Equity Derivatives Basics
Equity Derivatives Basics
2001 2002
Main Features
Premier exchanges: The National Stock Exchange of India Limited (NSE) The Stock Exchange, Mumbai (BSE) Almost all transactions in Derivatives Segment are executed on NSE
Trading system: Fully automated, screen based and order driven system
Orders are matched on Price Time priority Contracts are cash settled Trades are marginable (unlike in equity segment where institutional trades are margin exempt) Derivatives volume is more than double the Equity segment volume primarily due to lack of alternative viable products for short selling and carry forward of trades in Equity segment and, also pricing inaccuracies providing arbitrage opportunities
3
Total F&O
60434
12.99
27/04/2006
NSEs Positio n
Rank
Number of Contracts
JSE
1,31,18,13 1
3,71,45,12 2
3,13,83,19 4
17,54,65,4 23
NSE
92,61,984
Eurex
2,40,22,74 6
Philadelphi a SE
2,86,44,12 5
CBOE
2,15,85,98 6
31,12,178
Euronext.li ffe
6,342,391
Sao Paulo SE
2,21,52,40 2
Eurex
1,64,31,92 0
Meaning of Derivatives
Derivatives is a product whose value is derived from the value of the underlying asset Underlying asset can be equity, forex, commodity or any other asset Eg. Sensex, Nifty
Functions of Derivatives
Price discovery Risk transfer
Higher volumes
Controlled speculation Enhances entrepreneurship
Types of Derivatives
Forwards A forward contract is a customized agreement between two parties to exchange an asset at certain period in future at todays pre agreed price Futures A futures contract is an agreement between two parties to exchange an asset at a certain date at a certain price Futures contracts are standardized forward contracts that are traded on an exchange
Options An options contract gives buyer the right, but not the obligation to buy or sell a specified underlying at a set price on or before a specified date
Participants in Derivatives
Hedgers Hedgers face risk associated with the price of an asset they own They use derivatives to reduce or eliminate risk
Scalper/Jobbers
Speculators Speculators bet on future movements in the prices of an asset Derivatives give them an extra leverage, by which they can increase both the potential gains and losses Arbitrageurs Arbitrageurs take advantage of discrepancy between prices in two different markets
Introduction to Forwards
Forwards A forward contract is a customized agreement between two parties to exchange an asset at certain period in future at todays pre agreed price
eg. On May 1, 2004, Mr. X agrees to buy ten tola of Gold from Mr. Y on Dec 31, 2004 at Rs 6500/tola Mr. X has taken a long position and Mr. Y short
Other details are negotiated bilaterally
Forward- Users
Hedgers eg. Forex
Speculators
Forward - Limitations
Lack of centralization of trading Illiquidity Counter party risk
Introduction to Futures
Futures were designed to solve the problems that existed in the forward markets A futures contract is an agreement between two parties to exchange an asset at a certain date at a certain price Futures contracts are standardized forward contracts that are traded on an exchange
To facilitate liquidity, exchange specified standard features for the contract Quantity and quality of the underlying Date and month of delivery Units of price quotation and min. price change Location and mode of settlement Futures can be offset prior to maturity, 99% offset prior to maturity
Forwards
OTC in nature Customized Illiquid No margins Expiry settled
Futures Terminology
Spot Price: Price at which an asset trades in the spot market Futures price: Price at which futures contract trades in the futures market
Contract cycle: Period over which a contract trades Derivatives contracts have one, two and three months expiry cycles Contracts expire on last Thursday New contracts are fired on Friday
Expiry date: Date specified on the derivatives contract Its the last Thursday and the last day for the contract to be traded Contract will cease to exist from this day
Contract size: Quantity of asset that has to be delivered under one contract Basis: It is the difference between futures and spot. Theoretically basis is always positive
