercised
Example: Buy 1 Call & Buy 1 Put Option at same strike
20000
S&P 500
Spot Price (`)
1320.00
15000
*Lot size
1 Contract =
250 S&P 500
Call and Put Strike Price (`)
1350.00
10000
Put Premium (`)
40.00
-5000
1417.00
-10000
1283.00
Net Payoff (`)
-6750.00
15000.00
8250.00
1270.00
-6750.00
10000.00
3250.00
1283.00
-6750.00
6750.00
0
1320.00
-6750.00
-2500.00
-9250.00
1370.00
-1750.00
-10000.00
-11750.00
1417.00
10000.00
-10000.00
0
1440.00
15750.00
-10000.00
5750.00
1450.00
18250.00
-10000.00
8250.00
Pay-off from Call purchased
Pay-off from Put purchased
Net Pay-off
5000
27.00
Lower BEP (`)
Pay-off
from Put
purchased
(`)
1250.00
Profit (`)
Call Premium (`)
Upper BEP (`)
Pay-off
from Call
purchased
(`)
1450
1440
1430
1420
1410
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
1290
S&P 500
-15000
-20000
1280
1270
1260
1250
0
Loss (`)
18
Neutral Strategy: Short Straddle
S&P 500 on
expiry (`)
• View : S&P 500 will experience very little volatility
• Strategy : Sell Call and sell Put option of same strike
price
• Risk: Unlimited
• Reward : Limited to Premium received
• Breakeven :Upper BEP = Strike price of short call +
Net premium received
Lower BEP = Strike price of short put - Net premium
received
• Max Profit, when: Both the options not exercised
• Loss, when: one of the options exercised
Pay-off
from Call
sold (`)
5500.00
-11250.00
-5750.00
1273.00
5500.00
-5500.00
0
1300.00
5500.00
1250.00
6750.00
1350.00
3000.00
11250.00
14250.00
1390.00
-7000.00
11250.00
4250.00
1407.00
-11250.00
11250.00
0
1430.00
-17000.00
11250.00
-5750.00
1450.00
-22000.00
11250.00
-10750.00
Pay-off from Call sold
Pay-off from Put sold
S&P 500
Spot Price (`)
1320.00
20000
*Lot size
1 Contract =
250 S&P 500
Call and Put Strike Price (`)
1340.00
10000
Upper BEP (`)
1407.00
Lower BEP (`)
1273.00
5000
S&P 500
-15000
-20000
Loss (`)
-25000
19
1450
1440
1430
1420
1410
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
-10000
1290
-5000
1280
0
1270
45.00
Net Pay-off
15000
1260
Put Premium (`)
Profit (`)
1250
22.00
Net Pay-off
(`)
1250.00
Example: Sell 1 Call & Sell 1 Put Option at same strike
Call Premium (`)
Pay-off
from Put
sold (`)
Neutral Strategy: Long Strangle
S&P 500
on expiry
(`)
•
•
•
•
•
View : S&P 500 will experience significant volatility
Strategy : Buy slight OTM call and put option.
Risk: Limited to premium paid
Reward : Unlimited
Breakeven :Upper BEP = Strike Price of Long Call +
Net Premium Paid
Lower BEP = Strike Price of Long Put - Net Premium
Paid
• Profit, when: One of the option exercised
• Max Loss, when: Both the option not exercised
Example: Buy 1 Call & 1 Put Option at same strike
S&P 500
Spot Price (`)
1320.00
20000
*Lot size
1 Contract =
250 S&P 500
Call Strike Price (`)
1335.00
15000
33.29
10000
Upper BEP (`)
Lower BEP (`)
6340.00
1250.36
-8322.50
8322.50
0.00
1295.00
-8322.50
-2837.50
-11160.00
1325.00
-8322.50
-7837.50
-16160.00
1375.00
1677.50
-7837.50
-6160.00
1399.64
7837.50
-7837.50
0.00
1415.00
11677.50
-7837.50
3840.00
1425.00
14177.50
-7837.50
6340.00
Pay-off from Call purchased
Pay-off from Put purchased
Net Pay-off
S&P 500
-15000
-20000
Loss (`)
20
1425
1415
1405
1395
1385
1375
1365
1355
1345
1335
1325
1315
1305
-10000
1295
1399.64
1285
-5000
1275
31.35
1265
0
1255
5000
1315.00
1250.36
14662.50
1245
Put Premium (`)
Net Payoff (`)
-8322.50
1235
Put Strike Price (`)
Pay-off from
put purchased
(`)
1225.00
Profit (`)
1225
Call Premium (`)
Pay-off from
call
purchased (`)
Neutral Strategy: Short Strangle
S&P 500 on
expiry (`)
•
•
•
•
•
View : S&P 500 will experience very little volatility.
