C14 TRADING STRATEGIES

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 #

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• 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.