option -bullish strategies

8/16/2019 Option -Bullish Strategies

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Option -Bullish Strategies

RAVI - IBA


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Strategy 1: Long Call Cont%

• Ris': The ris' of the uyer is thea&ount pai% y hi& to uy the CallOption i#e# the pre&iu& "alue#

• Re$ar%: The re$ar% $ill e unli&ite%as the un%erlying asset "alue !an riseup to any "alue until the expiry#

• Brea'-E"en (oint: The rea'-e"enpoint for the Call Option )ol%er $ill e*Stri'e (ri!e + (re&iu,


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• Constru!tion: Buy 1 Call Option

• Exa&ple:

• Currently I.T/ is tra%ing aroun% 022le"els3 an% 4r# 5 is ullish on I.T/ an%uys one 0622 Call Option 7IT48 for Rs#622 pre&iu Lot si9e is 02#

• The in"est&ent a&ount $ill e Rs#12222# 7622028 7Option (ri!e ; Option(re&iu&8


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• Case 1: I.T/ !loses at 0022 le"els<

• 4r# 5 $ill &a'e a pro=t of Rs# 0222#>722-622802?

• Case 2: I.T/ %ips to 0122 le"els<

• 4r# 5 $ill in!ur a loss of Rs# 122227622028 $hi!h is the pre&iu& he pai%

for uying one lot of 0622 Call Option#• 7$orthless @ allo$s to expire only loss is the option pre&iu&8


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(ayo Chart Long Call


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Strategy 2: SyntheticLong Call

• Explanation

• A tra%er is ullish in nature for short ter&3 ut alsofearful aout the %o$nsi%e ris' asso!iate% $ith it#

• )ere3 a tra%er $ants to hol% an un%erlying asseteither in physi!al for& li'e in !ase of !o&&o%itiesor %e&at 7ele!troni!8 for& in !ase of sto!'s#

• But he is al$ays expose% to %o$nsi%e ris' an% inor%er to &itigate his losses3 he $ill uy 1 AT4 or

OT4 (ut Option sin!e IT4 (ut option $ill !arry&ore pre&iu& than AT4 @ OT4

• (ut options $hi!h are relati"ely !heap#


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Syntheti! Long Call

• Case 1: If the pri!es rise as per his !al!ulations3 he $ill &a'eunli&ite% pro=ts on his long position in spot;!ash &ar'et#

• Case 6: If the pri!es fall3 then his loss is !o"ere% y the (utOption# The loss in!urre% $ill e the pre&iu& a&ount pai% touy (ut option#

• The net position !reate% fro& Syntheti! Call strategy issi&ilar to Call Option uy strategy#

• A major diference exists between buying a Call Option andSynthetic Call strategy.

•

In a plain Vanilla Call Option you do not hold the underlyingasset, whereas in Synthetic Call you will hold the underlyingasset and reap the benets o! di"idends, bonus issues, etc.#only in case i! the underlying asset is a stoc$%


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Exa&ple Syntheti! LongCall

• Constru!tion :

• Buy 602 RIL Shares: Buy 1 (ut Option of RIL

• RIL is tra%ing at Rs# 62 le"els3 4r# 5 is ullish in the longter&3 ut $ants to he%ge hi&self fro& the fall in !ash

strategy goes $rong# )e $ill uy 602 shares of RIL fro&the !ash &ar'et D Rs# 62 an% uy one 22 (ut OptionD Rs# 12 as pre&iu The lot si9e of RIL is 602# )is net

in"est&ent $ill e Rs# 12222# >7602628 + Rs#60227602128 F Rs# 16022?

• Reward: The gains $ill e unli&ite% sin!e it,s a longposition# )is &axi&u& loss $ill e Rs# 6022 assu&ing he$ill hol% his !ash position irrespe!ti"e of the pri!e# Brea'-

E"en (oint for the net position $ill e Rs# 2# 762+128


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Example – Synthetic Long Call

• RIL is tra%ing at Rs# 62 le"els3 4r# 5 isullish in the long ter&3 ut $ants tohe%ge hi&self fro& the fall in

• !ash strategy goes $rong# )e $ill uy 602shares of RIL fro& the !ash &ar'et D Rs#62 an% uy 1 22 (ut Option D Rs# 12 aspre&iu The lot si9e of RIL is 602#

• )is net in"est&ent $ill e Rs# 12222#>7602628 + Rs# 60227602128 F Rs#16022?