Cost of carry: It measures the interest cost that is paid to finance the asset less the income earned on that asset
Initial margin: Amount that must be deposited in the margin account in order to initiate a futures position
Mark to Market (MTM) margin: In futures, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing prices. This adjustment is called MTM
Mr. X buys Nifty futures at 1300 Day Closing MTM a/c One 1310 +10 Two 1305 - 05 Three 1315 +10 Total +15
Maintenance Margin: This is lower than the initial margin. This margin is set to ensure that the balance in the margin account never becomes negative. If the balance falls below maintenance margin, margin call is made. Trader is expected to top up the margin account to the initial margin level
Futures Payoff
A payoff is the likely profit or loss that would accrue to a market participant with change in the price of the underlying asset Futures have a linear payoff, i.e. the losses as well as profits for the trader of futures contract are unlimited
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Futures Pricing
In equation terminologyF = S+C = S(1+r)T Where, F = Future Price S = Spot Price C = Cost of Carry r = Rate of Interest T = Time to expiry
Example
Spot Nifty (S) = 1250 Interest rate cost (r)= 10%
contd
F = S(1+r) t = 1250 (1+0.10) 1/12
= 1260
Futures Calculator
Show Calculator
Uses of Futures
Hedging Exposure to FII restricted stocks Better execution Arbitrage and Reverse arbitrage Cash Management Exposure prior to actual new inflows Leveraged Directional Trading
Hedging
Is a mechanism to reduce price risk, by taking an opposite position in futures market. Equity Investments of USD 1bn Hedging can be initiated by Selling Nifty Futures.hedge can be for 20%, 50% or 100% based on view Ideally 25 35% hedge is kept at all times, then based on view, its increased or decreased Similarly hedge can be initiated also for a single stock
Hedging
Is a mechanism to reduce price risk. By taking an opposite position in futures market.
Hedging on a scrip
(F&O Segment)
Hedging on a scrip
(Non F&O Segment)
Mr X takes a Rs 10 mn long position in Zee Tele on May 1, 2004 @ Rs 100 / share Suppose the beta is 1.2
Portfolio Hedging
Scrip ITC OBC Cipla Lupin Siemens Price 112 68.25 847.65 149.85 237.5 Shares 100 200 100 200 200 Value 11200 13650 84765 29970 47500 Weightage 6.0% 7.3% 45.3% 16.0% 25.4% Beta 0.59 0.90 0.75 1.13 1.10 Portfolio Beta 0.04 0.07 0.34 0.18 0.28
TOTAL
187085
0.90
Better execution
Since derivatives market is more liquid than equity markets, the impact cost for execution is relatively lower Simultaneous execution can happen in both segments, thus enabling better rates
Opportunities in Arbitrage
Indian Equity derivatives segment provides a unique opportunity to make gross returns varying from 8 - 12% from single stock cash and carry arbitrage Arb spreads tend to vary across stocks, spreads are generally higher in stocks where FII position limits have hit Opportunities have increased as the list of underlying stocks have gone up (225 stocks currently) FII proprietary books very active in single stock equity and futures arbitrage, approx. 50 55% of FII volumes in stock futures is from the prop. books active in arbitrage Participants are not active in Index cash and carry, as at times there is a high impact cost on basket execution, and also there are problems with shorting the spot
But with Nifty futures quoting at significant discount to spot, the arbitrage between Nifty futures and Single stock futures have provided new opportunity
PN inventory is also used for reverse cash and carry arbitrage
Modes of Arbitrage
Lending funds to the market Lending securities to the market
contd
Follow up Plan B: Second month futures trading at 100 bps premium to the first month, then rollover the position from the first month to the second month e.g. ABC one month futures is at 110 Buyback the futures and, ABC second month futures is at 111.10 Sell the futures Result: The funds continue to remain deployed at 12% p.a.
