VIII: Options 25: Options Strategies II. Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar  Hedging strategy on long shares  Long 10,000.

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Presentation transcript:

VIII: Options 25: Options Strategies II

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar  Hedging strategy on long shares  Long 10,000 GE

Chapter 25: Options Strategies Long 10,000 GE Value © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar  Hedging strategy on long shares  Long 10,000 GE  Place a Protective Put below the current market price of GE (out-of-the-money puts)  100 $30 June Put 0.75  $7500.

Chapter 25: Options Strategies Long GE with a Protective Put © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar  Hedging strategy on long shares  Long 10,000 GE  Place a Protective Put  Generate $7500 by writing an out-of-the- money call  $45 June $1.75  Short 43 contracts

Chapter 25: Options Strategies Long GE with a Collar © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar strategies  Should the collar use a $45 or $60 Call?  Generate $7500 by writing an out-of-the- money call  $45 June Call $1.75  43 contracts → $7525  $60 June Call $0.75  100 contracts → $7500

Chapter 25: Options Strategies Long GE with a Collar © Oltheten & Waspi 2012

Chapter 25: Options Strategies Other Options © Oltheten & Waspi 2012

Chapter 25: Options Strategies Interest Rate Options Strike Price CallPuts DecJanMarDecJanMar © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Interest Rate Options  Buy March  Pay $65 ($100 * 0.65)

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Barings Bank  Queen’s Bank  Bankrupt and collapsed in February 1995 due to the actions of one derivatives trader in Barings Securities Singapore

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Index Options  Index options are contracts defined as money times an index.  $100 * S&P500 (CBOE)  Nikkei 225 index Options  SIMEX (Singapore)  OSE (Osaka)  Index Options are generally European © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Nikkei 225 Option Example  Buy a 14,000 Jan call at 12  Pay ¥ 12,000 ($120) for the right to purchase the Nikkei at ¥ 14,000,000 ($140,000) in January  If in January the Nikkei 225 is at 14,200  Exercise (profit of ¥ 200,000 ($2,000))  If in January the Nikkei 225 is at 13,900  Expires worthless © Oltheten & Waspi 2012

Chapter 25: Options Strategies Nikkei 225 Call © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Nikkei 225 Option Example  Buy a 14,000 Jan put at 12  Pay ¥ 12,000 ($120) for the right to purchase the Nikkei at ¥ 14,000,000 ($140,000) in January  If in January the Nikkei 225 is at 14,200  Expires worthless  If in January the Nikkei 225 is at 13,900  Exercise (profit of ¥ 100,000 ($1,000)) © Oltheten & Waspi 2012

Chapter 25: Options Strategies Nikkei 225 Put © Oltheten & Waspi 2012

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collapse of Barings Bank

Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collapse of Barings Bank Arrested in Frankfurt in March 1995 Extradited to Singapore December 1995 Sentenced to 6 ½ years Released July 1999 Currently lives in Ireland and trades only his own money

Options III