1. Derivatives Trading Strategies Professor André Farber Solvay Business School Université Libre de Bruxelles

2. September 14, 2005 Derivatives 09 Strategies |2 Trading strategies 1.A single option and a stock: covered call, protective put Covered call: S-C Protective put: S+P 2.Spreads: bull, bear, butterfly, calendar Bull: +C(X 1 ) – C(X 2 ) X 1 <X 2 Bear: +C(X 1 ) – C(X 2 ) X 1 >X 2 Butterfly: +C(X 1 ) + C(X 3 ) – 2C(X 2 ) X 1 <X 2 <X 3 Calendar: +C(T 1 )-C(T 2 ) T 1 >T 2 3.Combinations: straddle, strips and straps, strangle Straddle: +C+P Strip: +C + 2P Strap: +2C+P Strangle: +C(X 2 )+P(X 1 ) X 1 <X 2

3. September 14, 2005 Derivatives 09 Strategies |3 Analyzing a strategy Initial cost Maximum profit: limited, unlimited Maximum loss: limited, unlimited Breakeven price: when do you recover initial price Standstill return: quid if stock price does not change? Market outlook: bearish, neutral, bullish Risk posture

4. September 14, 2005 Derivatives 09 Strategies |4 Covered Call Profit Stock Price Immediate At maturity

5. September 14, 2005 Derivatives 09 Strategies |5 Protective Put

6. September 14, 2005 Derivatives 09 Strategies |6 Bull Call Spread

7. September 14, 2005 Derivatives 09 Strategies |7 Bear Call Spread

8. September 14, 2005 Derivatives 09 Strategies |8 Butterfly

9. September 14, 2005 Derivatives 09 Strategies |9 Straddle

10. September 14, 2005 Derivatives 09 Strategies |10 Strip

11. September 14, 2005 Derivatives 09 Strategies |11 Strap

12. September 14, 2005 Derivatives 09 Strategies |12 Strangle