Scenario: Stock ABC trading at 101, and its one month futures is trading at 100 Action: Sell stock ABC in cash segment and simultaneously Buy its one month futures Follow up: On or before the expiry of one month futures contract, the difference between spot price and futures price narrow down to trade at parity, unwind the position e.g. ABC spot price on the expiry day is 110 Buy the stock and, ABC one month futures will also be at 110 Sell the futures Result: Arbitrage position is unwound at a risk less profit of 12% p.a. and continue to hold the delivery of the stock
Costs involved
Brokerage (inclusive of service tax of 12.36%) - Equity: 0.03% - Futures: 0.03% Securities Transaction Tax - Equity: 0.125% - Futures: 0.0166% Margin costs - Initial margin between 15 20% - Exposure margin between 5 10% - Mark to market margin depending on the futures movement Custody and clearing charges
Cash Management
During redemption pressures or during times of tight cash position, equity positions can be shifted to futures By doing this, same exposure is maintained at a small margin, thus releasing much needed cash
Exposure
Exposure can be initiated in futures before the actual fresh fund inflows Opportunity not missed if markets move up
Speculation
Speculation using Index Futures View on the market based on budget, overall corporate numbers, economic reforms, political stability, unforeseen events etc
Three possibilities for Index trading: Trade on the stocks which are most likely to be impacted Trade on Index (basket) portfolio Trade on Index Futures
Speculation using Stock Futures Advantages Leverage Low transaction Disadvantages MTM debit No Ownership
On expiry of series
Rollover to the next month Shift futures position to equity Let the futures position expire
Options
Hyundai is launching SONATA
Price is Rs 15 Lakh You can book the car by paying Rs 50,000
Introduction to Options
An options contract gives buyer the right, but not the obligation to buy or sell a specified underlying at a set price on or before a specified date e.g. Car Purchase, Insurance
Options Terminology
Index options: Have index as the underlying Stock Options: Have stock as the underlying Option buyer: Buys the option by paying premium and gets the right to exercise options on writer/seller Option seller: Sells/writes the option and receives the premium and is hence under obligation to buy/sell asset if the buyer exercises option
Option premium: Price paid by the buyer to seller to acquire the right. Comprises of Intrinsic Value and Time Value Strike / Exercise price: Price at which the underlying may be purchased or sold Expiry date: Its last Thursday of the month for options to be exercised/ traded. Options cease to exist after expiry
Options Payoff
Optional characteristics of options results in a non linear payoff for options. Non linear payoffs provide flexibility to create combinations Losses of the buyer is limited to the premium paid and profits are unlimited For writers/sellers losses are unlimited and profits limited to the premium received
Call options
A call option gives the buyer, the right to buy specified quantity of the underlying asset at a set strike price on or before expiration date
The seller(writer) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise the option to buy
Payoffs
Nifty Spot 1000 1100 1200 1250 1350 1400 1500
Below strike Value of 1250 call Premium paid Net Profit / (Loss) 0
Below strike 0
Below strike 0
At strike
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Nifty Spot 1000 1100 1200 1250 1350 1450 1550 Below strike Value of 1250 call Premium recd Net Profit / (Loss) 0 Below strike 0 Below strike 0 At strike Break even -100 Above strike -200 Above strike -300
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Payoff Chart
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Payoffs
Nifty Spot 1000 1100 1150 1250 1350 1450 1550 Below strike Value of 1250 put Premium paid Net Profit / (Loss) 250 Below strike 150 Break even 100 At strike Above strike 0 Above strike 0 Above strike 0
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Nifty Spot 1000 1100 1150 1250 1350 1450 1550
Below strike Value of 1250 put Premium recd Net Profit / (Loss) -250
At strike
Above strike 0
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Payoff Chart
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Options Terminology
Open Interest The total number of outstanding contracts on a given series or for a given underlying at a particular point in time
Exercise Invoke the rights approved to buyer of option Assignment When the buyer of an option exercises his right to buy / sell, a randomly selected option seller ( at the client level ) is assigned the obligation to honor the underlying contract.