Strategy : Sell OTM Call and Put option
Risk: Unlimited
Reward : Limited to premium received
Breakeven :Upper BEP = Strike Price of Long Call +
Net Premium Received
Lower BEP = Strike Price of Long Put - Net Premium
Received
• Max Profit, when: Both the options not exercised
• Loss: When one of the options exercised
Pay-off
from call
sold (`)
8322.50
-14662.50
-6340.00
1250.36
8322.50
-8322.50
0.00
1295.00
8322.50
2837.50
11160.00
1325.00
8322.50
7837.50
16160.00
1375.00
-1677.50
7837.50
6160.00
1399.64
-7837.50
7837.50
0.00
1415.00
-11677.50
7837.50
-3840.00
1425.00
-14177.50
7837.50
-6340.00
10000
1315.00
5000
Upper BEP (`)
1399.64
-10000
Lower BEP (`)
1250.36
-15000
-20000
Loss (`)
21
1425
1415
1405
1395
1385
1375
1365
1355
1345
1335
1325
1315
-5000
1305
31.35
S&P 500
0
1295
Put Premium (`)
33.29
1285
Put Strike Price (`)
15000
1275
Call Premium (`)
Net Pay-off
1265
1335.00
1255
Call Strike Price (`)
Pay-off from Put sold
Profit (`)
1245
*Lot size
1 Contract =
250 S&P 500
20000
1235
1320.00
Pay-off from Call sold
1225
Spot Price (`)
Net Pay-off
(`)
1225.00
Example: Sell 1 Call & Sell 1 Put Option at same strike
S&P 500
Pay-off
from put
sold (`)
Neutral Strategy : Long Call Butterfly
S&P 500
on expiry
(`)
Pay-off from
2 ATM Calls
Sold (`)
-7775.00
-427.50
1290.00
20250.00
-12902.50
-7775.00
-427.50
1301.71
20250.00
-12475.00
-7775.00
0.00
1320.00
20250.00
-7902.50
-7775.00
4572.50
1338.29
11105.00
-3330.00
-7775.00
0.00
1350.00
5250.00
-402.50
-5275.00
-427.50
1370.00
-4750.00
4597.50
-275.00
-427.50
-5000
-10000
Upper BEP (`)
1338.29
-15000
Lower BEP (`)
1301.71
-20000
Loss (`)
S&P 500
22
1390
0
1380
1340.00
1370
5000
1360
51.61
1350
10000
1340
1300.00
1330
15000
1320
40.50
31.10
Call Premium (`)
Net Pay-off
20000
1310
Buy OTM Call Strike (`)
Payoff from 1 OTM Call Purchased
Profit (`)
1300
Call Premium (`)
1320.00
25000
1280
Buy ITM Call Strike (`)
Payoff from 1 ITM Call Purchased
1320.00
1270
Call Premium (`)
Pay-off from 2 ATM Calls Sold
1260
Sell ATM Call Strike (`)
Net Payoff (`)
-12902.50
1250
*Lot size
1 Contract =
250 S&P 500
Spot Price
Payoff from 1
OTM Call
purchased (`)
20250.00
Example Sell 2 ATM Call, Buy 1 ITM Call, Buy 1 OTM Call
S&P 500
Payoff from 1
ITM Call
purchased (`)
1270.00
1290
• View : Neutral on S&P 500 direction and bearish on volatility
• Strategy : Sell 2 ATM Call, Buy 1 ITM Call and Buy 1 OTM
Call
• Risk: Limited to net premium paid
• Reward : Limited to difference between adjacent strikes
minus net premium debit
• Breakeven : Upper BEP = Higher Strike Price - Net
Premium
Lower BEP = Lower Strike Price + Net Premium
• Profit, when: ITM call exercised and other options not