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Exa&ple Syntheti! Long Call

!ont%#

• Reward: The gains $ill e unli&ite%sin!e it,s a long position# )is&axi&u& loss $ill e Rs# 6022

assu&ing he $ill hol% his !ashposition irrespe!ti"e of the pri!e#

• Brea'-E"en (oint for the net position

$ill e Rs# 2# 762+128


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(ayo Chart Syntheti!Long Call


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Strategy 3: Short Put

Explanation

• A tra%er $ill short put if he is ullish innature an% expe!ts the un%erlying asset not

to fall elo$ a !ertain le"el#• Ris!: Losses $ill e potentially unli&ite% if

the sto!' s'yro!'ets ao"e the stri'e pri!eof put#

• Reward: )is pro=ts $ill e !appe% y thepre&iu& a&ount re!ei"e%#

• &is$y Strategy


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Exa&ple Short (ut

• Constru!tion: Sell 1 (ut Option

• Example

• Suppose I.T/ is tra%ing at 0622 le"el an% 4r# 5

is ullish on the &ar'et# )e expe!ts I.T/ tostay near 0622-022 le"els or e"en rise furtheruntil expiry#

• )e $ill sell one I.T/ 0622 (ut Option for a

pre&iu& of Rs#2# The lot si9e of I.T/ is 02#4r# 5,s a!!ount $ill e !re%ite% y Rs# 02272028 $hi!h is the pre&iu& re!ei"e% on saleof (ut option#


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• Case 1: If the I.T/ !loses at 0G223then 4r# 5 $ill re!ei"e the &axi&u&pro=t of Rs# 022#

• ote : Option uyer $ill allo$ toexpire the option sin!e it has e!o&e$orthless#

• Case 2: If the I.T/ !loses at 02223then 4r# 5 $ill fa!e a loss of Rs#H022# >7622-2802?

• ote : Option uyer $ill stri'e as


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(ayo Chart Short (ut(ayo


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Strategy ": Co#ered Call

Explanation

4r# 5 o$ns Relian!e Shares an% expe!ts the pri!e to

rise in the near future#

4r# 5 is entitle% to re!ei"e %i"i%en%s for the shares hehol% in !ash &ar'et# Co"ered Call Strategy in"ol"esselling o! O'( Call Option o! the same underlyingasset #

The OT4 Call Option Stri'e (ri!e $ill generally e the

pri!e3 $here 4r# 5 $ill loo' to get out of the sto!'#)e will recei"e premium amount !rom writing the Calloption.


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Strategy ": Co#ered Call

Ris!:

• 4r# 5 $ill in!ur losses on his short position $hen the

sto!' &o"es eyon% the stri'e pri!e of the !all$ritten# This strategy is generally a%opte% y the

people $ho are **eutral or (oderately +ullish onthe underlying asset.

Reward:

• 4r# 5 $ill &a'e pro=ts $hen the sto!' pri!e shoots

up an% po!'ets the pre&iu& $hi!h he re!ei"e% fro&shorting the Call Option# If it !o&es %o$n then he is$illing to exit at a point3 the exit point is $here 4r# 5has shorte% the Call Option#


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Strategy Constru!tion -Co#eredCall

• Buy 602 RIL Shares : Sell 1 Call Option

Exa&ple

• RIL is tra%ing aroun% Rs G0 le"els#Lot si9e of RIL Option is 602# 4r# 5 isullish in nature an% uys 602 sharesof RIL D Rs G0 fro& the &ar'et# )e

also shorts one H2 Call Option for apre&iu& of Rs# 10#


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Case 1: If RIL !loses at Rs# 003 4r# 5$ill get a !apital appre!iation on hisin"est&ent of Rs# 6022# >700-

G08602? plus the Call Optionpre&iu& he re!ei"e% fro& $riting iti#e# Rs#02 7106028#

)is total gain $ill e Rs H602#


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Case 2: If RIL !loses at Rs# 23 4r# 5$ill &a'e a pro=t on his long positionin spot &ar'et ut in!ur loss on his

short !all# )is net payo $ill e Rs#022# >72-G08 + 710-628J602?


