option trading in future

Jun 28th, 2015
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A. T. Still University
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OTC option for the buyer to enter into a swap at a future date and a predetermined swap rate A payer swaption gives the buyer the right to enter into a swap where they pay the fixed leg and receive the floating leg (long IRS). A receiver swaption gives the buyer the right to enter into a swap where they will receive the fixed leg, and pay the floating leg (short IRS).

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Option Strategies &Exotics1Note on Notation Here, T denotes time to expiry as well as timeof expiry, i.e. we use T to denote indifferently Tand = T t Less accurate but handier this way, I think2Types of Strategies Take a position in the option and the underlying Take a position in 2 or more options of the same type(A spread) Combination: Take a position in a mixture of calls &puts (A combination)3Positions in an Option & theUnderlyingProfitProfitKKSTST(a)ProfitProfit(b)KST(c)Basis of Put-Call Parity:KST(d)P + S = C + Cash ( Ke-rT)4Bull Spread Using CallsProfitSTK1K25Bull Spread Using CallsExample Create a bull spread on IBM using the following 3month call options on IBM:Option 1:Strike: K1 = 102Price: C1 = 5Option 2:Strike: K1 = 110Price: C2 = 2Gamble on stock price rise and offset costwith sale of call+1Long Call (at K1)+10K10K2Short Call (at K2 > K1)-10Profitequals05K1=102+1Call Bull SpreadK2=1100-3plusSBE=105Share PricePayoff:Long call (K1) + short call (K2) = Bull Spread:{ 0, +1, +1} + {0, 0, -1}= {0, +1, 0 }= Max(0, ST-K1) C1 Max(0, ST-K2) + C2= C2 - C1if ST K1 K2= ST - K1 + (C2 - C1)if K1 < ST K2= (ST - K1 - C1) + (K2 - ST + C2) == K2 - K1 + (C2 - C1)if ST > K1 > K2Break-even:SBE = K1 + (C1 C2) = 102 + 3 = 105Bear Spread Using PutsProfitK1K2ST9Bull Spreads wit

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