1. © K. Cuthbertson and D. Nitzsche Figures for Chapter 10 OPTION SPREADS AND STOCK OPTIONS (Financial Engineering : Derivatives and Risk Management)

2. © K. Cuthbertson and D. Nitzsche Figure 10.1 : Payoff for calls A. Buy (long) call B. Write (short) call +1 0 0

3. © K. Cuthbertson and D. Nitzsche Figure 10.2 : Payoff for puts 0 A. Buy (long) put B. Write (short) put 0

4. © K. Cuthbertson and D. Nitzsche Figure 10.3 : Payoff for futures +1 Payout profile on futures and on the underlying stocks are the same. Futures profits occur at same time as profits from the options. Futures do not require any “up front“ costs at t = 0. +1 A. Buy (long) futuresB. Sell (short) futures

5. © K. Cuthbertson and D. Nitzsche Figure 10.4 : Synthetic long call Long Futures plus Long Put equals Long Call +1 0 0 +1

6. © K. Cuthbertson and D. Nitzsche Figure 10.5 : Synthetic short put Long Futures plus Short Call equals Short Put +1 0 0 +1

7. © K. Cuthbertson and D. Nitzsche Figure 10.6 : Synthetic long futures Short Put plus Long Call equals Long Futures +1 0 0

8. © K. Cuthbertson and D. Nitzsche Figure 10.7 : Bull spread with calls Long Call (at K 1 ) plus Short Call (at K 2 > K 1 ) equals Call Bull Spread +1 0 Profit Share Price K1K1 5 -3 K 1 =102 K 2 =110 S BE =105 0 0 K2K2 +10 0

9. © K. Cuthbertson and D. Nitzsche Figure 10.8 : Bear spread with calls Short Call (at K 1 ) plus Long Call (at K 2 > K 1 ) equals Bear Spread 0 Profit Share Price K1K1 0 0 +1 K2K2 0 0

10. © K. Cuthbertson and D. Nitzsche Figure 10.9 : Payoff from volatility strategies a) Long (Buy) Straddle Profit 0 -8 STST 94 110 +1 c) Short (Sell) Butterfly Profit 0 STST 00 b) Long (Buy) Strangle Profit 0 STST +1 d) Short (Sell) Condor Profit 0 STST 00 +1 +1 0 0

11. © K. Cuthbertson and D. Nitzsche Figure 10.10 : Long (buy) straddle Long Call plus Long Put equals Long Straddle 0 +1 0 +1 Profit 0 S BE = 94 S BE = 110 K = 102 -8 8 8.

12. © K. Cuthbertson and D. Nitzsche Figure 10.11 : Long (buy) strangle Long Put plus Long Call equals Long Strangle 0 +1 0 Profit 0 0 0 0. KcKc KpKp

13. © K. Cuthbertson and D. Nitzsche Figure 10.12 : (a.) Short butterfly 0 0 +1 0 K1K1 K2K2 +1 0 0 000 Sell Call at K 1 plus Buy 2 Calls at K 2 plus Sell 1 Call at K 3

14. © K. Cuthbertson and D. Nitzsche Figure 10.12 : (a.) Short butterfly (Cont.) Profit 0 -40 Stock Price 00 10 +1 equals Short Butterfly +1

15. © K. Cuthbertson and D. Nitzsche Figure 10.12 : (b.) Long butterfly Profit 0 -10 Stock Price 0 0 40 +1

16. © K. Cuthbertson and D. Nitzsche Figure 10.13 : Horizontal spread Profit at expiry 0 Horizontal spread : a long position in a 1-year option and a short position in a 180 day option, both at-the-money Profit profile 30 days before expiry of short dated option Profit S 0 = K Stock price

17. © K. Cuthbertson and D. Nitzsche Figure 10.14 : Covered call STST 24 Profit 0 $4 Short Call 2128 $3 25 K = 25 26 Long Stock Covered call = long stock + short call

18. © K. Cuthbertson and D. Nitzsche Figure 10.15 : Protective put strategy STST 24 Profit 0 -$4 Long Put 22 -$5 2520 29 Long stock Note : P = 5, K = 25, S 0 = 24 Protective put = long stock + long put