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Strategy $: Long Com%o

Explanation:

• Long Co&o Option Tra%ing Strategy isi&ple&ente% $hen a tra%er is ullish in nature an%expe!ts the sto!' pri!e to rise in the near future#

• )ere a tra%er $ill sell one -Out o! the (oney utOption and buy one -Out o! the (oney Call Option#

• This tra%e $ill reKuire less !apital to i&ple&entsin!e the a&ount reKuire% to uy the !all $ill e

!o"ere% y the a&ount re!ei"e% fro& selling theput#


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Constru!tion Long Co&o

• Sell 1 *Out of the 4oney, (ut Option

• Buy 1 *Out of the 4oney, Call Option

• Exa&ple

• Suppose I.T/ is tra%ing at 0622 le"els3 4r#5 $ants to enter in a long !o&o strategy3he $ill sell one 0222 OT4 (ut Option for apre&iu& of Rs# 60 @ uy one 0G22 OT4Call Option for a pre&iu& of Rs# 0# The lotsi9e of I.T/ is 02# )is net in"est&ent $ille Rs# 022# >70-60802?


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Constru!tion Long Co&o

• Case 1: At expiry if I.T/ !loses atG223 then 4r# 5 $ill in!ur a loss of Rs#62022# >7G22-06228 + 760- 08J02?

• Case 2: At expiry if I.T/ !loses at01223 then 4r# 5 $ill &a'e a loss of Rs#0022# >70122-06228 + 760- 0802?

• Case 3: At expiry if I.T/ !loses at0H223 then 4r# 5 $ill &a'e a pro=t ofRs# 022# >7622-08 + 7608J02?


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Strategy &: 'he Collar

Explanation

• Collar Strategy is an extension to Co"ere% Call Strategy#A tra%er3 $ho is ullish in nature ut has a "ery lo$ ris'

appetite an% $ants to &itigate his ris' $ill i&ple&ent the

Collar Strategy#• Collar in"ol"es buying o! stoc$ in either Cash/0utures

(ar$et, buying an A'( ut Option 1 selling an O'( Call

Option.

• The expiry %ates of the options shoul% e sa&e# )ere the

long position $ill &a'e pro=ts if things go as per plan i#e#sto!' gains# The put option $ill !o"er the losses if thingsgo in the opposite %ire!tion# The pro=ts $ill e li&ite% on

a!!ount of the sale of an OT4 Call Option#


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Constru!tion

• Buy shares in Cash;.utures 4ar'et

• Buy 1 AT4 (ut Option

•

Sell 1 OT4 Call Option


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Constru!tion Exa&ple The Collar

Example :

4r# 5 is ullish on I.T/ an% expe!ts it to rise3 ut also"ery !onser"ati"e in nature# )e %eploys Collar Strategy$here he uys the un%erlying sto!' in the futures &ar'et3

sells an OT4 Call Option @ uys 1 AT4 (ut Option# o$his net position is safe fro& a%"erse &o"e&ents in any%ire!tion either %o$n or up# Lot si9e of I.T/ is 02#

1# )e uys one I.T/ futures at 06223

6# Sells one 0G22 OT4 Call Option at a pre&iu& of Rs# 60

@

# Buys one 0622 AT4 (ut Option for a pre&iu& of Rs# 0#


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• Case 1: At expiry if I.T/ !loses atG223 then 4r# 5 $ill &a'e a loss of Rs#222# >7608-7228 + 722- 08J02?

• Case 2: At expiry if I.T/ !loses at06223 then 4r# 5 $ill &a'e a loss of Rs#222# >760-0802?

