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CH 12 Hull OFOD11 TH Edition

A derivative is a fundamental concept in calculus that represents the rate of change of a function at a given point. In simple terms, it measures how a function's output (dependent variable) changes with respect to a change in its input (independent variable). The derivative is denoted by the prime symbol (') or by using the differential operator (d/dx). If \(y = f(x)\), then the derivative of \(f(x)\) with respect to \(x\) is often written as \(f'(x)\) or \(\frac{dy}{dx}\). Geometrically, the

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54 views

CH 12 Hull OFOD11 TH Edition

A derivative is a fundamental concept in calculus that represents the rate of change of a function at a given point. In simple terms, it measures how a function's output (dependent variable) changes with respect to a change in its input (independent variable). The derivative is denoted by the prime symbol (') or by using the differential operator (d/dx). If \(y = f(x)\), then the derivative of \(f(x)\) with respect to \(x\) is often written as \(f'(x)\) or \(\frac{dy}{dx}\). Geometrically, the

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Chapter 12

Trading Strategies Involving


Options

Options, Futures, and Other Derivatives,


11th Edition, Copyright © John C. Hull 2021 1
Strategies to be Considered
Bond plus option to create principal
protected note
Stock plus option
Two or more options of the same type (a
spread)
Two or more options of different types (a
combination)

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 2
Principal Protected Note
Allows investor to take a risky position without
risking any principal
Example: $1000 instrument consisting of
3-year zero-coupon bond with principal of $1000
3-year at-the-money call option on a stock portfolio
currently worth $1000

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 3
Principal Protected Notes continued
Viability depends on
Level of dividends
Level of interest rates
Volatility of the portfolio
Variations on standard product
Out of the money strike price
Caps on investor return
Knock outs, averaging features, etc

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 4
Positions in an Option & the Underlying
(Figure 12.1)

Profit Profit

K
K ST ST
(a)
(b
Profit Profit )

K
ST K ST

(c (d
Options, )Futures, and Other Derivatives, 11th Edition,)
Copyright © John C. Hull 2021 5
Bull Spread Using Calls
(Figure 12.2)

Profit

ST
K1 K2

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 6
Bull Spread Using Puts
Figure 12.3

Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 7
Bear Spread Using Puts
Figure 12.4

Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 8
Bear Spread Using Calls
Figure 12.5
Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 9
Box Spread
A combination of a bull call spread and
a bear put spread
If all options are European a box spread
is worth the present value of the
difference between the strike prices
If they are American this is not
necessarily so (see Business Snapshot
11.1)
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 10
Butterfly Spread Using Calls
Figure 12.6
Profit

K1 K2 K3 ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 11
Butterfly Spread Using Puts
Figure 12.7

Profit

K1 K2 K3 ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 12
Calendar Spread Using Calls
Figure 12.8

Profit

ST
K

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 13
Calendar Spread Using Puts
Figure 12.9

Profit

ST
K

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 14
A Straddle Combination
Figure 12.10

Profit

K ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 15
Strip & Strap
Figure 12.11

Profit Profit

K ST K ST

Strip Strap
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 16
A Strangle Combination
Figure 12.12

Profit

K1 K2
ST

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 17
Other Payoff Patterns
When the strike prices are close together a
butterfly spread provides a payoff consisting
of a small “spike”
If options with all strike prices were available
any payoff pattern could (at least
approximately) be created by combining the
spikes obtained from different butterfly
spreads

Options, Futures, and Other Derivatives, 11th Edition,


Copyright © John C. Hull 2021 18

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