1. Trading Strategies Involving Options
Chapter 10
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

2. 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 6th Edition, Copyright © John C. Hull 2005

3. Positions in an Option & the Underlying (Figure 10.1, page 224)
Profit
Profit K K ST ST
(a) Writing a covered call
(b) Reverse
Profit
Profit K ST K ST
(c) Protective put
(d) Reverse
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

4. Bull Spread Using Calls (Figure 10.2, page 225)
Profit ST K1 K2
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

5. Payoff from a bull spread created using call options
Stock price Payoff from Payoff from Total
range long call option short call option payoff
K2  ST ST - K (ST - K2) K2 - K1
K1 < ST < K ST - K ST - K1
ST  K
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

6. Bull Spread Using Puts Figure 10.3, page 226K1 K2
Profit ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

7. Bear Spread Using Puts Figure 10.4, page 227K1 K2
Profit ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

8. Payoff from a bear spread created using put options
Stock price Payoff from Payoff from Total
range long put option short put option payoff
K2  ST
K1 < ST < K K2 - ST K2 - ST
ST  K K2 - ST (K1 - ST ) K2 - K1
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

9. Bear Spread Using Calls Figure 10.5, page 229
Profit K1 K2 ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

10. Butterfly Spread Using Calls Figure 10.6, page 231
Profit K1 K2 K3 ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

11. Payoff from a butterfly spread created using call options
Stock price Payoff from Payoff from Payoff from Total
range first long call second long call short calls payoff
ST < K
K1 < ST < K ST - K ST - K1
K2 < ST < K ST - K (ST - K2 ) K3 - ST
ST > K ST - K ST - K (ST - K2 )
Where K2 =0.5*(K1 + K3)
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

12. Butterfly Spread Using Puts Figure 10.7, page 232
Profit K1 K2 K3 ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

13. Calendar Spread Using Calls Figure 10.8, page 232
Profit ST K
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

14. Calendar Spread Using Puts Figure 10.9, page 233
Profit ST K
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

15. A Straddle Combination Figure 10.10, page 234
Profit K ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

16. Payoff from a straddle Stock price Payoff from Payoff from Total
range call option put option payoff
ST  K K - ST K - ST
ST > K ST - K ST - K
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

17. Strip & Strap Figure 10.11, page 235
Profit
Profit K ST K ST
Strip
Strap
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

18. A Strangle Combination Figure 10.12, page 236
Profit K1 K2 ST
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005

19. Payoff from a strangle Stock price Payoff from Payoff from Total
range call option put option payoff
ST  K K1 - ST K1 - ST
K1 < ST < K
K2  ST ST - K ST - K2
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005