Module 7: Option Positions and Strategies Derivative and Financial Markets Concepts Module 7: Option Positions and Strategies Objectives: To understand different option position and strategy applications To relate different underlying and option positions Structure: Combination Worksheets Options Positions 2, 3 and 4 [OPTPOS.XLS] Derivative algebra (+F, +C, -P, +C=+F+P, …) Discussion Options 9th: Chapter 12 Options 8th: Chapter 11, pp. 236-248 Options 7th: Chapter 10, pp. 219-221, 230-231  Options 6th: Chapter 10, pp. 223-225, 234-235   Options 5th:  Chapter 9, pp. 185-187, 194-195  Options 4th:  Chapter 8, pp. 185-187, 194-195 Jointly-developed module licensed to James Bodurtha Copyright Ó Financial Labs, Inc., 1993, 1994, 1995, 1996 all rights reserved. Confidential, Proprietary Information of Financial Labs, Inc.

Combined Option Positions Option Positions are created by combining options with underlying positions and with other options. The variations of such combinations are unlimited. Explore the possible combinations and their purposes using the following worksheets. As you work through them do the following: · Think through the profit at maturity of the combination and try to explain it verbally. · Calculate the profit at maturity of each component of the position and then net them together. · Plot a graph of each component and the net position. After you have completed the position to your satisfaction be sure to note the following on your worksheet: · What market view is appropriate for the position? (up, not up, down, not down, stable, volatile, sure, unsure, other) · Is the purpose insurance, yield (income) enhancement, or trading profits? · Does the combination have a commonly accepted name (that you know)?

Must-do Combos Module summary tables - page 5: 1-8, page 24: 9-10, page 32: 11-14, page 42: 15-18 - marked with *; (page # listed).

Combinations of Two Positions with at-the-money options

Combinations of Two Positions Summary Checklist Combinations of Two Positions at-the-money options

Example Name: Synthetic Long Call View: Up, unsure Purpose: Trade, insure

Combinations with Multiple Option Contracts Underlying and two of the same at-the-money options

Summary Checklist Combinations with Multiple Option Contracts Underlying and two of same at-the-money options

Combinations of Two Forward with “participating” (1/2 and 3/2) at-the-money option positions

Combinations of Two Forward with “participating” (1/2 and 3/2) at-the-money option positions

Combinations of Three Positions Underlying with two out-of-the-money options

Summary Checklist Combinations of Three Positions Underlying with two out-of-the-money options

Combination Position Summary