exercised
• Max Loss:, when: all options exercised or all options not
exercised
Neutral Strategy : Short Call Butterfly
• View : Neutral on S&P 500 direction and bullish on volatility
• Strategy : Buy 2 ATM Call, Sell 1 ITM Call and Sell 1 OTM
Call
• Risk: Limited to difference between adjacent strikes minus
net premium received
• Reward :Limited to net premium received
• Breakeven : Upper BEP = Higher Strike Price - Net
Premium Lower BEP = Lower Strike Price + Net Premium
• Max Profit, when: all options exercised or all options not
exercised
• Loss, when: ITM call exercised and other options not
exercised
S&P 500
on expiry
Pay-off from
2 ATM Calls
Purchased (`)
Payoff from 1
ITM Call sold
1270.00
-20250.00
12902.50
7775.00
427.50
1290.00
-20250.00
12902.50
7775.00
427.50
1301.71
-20250.00
12475.00
7775.00
0.00
1320.00
-20250.00
7902.50
7775.00
-4572.50
1338.29
-11105.00
3330.00
7775.00
0.00
1350.00
-5250.00
402.50
5275.00
427.50
1370.00
4750.00
-4597.50
275.00
427.50
(`)
(`)
Example: Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call
-10000
31.10
-15000
Upper BEP (`)
1338.29
-20000
Lower BEP (`)
1301.71
-25000
Call Premium (`)
S&P 500
Loss (`)
23
1390
-5000
1380
1340.00
1370
0
1360
51.61
1350
5000
1340
Sell OTM Call Strike (`)
10000
1300.00
1330
Call Premium (`)
Net Pay-off
15000
1320
Sell ITM Call Strike (`)
40.50
Payoff from 1 OTM Call Sold
Profit (`)
1310
Call Premium (`)
20000
1300
1320.00
1290
Buy ATM Call Strike (`)
(`)
Payoff from 1 ITM Call Sold
1280
*Lot size
1 Contract =
250 S&P 500
Net
Pay-off
Pay-off from 2 ATM Calls Purchased
1270
1320.00
1260
Spot Price
1250
S&P 500
Payoff from 1
OTM Call
sold (`)
Neutral Strategy : Long Call Condor
• View : Range bound market
• Strategy : Buy 1 ITM Call (Lower strike “A”), Sell 1 ITM Call
(Lower middle “B”), Sell 1 OTM Call (Higher middle “C”),
Buy 1 OTM Call (Higher strike “D”)
• Risk: Limited to difference between the lower strike spread
less the higher strike spread less premium paid
• Reward :Limited. Max profit when S&P 500 between “B” and
“C”
• Breakeven : Upper BEP = Highest Strike Price - Net
Premium. Lower BEP = Lowest Strike Price + Net Premium
• Max Profit, when: option “A & B” exercised
• Max Loss, when: all options exercised or all options not
exercised
S&P 500
Spot Price
1320.00
*Lot size
1 Contract = 250
S&P 500
Buy ITM Call Strike “A” (`)
1315.00
Call Premium (`)
-6750.00 -1000.00
1305.00
-11250.00
8750.00
8250.00
-6750.00 -1000.00
1319.00
-10250.00
8750.00
8250.00
-6750.00
1325.00
-8750.00
8750.00
8250.00
-6750.00 1500.00
1335.00
-6250.00
6250.00
8250.00
-6750.00 1500.00
1341.00
-4750.00
4750.00
6750.00
-6750.00
1355.00
-1250.00