European Option Can be exercised only on the expiration date e.g. Index options American Option Can be exercised any time on or before the expiration date e.g. Stock options
In the money options It is an option that will lead to a positive cash flow to buyer when exercised
At the money options It is an option that will lead to a zero cash flow to buyer when exercised
Out of the money options It is an option that will lead to a negative cash flow to buyer when exercised, however OTM options can never be exercised / assigned
Call option is out of money when CMP is lower than strike Put option is out of money when CMP is higher than strike
At-The-Money-Strike In-The-Money Calls Out-The-Money-Calls 950 1050 1150 1250 1350 1450 1550
Spot
950 1050 1150 1250 1350 1450 1550 Out-The-Money-Puts In-The-Money-Puts At-The-Money-Strike
Intrinsic Value (IV ) Difference between spot and strike ITM has IV, ATM and OTM have zero IV
Time Value ( TV ) Difference between the premium and intrinsic value ITM have both IV and TV, ATM and OTM have only TV Longer the expiry more the TV, on expiry TV is 0
Options Pricing
Primarily two methods used :
Black Scholes method
Strike price Call options - more valuable at the lower strike and less valuable at the higher strike Put options - more valuable at the higher strike and less valuable at the lower strike
Risk free interest rate Call option premium increases with rise in interest rates Put option premium decreases with rise in interest rates
Time to expiry Options are more valuable when the time to expiration is more
Dividend Stock price reduces on the ex dividend date. This has a ve effect on calls and +ve effect on puts
Volatility It is a measure of risk, uncertainty or the variability in the future price of a stock
Higher volatility reflects greater expectations of fluctuations in either direction for a stock Options are more valuable with increase in volatility
Not possible to anticipate future volatility, however two ways to estimate the volatility: Historical volatility
Implied volatility It is the markets estimate of how volatile the stock will be from the present up to expiry
Options Greeks
Delta Ceteris Paribus (stock price, risk free interest rate, strike price, time to expiry and volatility):Delta of an option indicates how much the premium will change for a unit change in the price
For an option with a delta of 0.50, the premium of option will change by 50 paise for a Re 1/change in the price of stock
Delta is 0.50 for ATM options, as the option becomes ITM the value of delta increases and it decreases as the option becomes OTM
Delta indicates that OTM options are less sensitive to price change as compared to ATM and ITM options
Delta is positive for bullish positions (long futures, long call, short put) and negative for bearish positions (short futures, long put and short call)
Theta Theta shows how much value the option will lose after one day with all the parameters remaining same
Theta is always negative (positive) for the buyer (seller) of option, as the value of option loses value each day if the anticipated view is not realized
Spot =410 Call Premium = 15 Ceteris Paribus and one day passes, the value for RIL 420 call option will reduce by Re 1/-
Vega Vega indicates how much the option premium will change for a unit change in volatility of the spot
Volatility increase is advantageous to the buyer of option (i.e. vega is +ve) and disadvantageous to the seller (i.e vega is ve)
Vega of 1 month Reliance 420 Call option is 1, when volatility is 35 Spot =410 Call Premium = 15 Ceteris Paribus and volatility moves to 36, call premium will increase to 16
Rho Rho indicates the change in value of an option for 1 unit change in interest rate
Interest rates are almost constant over the expiry hence are considered insignificant
Gamma Gamma indicates how much the delta changes for a unit change in the price of the underlying When delta change is known, then it becomes easy in finding how much the next premium change will be for a unit change in the spot price, i.e it indicates the rate of change in premium
Gamma is positive for option buyers and negative for option sellers
