R28 risk management applications of options strategies
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Reading 28
Risk Management Applications of Options
Strategies
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Graphs, charts, tables, examples, and figures are copyright 2014, CFA Institute. Reproduced
and republished with permission from CFA Institute. All rights reserved.
Contents
1. Introduction
2. Option Strategies for Equity Portfolios
Listen to Level I video if you need help
Video is called: Option Strategies Part 0
3. Interest Rate Option Strategies
Level I video on interest rate options
4. Option Portfolio Risk Management Strategies
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1. Introduction
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2. Option Strategies for Equity Portfolios
Buy Call (Long Call)
Sell Call
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Buy Put (Long Put)
Sell Put
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2.2 Risk Management Strategies with Options and the Underlying
Covered Call: Long position in underlying + short call
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Protective Put: Long in underlying + long put
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2.3 Money Spreads
• Buy one option and sell another option which is identical except
for exercise price or time to expiration
• Time spread: expiration time is different (not covered in this
reading)
• Money spread: exercise price is different
Called a spread because payoff is based on difference, or spread,
between option exercise prices
Bull spread
Bear spread
Butterfly spread
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Bull Spread
Long call with low X and short call with high X
+
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Bear Spreads
Sell call with low X buy call with high X
OR
Buy put with high X and sell put with low X
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Butterfly Spreads
Bull + Bear Butterfly
Increasing strike price
Buy Call(X1)
Sell Call(X2)
Sell Call(X2)
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Buy Call(X3)
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2.4 Combinations of Call and Puts
Collar, Straddle and Box Strategies
Collar: Buy put and sell call
Zero cost collar: put and call premium are the
same
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Straddle strategy attempts to exploit high volatility
Buy call and put on same underlying with same exercise price and same expiration
Strip, strap and strangle
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