What is the advantage of this format? Categorize things with different criteria other than the date and month.
This is a good idea.
testing pdf with option content
Posted by xxkanxx on December 16, 2008
Long straddle is a strategy that buys both put and call of the same underlying stock at the same strike price and same expiration day. The buyer would make money only if the rise of the underlying stock price of the option is high or low enough to cover the cost of the premium for the transaction (plus the cost of the stock when exercising the option to buy or sell stocks).
This is not clear if an example is not given.
EXAMPLE
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 put and the JUL 40 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of $400 taken to enter the trade.
The opposite case is also true if the stock price is falling below the strike price at a very deep level to cover both the premium paid for the call and put.
This is a strategy for the case of the price of the underlying stock swings both way very strongly. Otherwise the investor will lose all his investment.
Long Straddle Payoff Diagram
http://www.theoptionsguide.com/long-straddle.aspx is the URL of the website. This is such a good way to read about option. It is better than reading books from the library.
There is another strategy for selling Straddle to investor known as Short Straddle. This is the opposite end of the straddle transaction. This is because of the nature of stock option requires a seller and a buyer. So this is the case when one expects that the market is very stable, no strong swing into both side of the striking price would be take place.
The short straddle loss gain diagram would be the reverse V of the long straddle.
The long put butterfly spread is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying security will not rise or fall much by expiration.
There are 3 striking prices involved in a long put butterfly spread and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.
LIMITED PROFIT
Maximum gain for the long put butterfly is attained when the underlying stock price remains unchanged at expiration. At this price, only the highest striking put expires in the money.
Long Put Butterfly Payoff Diagram
LIMITED RISK
Maximum loss for the long put butterfly is limited to the initial debit taken to enter the trade plus commissions.
BREAKEVEN POINT(S)
There are 2 break-even points for the long put butterfly option strategy. The breakeven points can be calculated using the following formulae.
EXAMPLE
Suppose XYZ stock is trading at $40 in June. An options trader executes a long put butterfly by buying a JUL 30 put for $100, writing two JUL 40 puts for $400 each and buying another JUL 50 put for $1100. The net debit taken to enter the trade is $400, which is also his maximum possible loss.
On expiration in July, XYZ stock is still trading at $40. The JUL 40 puts and the JUL 30 put expire worthless while the JUL 50 put still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.
Maximum loss results when the stock is trading below $30 or above $50. At $50, all the options expires worthless. Below $30, any “profit” from the two long puts will be neutralised by the “loss” from the two short puts. In both situations, the long put butterfly trader suffers maximum loss which is equal to the initial debit taken to enter the trade.
LONG CALL BUTTERFLY
Long butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade.
EXAMPLE
Suppose XYZ stock is trading at $40 in June. An options trader executes a long call butterfly by purchasing a JUL 30 call for $1100, writing two JUL 40 calls for $400 each and purchasing another JUL 50 call for $100. The net debit taken to enter the position is $400, which is also his maximum possible loss.
On expiration in July, XYZ stock is still trading at $40. The JUL 40 calls and the JUL 50 call expire worthless while the JUL 30 call still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.
Maximum loss results when the stock is trading below $30 or above $50. At $30, all the options expires worthless. Above $50, any “profit” from the two long calls will be neutralised by the “loss” from the two short calls. In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade.
What gets me is the assumption that the JUL 30 call still has an intrinsic value of $1000. It has lost only $100 in time value. The intrinsic value is still there. I thought that when the price stood at $40 the option to buy the stock at $30 will lose all its value. No, the option mean I can still buy 100 share of the stock at $30 a share and this is why it still has a value (40-30)x100 =$1000 intrinsic value.
In options trading, a long butterfly (sometimes simply butterfly) is a combination trade resulting in the following net position:
all with the same expiration date. At expiration the position will be worth zero if the underlying is below X−a or above X+a, and will be worth a positive amount between these two values. The payoff function is shaped like an upside-down V, and the maximum payoff occurs at X (see diagram).
Since the payoff is sometimes zero, sometimes positive, the price of a butterfly is always non-negative (to avoid an arbitrage opportunity).
A butterfly can also be created as follows:
and this is equivalent to the call version (as can be verified via put–call parity).
The double position in the middle is called the body, while the two other positions are called the wings. A related strategy where the middle two positions have differing strike values is known as an Iron condor.
In an unbalanced butterfly the variable a can have 2 different values.
[edit]Long butterfly
The butterfly spread is a neutral options trading strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.
Long butterflies are entered when the investor thinks that the underlying stock will not rise or fall much by expiration (i.e. when the investor is bearish on volatility). Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade, hence it is also a debit spread.
A long butterfly spread can also be constructed using puts and is known as a long put butterfly. The long put butterfly spread is a neutral options trading strategy that is a combination of a bull put spread and a bear put spread. It is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will not rise or fall much by expiration. There are 3 striking prices involved in a long put butterfly spread and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.
[edit]Short butterfly
Short butterfly is the name of a neutral-outlook, options trading strategy that involves trading options at three different strike prices. The short butterfly is a neutral strategy like the long butterfly spread but bullish on volatility. It is a limited profit, limited risk options trading strategy and it can be constructed using calls or puts.
Using calls, the short butterfly can be constructed by writing one lower striking call, buying two at-the-money calls and writing another higher striking call. A net credit is received upon entering this spread. Hence, the short butterfly is also a credit spread.
[edit]References
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McMillan, Lawrence G. (2002). Options as a Strategic Investment (4th ed. ed.), New York : New York Institute of Finance. ISBN 0-7352-0197-8.
Good I have successfuly upload a Word format file for 2000 to 2003 into Google doc and the test with PDF also uploaded successfully.
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