Gamma is unimportant for long maturity options For short maturity options gamma is high and option premium changes fast with spot changes
Uses of Options
Hedging Maintain Exposure post selling Cash Management Exposure prior to actual new inflows Determine profit booking level Determine buying level
Hedging
Hedging can also be initiated by buying a Put Option, which will protect the downside This strategy will keep downside limited, and at same time keeps the upside open
Buy Put
Payoff
Sell Equity
Buy Call
Cash Management
During redemption pressures or during times of tight cash position, equity positions can be shifted to Buy Call Options By doing this, exposure is maintained at a small premium, thus releasing much needed cash
Exposure
Exposure can be initiated via Buy Call Options before the actual fresh fund inflows Opportunity not missed if markets move up
Corporate Announcements
In case of a corporate announcement the exchange adjusts the Futures and Options positions, so that the contract value of the positions on the cum benefit day and the ex benefit day is the same
Dividend
If the dividend yield is lower than 10% of spot, then there is no adjustment. Market adjusts option price considering dividend. Option pricing is calculated using Futures price instead of the Spot price in options calculator The Futures price start quoting at a discount to the spot by the dividend amount
As per SEBI, if the dividend yield is more than 10% of the spot price on the dividend announcement day, then on ex dividend date the strike price of the options is reduced by the dividend amount, and MTM credit of the dividend amount is given to the long futures position, which in turn is debited from the short futures position
Bonus
When a company declares bonus then the lot size for futures as well as options and strike price of the stock option is adjusted by the exchange as per the bonus ratio on ex-bonus day
Strategies
Bullish
Long Call Call Ratio Backspread
Neutral
Long Straddle Long Strangle Long Strap Long Strip Long Condor Short Condor Long Butterfly Short Butterfly Short Straddle Short Strangle Short Strap & Strip Put & Call Ratio Spread
Bearish
Long Put Put Ratio Backspread
Rising
Neutral
Long Futures Long Semi Futures Bull Call Spread Bull Put Spread Short Put
Short Futures Short Semi Futures Bear Put Spread Bear Call Spread Short Call
Falling
Limited
Bull Call Spread (18) Bull Put Spread (21) Long & Short Condor (44 & 50) Long & Short Butterfly (41 & 47) Bear Put Spread (86) Bear Call Spread (89) Short Put & Call (24 & 92) Short Straddle & Strangle (53 & 56) Short Strap & Strip (60 & 63) Put Ratio Spread (69) Call Ratio Spread (66)
Unlimited
Long Call & Put (4 & 72) Call Ratio Backspread (8) Long Straddle & Strangle (28 & 31) Long Strap & Strip (35 & 38) Put Ratio Backspread (76)
Limited
Unlimited
Long Futures (11) Long Semi Futures ( 15) Short Futures ( 79) Short Semi Futures ( 83)
Long Call
View
Profit Loss Breakeven Time Decay Use
Comment
Unlimited, Increases as the spot price increases Limited to the premium paid Strike price + premium Hurts Very bullish outlook
Volatility
Margin
Loss
Max. Loss : If Futures < Put strike = Premium - (Strike Futures) If Futures > Put strike = (Futures - Strike) + premium
Breakeven = Put Strike + Max. Loss
Profit
Loss
Comment
Increases as the spot price increases
(B A) + (debit premium) or (credit premium) B + Max. Loss Hurts
Use
Volatility Margin
Variant Sell a lower strike (A) put, Buy 2 higher strike (B) calls and, Short Futures
Short Call B
Breakeven
A
Max. Loss
Long Calls
Loss
Long Futures
View
Profit Loss Breakeven Time Decay Use Volatility
Comment
Increases as the spot price increases Increases as the spot price decreases Purchase price + Brokerage No impact Very bullish outlook No impact Yes
Margin
Purchase Price
Loss
Short Put
Long Call
Loss
Comment
Increases as the spot price increases Increases as the spot price decreases Call Strike (B) + Premium debit or Put Strike (A) Premium credit Mixed Hurts for Long Call and helps for Short Put Bullish outlook Neutral Yes
Breakeven
Time Decay Use Volatility Margin
Loss
Comment
Limited, Max. Profit = (B A) - Net Premium Limited, Max. Loss = Net Premium