1250.00
3250.00
-4250.00 -1000.00
1375.00
3750.00
-3750.00
-1750.00
750.00 -1000.00
1325.00
35.00
Profit (`)
10000
Pay-off
from “C”
(`)
Pay-off from
Pay-off from
Pay-off from
Pay-off from
Net Pay-off
Pay-off
from “D”
(`)
Net Payoff (`)
0.00
0.00
lower strike "A" purchased
lower middle strike "B" sold
higher middle strike "C" sold
higher strike "D" purchased
5000
1335.00
27.00
Upper BEP (`)
1341.00
Lower BEP (`)
1319.00
1395
1385
1375
1365
1355
-5000
1345
1345.00
0
1335
33.00
1325
Buy OTM Call Strike “D” (`)
8250.00
45.00
Pay-off
from “B”
(`)
1315
Call Premium (`)
8750.00
1305
Sell OTM Call Strike “C” (`)
-11250.00
1295
Call Premium (`)
1285.00
1285
Sell ITM Call Strike “B” (`)
Pay-off
from “A”
(`)
1275
Call Premium (`)
S&P 500
on expiry
(`)
S&P 500
-10000
-15000
Loss (`)
24
Neutral Strategy : Short Call Condor
• View : Market will break-out trading range, but direction is
uncertain
• Strategy : Sell 1 ITM Call (Lower strike “A”), Buy 1 ITM Call
(Lower middle “B”), Buy 1 OTM Call (Higher middle “C”), Sell
1 OTM Call (Higher strike “D”)
• Risk: Limited. Max loss when S&P 500 between “B” and “C”
• Reward :Limited. Price move above the “D” or below “A”
• Breakeven : Upper BEP = Highest Strike Price - Net Premium
Lower BEP = Lowest Strike Price + Net Premium
• Max Profit, when: all options exercised or all options not
exercised
• Max Loss, when: option “A & B” exercised
S&P 500
Spot Price
1320.00
*Lot size
1 Contract = 250
S&P 500
Sell ITM Call Strike “A” (`)
1315.00
11250.00
-8750.00
-8250.00
6750.00 1000.00
1319.00
10250.00
-8750.00
-8250.00
6750.00
1325.00
8750.00
-8750.00
-8250.00
6750.00 -1500.00
1335.00
6250.00
-6250.00
-8250.00
6750.00 -1500.00
1341.00
4750.00
-4750.00
-6750.00
6750.00
1355.00
1250.00
-1250.00
-3250.00
4250.00 1000.00
1375.00
-3750.00
3750.00
1750.00
-750.00 1000.00
0.00
0.00
Pay-off from lower middle strike "B" purchased
15000
Pay-off from higher middle strike "C" purchased
Profit (`)
Pay-off from higher strike "D" sold
Net Pay-off
10000
1335.00
Upper BEP (`)
1341.00
Lower BEP (`)
1319.00
0
-5000
Loss (`)
1385
27.00
1375
1345.00
5000
1365
33.00
1355
Call Premium (`)
1305.00
1345
Sell OTM Call Strike “D” (`)
6750.00 1000.00
1335
Call Premium (`)
Net Payoff (`)
-8250.00
1325
Buy OTM Call Strike “C” (`)
35.00
Pay-off
from “D”
(`)
-8750.00
1315
Call Premium (`)
Pay-off
from “C”
(`)
Pay-off from lower strike "A" sold
45.00
1325.00
Pay-off
from “B”
(`)
11250.00
1305
Buy ITM Call Strike “B” (`)
Pay-off
from “A”
(`)
1285.00
1295
Call Premium (`)
S&P 500
on expiry
(`)
S&P 500
-10000
25
Neutral Strategy : Long Box or Conversion
• To take advantage of temporary mis-pricing of
options in the market.
