1. 9.1 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull USDA Publication Calendar - Web Address: http://www.usda.gov/nass/pubs/rptscal.htm - March 7, 2000: Weekly Weather and Crop Bulletin - March 10, 2000: Crop Production

2. 9.2 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Trading Strategies Involving Options Chapter 9

3. 9.3 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Trading Strategies Involving Options Take a position in the option & the underlying stock. Spread: Position in 2 or more options of the same type Combination: Position in a mixture of calls & puts

4. 9.4 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Different Strategies involving a single option and a stock - a.A long position in a stock plus a short position in a call option (covered call). - b.A short position in a stock with a long position in a call option. - c.A long position in a put option plus a long position in stock itself (protective put). - d.A short position in a put option with short position in stock.

5. 9.5 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Positions in an Option & the Underlying Figure 9.1 (p. 218) Profit STST X STST X STST X STST X (a) (b) (c)(d)

6. 9.6 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Problem An option writer sells a put option on May soybean at a strike price of $ 4.80/bu at a premium of $ 0.20 and sold May soybean at 4.90/bu. What will be his profit/loss under the following scenarios? - Soybean price (P)  4.90 - 4.80<Soybean price (P)<4.90 - Soybean price (P)  4.80

7. 9.7 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Problem An investor buys a call option on May soybean at a strike price of $ 4.90/bu at a premium of $ 0.20 and sell May soybean for $ 0.30 with a strike price of 4.60/bu. What will be his payoffs under the following scenarios? - Soybean price (P)  4.90 - 4.60<Soybean price (P)<4.90 - Soybean price (P)  4.60

8. 9.8 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Different Strategies involving two or more options of same type (Spread) - Bull Spread: It can created by buying a call option on a stock with a certain strike price and selling a call option on the same stock with a higher strike price. - This strategy limits the investor’s upside and downside potential. It has chosen to give up upside potential by selling a call option with higher strike price. - Three different types of bull spread: Both calls are initially out of the money, one call is initially in the money, the other call is initially out of the money, and Both calls are initially in the money.

9. 9.9 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bull Spread Using Calls Figure 9.2 (p.219) X1X1 X2X2 Profit STST

10. 9.10 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bull Spread Using Put Options - Bull spread can also be created by buying a put option with a low strike price and selling a put with a high strike price. Unlike bull spread created from call, bull spread created from puts involve a positive cash flow to the investor up front. Investor has chosen to give up upside potential by getting the price of the put option with higher strike price.

11. 9.11 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bull Spread Using Puts Figure 9.3 (p.221) X1X1 X2X2 Profit STST

12. 9.12 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Problem - An investor buys for $3 a call with a strike price of $30 and sells for $1 a call with a strike price of $35. Calculate the payoff from this bull strategy under the following scenarios: Stock price (S)  $ 30 $ 30 < Stock price (S) < $ 35 Stock price  $ 35

13. 9.13 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bear Spread - In bear spread, strike price of the option purchased is greater than the strike price of option sold. - Bear spread can be created using either call or put option. - Like bull spread, bear spread also limits both the upside profit potential and downside risk.

14. 9.14 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bear Spread Using Calls Figure 9.4 (p.221) X1X1 X2X2 Profit STST

15. 9.15 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Bear Spread Using Puts Figure 9.5 (p. 223) X1X1 X2X2 Profit STST