COVERED CALLS & PROTECTIVE PUTS #
- COVERED CALLS: Sell a call option on a stock owned by the option writer.
Use: To generate cash on a stock that is not expected to increase above the exercise price.
- PROTECTIVE PUTS: Constructed by holding a long position in the underlying security and buying a put option.
Use: limit the downside risk at the cost of the put premium
SPREAD STRATEGIES #
- BULL & BEAR SPREADS:
- BUTTERFLY SPREAD:
- CALENDER SPREAD: Sell short dated option & buy long dated option with same strike price.
COMBINATION STRATEGIES #
- STRIPS & STRAPS
- COLLAR: Combination of protective put & covered call.
INTEREST RATE CAPS & FLOORS #
- INTEREST RATE CAP: One party agrees to pay the other at regular interval, when the benchmark interest rate ( ex– LIBOR) exceeds the cap rate (strike rate) specified in the contract.
- INTEREST RATE FLOOR: One party agrees to pay the other at regular interval, when the benchmark interest rate ( ex– LIBOR) falls below the floor rate (strike rate) specified in the contract.
- INTEREST RATE COLLAR: Simultaneous position in a floor and a cap on the same benchmark rate over the same period with the same settlement date.
Purchase cap & sell a floor
Purchase a floor & sell a cap
- Zero cost collar: Premium paid for buying the cap is equal to premium received from selling the floor.