• Strategy : Long Call “A”, short Call “B”, long
Put “B” and Short Put “A”; Where B>A
• Risk: None, No effect of price change
• Reward : Fixed ((B-A)-Net Premium Debit)
• Max Profit, when: Always
• Max Loss, when: No effect of price change
Example: Buy 1 Call ,Sell 1 Call, Buy 1 Put & Sell 1
Put *
S&P 500
Spot Price
*Lot size
1 Contract =
250 S&P 500
Premium for Call
Strike Price 1310 (`)
40.00
Premium for Call
Strike Price 1340 (`)
33.00
Premium for Put
Strike Price 1340 (`)
44.20
Premium for Put
Strike Price 1310 (`)
31.00
S&P
500 on
expiry
(`)
Pay off
from Call
Bought
(`)
Pay off
from Call
Sold (`)
Pay off
from Put
Bought
(`)
1310.00
-10000.00
8250.00
-3550.00
7750.00
2450.00
1330.00
-5000.00
8250.00
-8550.00
7750.00
2450.00
1350.00
0.00
5750.00
-11050.00
7750.00
2450.00
1370.00
5000.00
750.00
-11050.00
7750.00
2450.00
1390.00
10000.00
-4250.00
-11050.00
7750.00
2450.00
1410.00
15000.00
-9250.00
-11050.00
7750.00
2450.00
1430.00
20000.00
-14250.00
-11050.00
7750.00
2450.00
Pay-off from
Pay-off from
Pay-off from
Pay-off from
Net Pay-off
1320.00
Profit (`)
15000
Pay off
from Put
Sold (`)
Net
Pay-off
(`)
Call purchased
Call sold
Put purchased
Put sold
10000
5000
S&P 500
-10000
Loss (`)
-15000
26
1400
1390
1380
1370
1360
1350
1340
1330
1320
1310
1300
1290
1280
1270
1260
-5000
1250
0
Neutral Strategy : Short Box or Conversion
• To take advantage of temporary mis-pricing of
options in the market.
• Strategy : Long Call “B”, Short Call “A”, Long Put
“A” and Short Put “B”; Where B>A
• Risk: None, No effect of price change
• Reward : Fixed ((B-A)-Net Premium Credit)
• Max Profit, when: Always
• Max Loss, when: Never. No effect of price change
Example: Buy 1 Call ,Sell 1 Call, Buy 1 Put & Sell 1
Put *
S&P 500
Spot Price
*Lot size
1 Contract =
250 S&P 500
Premium for Call
Strike Price 1310 (`)
47.00
Premium for Call
Strike Price 1340 (`)
28.00
Premium for Put
Strike Price 1340 (`)
46.00
Premium for Put
Strike Price 1310 (`)
29.10
S&P
500 on
expiry
(`)
Pay off
from Call
Bought (`)
Pay off
from Call
Sold (`)
Pay off
from Put
Bought
(`)
Pay off
from Put
Sold (`)
Net
Pay-off
(`)
1310.00
11750.00
-7000.00
4000.00
-7275.00
1475.00
1330.00
6750.00
-7000.00
9000.00
-7275.00
1475.00
1350.00
1750.00
-4500.00
11500.00
-7275.00
1475.00
1370.00
-3250.00
500.00
11500.00
-7275.00
1475.00
1390.00
-8250.00
5500.00
11500.00
-7275.00
1475.00
1410.00
-13250.00
10500.00
11500.00
-7275.00
1475.00
1430.00
-18250.00
15500.00
11500.00
-7275.00
1475.00
Pay-off from
Pay-off from
Pay-off from
Pay-off from
Net Pay-off
1320.00
15000
Profit (`)
Call sold
Call purchased
Put sold
Put purchased
10000
5000
-10000
-15000
1380
1370
1360
1350
1340
1330
1320
1310
1300
1290
1280
1270
1260
-5000
1250
0
S&P 500
Loss (`)
27
Neutral Strategy : Put-Call Parity
• To take advantage of temporary mis-pricing of options in the
market.