Breakeven
Time Decay
Use
Volatility Margin
Short Call
A Long Call
B Breakeven
Loss
Comment
Limited, Max. Profit = Net Premium Limited, Max. Loss = (B A) Net Premium
Breakeven
Time Decay Use Volatility Margin
Breakeven
Long Put
Loss
Short Put
View
Profit
Loss Breakeven Time Decay
Comment
Limited to the premium received
Unlimited, increases as the spot price decreases Strike price Premium Helps
Use
Volatility Margin
Bullish outlook
Volatility decrease helps the position Yes
Breakeven Strike
Premium received
Loss
Loss
Long Straddle
View
Profit Loss
Unlimited Limited to the net premium paid Low BEP = Strike price net premium High BEP = Strike price + net premium Hurts Expecting a large breakout, Uncertain about the direction Volatility increase improves the position No
Comment
Breakeven
Time Decay Use Volatility Margin
Long Straddle
Formation Buy Call A and, Buy Put A
Variant Buy 2 Calls A & Short Futures or Buy 2 Puts A & Long Futures
Low Breakeven
Common Strike A
High Breakeven
Max. Loss Long Put
Long Call
Long Straddle
Loss
Long Strangle
View
Profit Loss
Unlimited Limited, Premium (B A), if Call Strike is A Limited to premium, if Call Strike is B
Comment
Breakeven
Time Decay
Use
Volatility Margin
Long Strangle
Formation Buy Call A and Buy Put B Variants Buy Put A and Buy Call B Buy Put A, Buy Put B and Long Futures Buy Call A, Buy Call B and Short Futures
Low Breakeven
High Breakeven
A
Long Call
B
Long Put
Loss
Profit
Low Breakeven
Long Call
High Breakeven
Long Put
Loss
Long Strap
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Unlimited Limited to the net premium paid Low BEP = Strike price net premium High BEP = Strike price + (net premium / 2) Hurts Expecting a large breakout, Uncertain about the direction. Increase in the stock more likely. Volatility increase improves the position No
Comment
Long Strap
Formation
Buy 2 Calls A and, Buy Put A Variant Buy 3 Calls A & Short Futures
Profit
Common Strike A
Loss
Long Strip
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Unlimited Limited to the net premium paid Low BEP = Strike price (net premium / 2) High BEP = Strike price + net premium Hurts Expecting a large breakout, Uncertain about the direction. Decrease in the stock more likely. Volatility increase improves the position No
Comment
Long Strip
Formation
Buy 2 Puts A and, Buy Call A Variant Buy 3 Puts A & Long Futures
Common Strike A
Loss
Long Butterfly
View
Profit Loss
Comment
Limited to [(B A) or (C B)] Net premium Limited to the net premium paid Low BEP = Middle Strike Profit High BEP = Middle Strike + Profit Neutral Large stock price movement unlikely. Often used as a follow up strategy Neutral Yes
Breakeven
Time Decay Use Volatility Margin
Long Butterfly
Formation Buy Call A, Sell 2 Calls B, Buy Call C Variants Buy Put A, Sell 2 Puts B, Buy Put C Buy Call A, Sell Put & Call B, Buy Put C Buy Put A, Sell Put & Call B, Buy Call C
Profit
Loss
Long Condor
View
Profit Loss
Comment
Limited, Maximum when spot is between B & C Limited, Maximum when spot is < A & > D Low BEP = B Profit High BEP = C + Profit Neutral Large stock price movement unlikely. Often used as a follow up strategy Neutral Yes
Breakeven
Time Decay Use Volatility Margin
Long Condor
Formation Buy Call A, Sell Call B & C, Buy Call D Variants Buy Put A, Sell Put B & C, Buy Put D Buy Put A, Sell Put B & Call C, Buy Call D Buy Call A, Sell Call B & C, Buy Put D
Profit
Low Breakeven
Loss
Short Butterfly
View
Profit Loss
Comment
Limited to the net premium received Limited to [(B A) or (C B)] Net premium Low BEP = Middle Strike Loss High BEP = Middle Strike + Loss Neutral Large stock price movement expected. Often used as a follow up strategy Neutral Yes
Breakeven
Time Decay Use Volatility Margin
Short Butterfly
Formation Sell Call A, Buy 2 Calls B, Sell Call C Variants Sell Put A, Buy 2 Puts B, Sell Put C Sell Put A, Buy Put & Call B, Sell Call C Sell Call A, Buy Put & Call B, Sell Put C
Profit
Low Breakeven
High Breakeven
Loss
Short Condor
View
Profit Loss
Comment
Limited, Maximum when spot is < A & > D Limited, Maximum when spot is between B & C Low BEP = B Loss High BEP = C + Loss Neutral Large stock price movement expected. Often used as a follow up strategy Neutral Yes
