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

VIII: Options

25: Options Strategies II

Chapter 25: Options Strategies © Oltheten & Waspi 2012

Collar

Hedging strategy on long shares Long 10,000 GE


Long 10,000 GE

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

0 10 20 30 40 50 60 70 80

Value


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 contracts @ 0.75

$7500.


Long GE with a Protective Put

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

0 10 20 30 40 50 60 70 80


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 Call @ $1.75 Short 43 contracts


Long GE with a Collar

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

0 10 20 30 40 50 60 70 80


Collar strategies

Should the collar use a $45 or $60 Call? Generate $7500 by writing an out-of-the-

money call $45 June Call contracts @ $1.75

43 contracts → $7525 $60 June Call contracts @ $0.75

100 contracts → $7500


Long GE with a Collar

43 $45 collar

100 $60 collar

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

0 10 20 30 40 50 60 70 80

Chapter 25: Options Strategies

Other Options

© Oltheten & Waspi 2012


Interest Rate Options

StrikePrice

Call PutsDec Jan Mar Dec Jan Mar

40 5.70 6.45 6.50 .95 .25

45 3.30 1.95 2.30 .50 0.60 .75

50 .90 .25 1.15 3.60 3.20 1.80

55 .35 .10 1.85 3.00 8.50 4.00

60 .35 0.65 8.00 13.20

65 .65 18.40

70 .10 23.60


Interest Rate Options

Buy March 60 call @ 0.65 Pay $65 ($100 * 0.65)

-$500

$0

$500

$1,000

$1,500

$2,000

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%


Barings Bank

Queen’s Bank Bankrupt and collapsed in February 1995

due to the actions of one derivatives trader in Barings Securities Singapore


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



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



Nikkei 225 Call

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

13600 13800 14000 14200 14400


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))



Nikkei 225 Put

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

13600 13800 14000 14200 14400


Collapse of Barings Bank

Futures

Options (Write Straddle)

17500 18000 18500 19000 19500 20000 20500


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

Documents

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