• Relation: Call + PV (Strike) = Put + PV (Futures)
• Strategy : Sell Call & Invest in Bond and Buy Put & Futures if
Call +PV (Strike) > Put + Futures
• Sell Put & Futures and Buy Call & Invest in Bond if
Call + PV (Strike) < Put + Futures
• Risk: None, No effect of price change
• Reward : Limited to the price difference
• Max Profit, when: Always
• Max Loss, when: No effect of price change
S&P 500
on expiry
(`)
Pay- off
from Future
(`)
Pay-off
from Put
(`)
Pay-off
from Call
(`)
Net
Pay-off
(`)
1300.00
-6250.00
12500.00
-3750.00
2500.00
1320.00
-1250.00
10000.00
-6250.00
2500.00
1340.00
3750.00
5000.00
-6250.00
2500.00
1360.00
8750.00
0
-6250.00
2500.00
1380.00
13750.00
-5000.00
-6250.00
2500.00
1400.00
18750.00
-10000.00
-6250.00
2500.00
1420.00
23750.00
-15000.00
-6250.00
2500.00
Pay-off from Call sold
Example: Sell 1 Call ,Invest Cash , Buy 1 Put & Buy 1
Future Contract *
Pay-off from Put purchased
S&P 500
Futures Price
1325
*Lot size
1 Contract =
250 S&P 500
Premium for Call Strike Price
1310 (`)
50.00
Premium for Put Strike Price 1310
(`)
25.00
15000
Pay-off from Future purchased
Profit (`)
Net Pay-off
10000
5000
-10000
Interest Rate (per Annum)%
5.00
-15000
Cash to be invested (PV of Strike)
1304
-20000
-25000
S&P 500
Loss (`)
28
1350
1340
1330
1320
1310
1300
1290
1280
1270
1260
-5000
1250
0
Glossary
At-the money (ATM): Any option is at-the money if
the strike price is equal to the market price of
underlying.
Break-Even Point (BEP): The price at which an option
strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right
to buy the underlying at a specified price for a certain,
fixed period of time.
In-the-money (ITM): A call option is in-the-money if
the strike price is less than the market price of the
underlying. A put option is in-the-money if the strike
price is greater than the market price of the underlying.
Long position: A position wherein an investor is a net
holder in a particular options series.
Out-of-the-money (OTM): A call option is out-of-themoney if the strike price is greater than the market
price of the underlying . A put option is out-of-themoney if the strike price is less than the market price
of the underlying.
Premium: The price a put or call buyer must pay to a
put or call seller (writer) for an option contract.
Market supply and demand forces determine the
premium.
Put: An option contract that gives the holder the
right to sell the underlying at a specified price for a
certain, fixed period of time.
Strike price or exercise price: The stated price per
quantity for which the underlying may be purchased
(in the case of a call) or sold (in the case of a put) by
the option holder upon exercise of the option
contract.
Synthetic position: A strategy involving two or more
instruments that has the same risk/reward profile as
a strategy involving only one instrument.
Time decay or erosion: A term used to describe how
the time value of an option can “decay” or reduce
with the passage of time.
Volatility: A measure of the fluctuation in the market
price of the underlying . Mathematically, volatility is
the annualized standard deviation of returns.
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Contact US
NATIONAL STOCK EXCHANGE OF INDIA LIMITED
Exchange Plaza, Bandra Kurla Complex, Bandra (E),
Mumbai 400051, India
Tel: + 91 22 26598165/ 26598168
Fax: + 91 22 26598242
email : [email protected]
Web Site: www.nseindia.com
National Stock Exchange of India Limited (NSE) is providing this publication for informational purposes
only. No statement in this publication is to be construed as furnishing investment advice or being a
recommendation, solicitation or offer to buy or sell any option or any other security.
Investors are advised to seek adequate product and market knowledge as well as proper investment advice
before trading. While care has been taken to ensure accuracy, the information furnished to reader with no
warranty as to accuracy or completeness of its contents and on condition that any changes, omissions or
errors shall not be made the basis for any claim, demand or cause of action
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Thank You
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