Fundamentals of futures and options markets 9th by john c hull 2016 chapter 11

Trading Strategies
Involving Options
Chapter 11

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull 2016

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Strategies to be Considered
 Bond

plus option to create principal
protected note
 Stock plus option
 Two or more options of the same type
(a spread)
 Two or more options of different types
(a combination)
Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Principal Protected Note
 Allows

investor to take a risky position
without risking any principal
 Example: $1000 instrument consisting of

3-year zero-coupon bond with principal of
$1000
 3-year at-the-money call option on a stock
portfolio currently worth $1000


Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Principal Protected Notes continued
 Viability

depends on

Level of dividends
 Level of interest rates
 Volatility of the portfolio


 Variations

on standard product

Out of the money strike price
 Caps on investor return
 Knock outs, averaging features, etc


Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Positions in an Option & the
Underlying (Figure 11.1, page 252)
Profit

Profit

K
K

ST

ST

(a)
Profit

Profit

(b)

K
ST

K

(d
Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright ©) John C. Hull

ST

(c)

2016

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Bull Spread Using Calls
(Figure 11.2, page 253)

Profit
ST
K1

K2

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Bull Spread Using Puts

Figure 11.3, page 254

Profit
K1

K2

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Bear Spread Using Puts
Figure 11.4, page 255

Profit

K1

K2

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Bear Spread Using Calls
Figure 11.5, page 256

Profit

K1

K2

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Box Spread
A

combination of a bull call spread and a
bear put spread
 If all options are European a box spread is
worth the present value of the difference
between the strike prices
 If they are American this is not necessarily
so (see Business Snapshot 11.1)
Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull

2016

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Butterfly Spread Using Calls
Figure 11.6, page 258

Profi
t
K1

K2

K3

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Butterfly Spread Using Puts
Figure 11.7, page 259

Profit
K1

K2

K3

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Calendar Spread Using Calls
Figure 11.8, page 260

Profit
ST
K

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Calendar Spread Using Puts
Figure 11.9, page 260

Profit
ST

K

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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A Straddle Combination
Figure 11.10, page 261

Profit

K

ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Strip & Strap
Figure 11.11, page 262

Profit

Profit

K
Strip

ST

K

ST

Strap

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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A Strangle Combination
Figure 11.12, page 263

Profit
K1

K2
ST

Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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Other Payoff Patterns
 When

the strike prices are close together
a butterfly spread provides a payoff
consisting of a small “spike”
 If options with all strike prices were
available any payoff pattern could (at least
approximately) be created by combining
the spikes obtained from different butterfly
spreads
Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright © John C. Hull
2016

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