Breakeven
Time Decay Use Volatility Margin
Short Condor
Formation Sell Call A, Buy Call B & C, Sell Call D Variants Sell Put A, Buy Put B & C, Sell Put D Sell Put A, Buy Put B & Call C, Sell Call D Sell Call A, Buy Call B & Put C, Sell Put D
Profit
Low Breakeven
High Breakeven
Loss
Short Straddle
View
Profit Loss
Unlimited
Comment
Limited to the net premium received
Breakeven
Time Decay
Low BEP = Strike price net premium High BEP = Strike price + net premium
Helps
Use
Volatility Margin
Short Straddle
Formation Sell Call A and, Sell Put A
Variant Sell 2 Calls A & Long Futures or Sell 2 Puts A & Short Futures
Low Breakeven
High Breakeven
Loss
Short Strangle
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Comment
Limited, Premium (B A), if Call Strike is A Limited to premium, if Call Strike is B Unlimited Low BEP = A Profit High BEP = B + Profit Helps Expecting a moderate sideways movement. Volatility decrease helps the position Yes
Short Strangle
Formation Sell Call A and Sell Put B Variants Sell Put A and Sell Call B Sell Put A, Sell Put B and Short Futures Sell Call A, Sell Call B and Long Futures
Profit
Short Call
Low Breakeven
High Breakeven
Loss
Profit
Loss
Short Strap
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Unlimited Low BEP = Strike price net premium High BEP = Strike price + (net premium / 2) Helps Expecting a tight sideways movement. Decrease in the stock more likely. Volatility decrease helps the position Yes
Comment
Limited to the net premium received
Short Strap
Formation
Loss
Short Strip
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Unlimited Low BEP = Strike price (net premium / 2) High BEP = Strike price + net premium Helps Expecting a tight sideways movement. Increase in the stock more likely. Volatility decrease helps the position Yes
Comment
Limited to the net premium received
Short Strip
Formation Sell 2 Puts A and, Sell Call A
Variant
Sell 3 Puts A & Short Futures
Profit
Loss
Comment
(B A) - (debit premium) or + (credit premium) Increases as the spot price increases
Breakeven
Time Decay Use Volatility Margin
B + Profit
Helps Expecting a tight sideways movement. Biased towards a decrease in stock price. Volatility decrease helps the position Yes
Profit
Short Calls
Max. Profit
Breakeven
A Long Call
Loss
Comment
(B A) - (debit premium) or + (credit premium) Increases as the spot price decreases
Breakeven
Time Decay
Use
Volatility
Margin
Profit
Breakeven
Long Put
Loss
Long Put
View
Profit Loss Breakeven Time Decay Use Volatility Margin
Comment
Unlimited, Increases as the spot price decreases Limited to the premium paid Strike price - premium Hurts Very bearish outlook Volatility increase helps the position No
Loss
Profit
Long Put
Loss
Comment
Increases as the spot price decreases
(B A) + (debit premium) or (credit premium) A - Loss Hurts
Use
Volatility Margin
Breakeven
B
Max. Loss
Long Puts
Loss
Short Futures
View
Profit
Loss Breakeven Time Decay
Comment
Increases as the spot price decreases
Increases as the spot price increases Sell price + Brokerage No impact
Use
Volatility Margin
Profit
Short Futures
Sale Price
Loss
Profit
Short Call
Long Put A
Loss
Comment
Increases as the spot price decreases Increases as the spot price increases
Breakeven
Time Decay
Call Strike (B) + Premium credit or Put Strike (A) Premium debit
Mixed Hurts for Long put and helps for Short call
Use
Volatility Margin
Bearish outlook
Neutral Yes
Profit
Loss
Comment
Limited, Max. Profit = (B A) - Net Premium
Limited, Max. Loss = Net Premium Strike B - Max. Loss Mixed Hurts for long put and helps for short put
Use
Volatility Margin
Bearish outlook
Neutral Yes
Profit
Short Put
Loss
Comment
Limited, Max. Profit = Net Premium Limited, Max. Loss = (B A) Net Premium
Breakeven
Time Decay
Use
Volatility Margin
Loss
Short Call
View
Profit
Loss Breakeven Time Decay
Comment
Limited to the premium received
Unlimited, increases as the spot price increases Strike price + Premium Helps
Use
Volatility Margin
Bearish outlook
Volatility decrease helps the position Yes
Premium received
Breakeven Strike
Loss
Profit
Thank You