Financial Derivatives :Financial Derivatives Keller Funds Option Investment strategy Group 7 Anantjit Pradeep Soubhagya Surya Prashant Rao Suvarthi


VOLATILITY :VOLATILITY Returns on Lotus are more volatile Returns on AT&T have SD of 0.11 (Rough Estimate)


AMERICAN OPTION PRICING :AMERICAN OPTION PRICING Arbitrage opportunity occurs if the following condition is not followed Call + Strike price>= Stock + put >= Call + PV(Strike) Ca(So,T,X)+X >=So+Pa(So,T,X)>=Ca(So,T,X)+Xe^-rT Example Lotus January So+Pa(So,T,X) < Ca(So,T,X)+X Ca Cost of Call Pa Cost of Put X Strike Price


LONG CALL :LONG CALL Bullish in the near term Increase in implied volatility would have a positive impact on this strategy AT & T :Better upside gain, lower downside losses


LONG PUT :LONG PUT Very bearish to neutral. If bullish on the underlying stock in the long run, other strategy alternatives might be more suitable: Protective Puts Increase in implied volatility would have a positive impact on this strategy


WRITE CALL :WRITE CALL Expects stagnant and listless markets Increase in implied volatility would have a negative impact on this strategy


WRITE PUT :WRITE PUT Expecting a steady or rising stock price during life of option, and considers the likelihood of a decline very remote. An increase in implied volatility would have a negative impact on this strategy


COVERED CALL :COVERED CALL Expecting steady or slightly rising stock price for at least the term of the option An increase in implied volatility would have a neutral to slightly negative impact on this strategy


PROTECTED PUT :PROTECTED PUT This strategy is a hedge against a temporary dip in the stock's value An increase in implied volatility would have a neutral to slightly positive impact on this strategy


LONG STRADDLE :LONG STRADDLE Big price move and/or a great deal of volatility in the foreseeable future Fueled by an increase in implied volatility Looking for a sharp move in the stock price, in either direction, during the life of the options.


BULL PUT SPREAD :BULL PUT SPREAD Limited risk and reward potential. Expecting stock price stays steady or rises.


BEAR CALL SPREAD :BEAR CALL SPREAD Income with limited risk, or to profit from a rise in the underlying stock's price, or both This strategy entails precisely limited risk and reward potential. The effects of volatility shifts on the two contracts may offset each other to a large degree.


LONG BUTTERFLY :LONG BUTTERFLY This strategy profits if the underlying stock is at the body of the butterfly at expiration. An increase in implied volatility, all other things equal, will usually have a slightly negative impact on this strategy. This strategy has an extremely high expiration risk.


Mimic :Mimic Match portfolio returns without underlying investment


Synthetic :Synthetic Match portfolio returns with investment