•

Case 3: At expiry if I.T/ !loses at00223 then 4r# 5 $ill &a'e a pro=t of Rs#222# >760-1228 - 708 + 7228J02?


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Strategy (: )arried Put

Explanation

• This strategy is applie% $hen tra%er goes long on theun%erlying asset i#e# he uys the sto!' in !ash &ar'et#

• )e has a bullish "iew and expects the mar$et to rise in

the near !uture, but simultaneously has the !ear o!downward mo"ement o! the mar$ets#

• In or%er to !o"er his position fro& "ulnerabilities hebuys one A'( ut Option o! the same underlyingasset. )ere3 a tra%er $ill re!ei"e all the gains fro&%i"i%en%s3 onus issues sin!e he is hol%ing longpositions in the !ash &ar'et#

• Ris!: Li&ite% - Reward: Mnli&ite%


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Constru!tion - 4arrie% (ut

• +uy 234 &I5 Shares 6+uy 7 A'( ut Option

Exa&ple

Suppose that RIL is tra%ing at Rs# G03 an%

4r# 5 is ullish on the &ar'et#)e uys 602 RIL shares in the !ash &ar'et#o$ the ris' al$ays persist 7%o$n$ar% &o"e8an% to !o"er hi&self fro& this a%"erse &o"e

he $ill uy one G2 RIL AT4 (ut Option at apre&iu& of Rs# 62# )is total in"est&ent $ille Rs# 11602# >7G0+628602?


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Exa&ple 4arrie% (ut!ont%#

Case 1: At expiry if RIL !loses at Rs# 123then 4r# 5 $ill &a'e a loss of Rs# H602#>712-G08 + 72-

628J602?Case 2: At expiry if RIL !loses at Rs# G23then 4r# 5 $ill &a'e a loss of Rs# H602#>7G2-G08 7628J602?

Case 3: At expiry if RIL !loses at Rs# 23then 4r# 5 $ill &a'e a pro=t of Rs# 1602#>72-G08 72-628J602?


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Strategy *: Protecti#ePut

Explanation

• (rote!ti"e (ut Strategy is a he%ging strategy$here tra%er guar%s hi&self fro& the %o$nsi%eris'# This strategy is a%opte% $hen a tra%er is

long on the un%erlying asset ut s'epti!al of the%o$nsi%e#

• )e will buy one A'( ut Option to hedge his position# o$3 if the un%erlying asset &o"es

either up or %o$n3 the tra%er is in a safe position#• Ris!: Li&ite%

• Reward: Mnli&ite%


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Constru!tion (rote!ti"e (ut

• Buy 602 RIL Shares in Cash;.utures 4ar'et

• Buy 1 AT4 (ut Option

• Exa&ple

• Suppose that RIL is tra%ing at Rs# G0 an%4r# 5 uys 602 shares in the Cash 4ar'et#

• )e $ill uy One G2 AT4 (ut Option at apre&iu& of Rs# 62 to he%ge his long position#

• )is net in"est&ent $ill e Rs# 11602#>7G0+628602?


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Constru!tion (rote!ti"e (ut !ont%#

• Case 1: At expiry if RIL !loses at Rs#123 then 4r# 5 $ill in!ur a loss of Rs#H602# >712-G08 + 72-628J602?

• Case 2: At expiry if RIL !loses at Rs#G23 then 4r# 5 $ill in!ur a loss of Rs#H602# >7G2-G08-7628J602?

• Case 3: At expiry if RIL !loses at Rs#23 then 4r# 5 $ill &a'e a pro=t ofRs# 1602# >72-G08-7628J602?


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(rote!ti"e (ut !ont%#

• +ote: It is oser"e% that on!e thesto!' starts &o"ing up3 the ti&e"alue of (ut $ill shrin' half ti&es the

!ash pri!e# This $ill also %epen% onthe nu&er of %ays left in the expiry#A professional tra%er !an also 'eep a

stop loss in AT4 (ut on!e sto!'rallies sharply#


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option -bullish strategies

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