...FIN-567: Options and Financial Futures Markets Final Project By Jacob C. Harris 19 Dec 2015 The objective of this project is to develop an investing strategy for a portfolio that consists of $500,000 of stock from ten different companies, $500,000 worth of US Treasury notes ranging from two to five years in maturity, and another $500,000 in money markets. The money market investment is considered safe and will provide a return at the risk-free rate. The market outlook for the next 18 months indicates a flat to slight downturn prediction. Given this predication, I developed a strategy of using various call and put options on a few of the stock assets in the portfolio in order to provide some income in a flat to down market. I will write covered calls to generate income and protective puts in order to limit the amount of losses in case of a dramatic drop in the market. The US Treasury notes portion of the portfolio is a ladder strategy consisting of various maturity dates to generate a steady stream of income from coupon payments over the next five years. The money market assets will also provide a steady stream of income at the risk-free rate equal to the rate on three-month US Treasury bills. My hedging strategy is to be conservative in a flat to down market that is predicted for the next 18 months. The portfolio of stocks consists of companies in various sectors of industry in order to diversify the unsystematic risk. I have two conglomerates...
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... debt and derivatives instruments by investors. NSE has set up a sophisticated electronic trading, clearing and settlement platform and its infrastructure serves as a role model for the securities industry. The standards set by NSE in terms of market practices; products and technology have become industry benchmarks and are being replicated by many other market participants. NSE has four broad segments Wholesale Debt Market Segment (commenced in June 1994), Capital Market Segment (commenced in November 1994) Futures and Options Segment (commenced June 2000) and the Currency Derivatives segment (commenced in August 2008). Various products which are traded on the NSE include, equity shares, bonds, debentures, warrants, exchange traded funds, mutual funds, government securities, futures and options on indices & single stocks and currency futures. Today NSE’s share to the total equity market turnover in India averages around 72% whereas in the futures and options market this share is around 99%. At NSE, it has always been our endeavour to continuously upgrade the skills and proficiency of the Indian investor....
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...Trading Strategies Involving Options BUSINESS SCHOOL 1 Overview › How options can be used for hedging a pre-existing position in the spot market, and for speculating on subsequent spot movements. › Hedging - Fiduciary call writing - Covered call writing - Protective put buying › Synthetic futures contracts › Speculating - Spreads - Straddles - other 2 › Fiduciary call writing - Writing call options against an asset already held - Involves frequent rebalancing to maintain a hedged position › Covered call writing - Hedger simply writes one call option for each unit of asset held › Synthetic puts - Created by one call option for each unit of an asset sold short › Protective put buying - Purchase of put options to insure a long asset position › Synthetic call - The combination of a short asset and a written put 3 Creating Synthetic Futures Contracts › Options can be combined to create synthetic futures contracts › A combination of options that consists of a written European call and a purchased european put, with the same exercise prices and expirations, behaves in a manner identical to a short position in a futures contract. › A long position in a synthetic futures contract is created by purchasing European calls and writing corresponding puts. 4 Put-call futures parity › A riskless portfolio consisting of short futures contract and long synthetic futures contract Position Current Value STX Short Futures ...
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...Equity Derivative Strategies Equity Derivative Strategies Joanne M. Hill Vice President, Equity Derivatives Goldman, Sachs & Company Understanding the tax implications of equity derivatives and the application of these instruments for taxable U.S. clients is a challenge worth meeting. Equity derivatives can playa useful role in implementing tax-efficient strategies that maximize after-tax returns. The key is to understand the costs, benefits, and rules for applying each instrument or strategy and then to select the best instrument to accomplish the investor's objectives and minimize the taxes. istorically, u.s. trust departments that managed money for taxable investors were restricted in their use of derivative securities. Because of such obstacles (some of which are a matter of education more than anything else), derivatives are not the first tool that comes to mind for managing taxable investments, even though they offer advantages for many clients. Derivatives are often perceived as complex in themselves; the roles derivatives can play when taxes are involved add yet another layer of complexity. Equity derivatives, independent of any tax motivation, are used for reducing the risk of holding equities or as efficient substitutes for equities. In both contexts, derivatives have natural applications in tax-related strategies. This presentation discusses the general tax issues facing corporate money managers or high-networth individuals with respect to equity derivatives...
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...Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings. d. Statements a, b, and c are correct. e. None of the statements above is correct. Derivatives Answer: d Diff: E N . Which of the following is an example of a derivative? a. Futures. b. Options. c. Swaps. d. All of the above are examples of derivatives. e. None of the above are examples of derivatives. Options Answer: b Diff: E . An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n) a. Call option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option. Option value Answer: d Diff: E . The value of an option depends on the stock’s price, the risk-free rate, and the a. Exercise price. b. Variability of the stock price....
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...THE EQUITY OPTIONS STRATEGY GUIDE JANUARY 2001 Table of Contents Introduction Option Terms and Concepts s s s s s s s s s s s s s s 2 4 4 4 4 4 5 5 5 6 6 6 6 7 7 7 8 8 10 12 14 16 18 20 22 24 26 28 What is an Option? Long Short Open Close Leverage and Risk In-the-money, At-the-money, Out-of-the-money Time Decay Expiration Day Exercise Assignment What’s the Net? Early Exercise/Assignment Volatility Long Call Long Put Married Put Protective Put Covered Call Covered Put Bull Call Spread Bear Put Spread Collar Strategies s s s s s s s s s Glossary For More Information 1 Introduction The purpose of this booklet is to provide an introduction to some of the basic equity option strategies available to option and/or stock investors. Exchange-traded options have many benefits including flexibility, leverage, limited risk for buyers employing these strategies, and contract performance guaranteed by The Options Clearing Corporation (OCC). Options allow you to participate in price movements without committing the large amount of funds needed to buy stock outright. Options can also be used to hedge a stock position, to acquire or sell stock at a purchase price more favorable than the current market price, or, in the case of writing (selling) options, to earn premium income. Options give you options. You’re not just limited to buying, selling or staying out of the market. With options, you can tailor your position to your own financial situation, stock market outlook...
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...101 Option Trading Secrets Also by Kenneth R. Trester The Complete Option Player The Option Player’s Advanced Guidebook Secrets to Stock Option Success 101 Option Trading Secrets K E N N E T H R. TRESTER Institute for Options Research, Inc. Lake Tahoe, Nevada Copyright © Kenneth R. Trester 2004 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher. Printed in the United States. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. We advise all readers that it should not be assumed that present or future recommendations will be profitable or equal the performance of previous recommendations. The reader should recognize that risk is involved in any option or security investment, and they should not assume that any formula, method, chart, theory or philosophy will result in profitable results or equal past performances. This...
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...Calculation Payback Period Stock Options @ Risk Analysis Conclusion References Page 1 4 5 7 11 12 22 23 24 Table of Tables Table Number Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24 Content DCF Analysis Variables Regression Analysis WACC Calculations Payback Period Depreciation Call Option - NYSE Call Option - S&P 500 Put Option - NYSE Put Option - S&P 500 Sell A Call - NYSE Sell A Call - S&P 500 Sell A Put - NYSE Sell A Put - S&P 500 Covered Call - NYSE Covered Call - S&P 500 Protective Put - NYSE Protective Put - S&P 500 Protective Collar - NYSE Protective Collar - S&P 500 Long Straddle - NYSE Long Straddle - S&P 500 Short Straddle - NYSE Short Straddle - S&P 500 Table of Exhibits List of exhibits Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Exhibit I Exhibit J Exhibit K Exhibit L Exhibit M Exhibit N Exhibit O @ RISK Sensitivity analysis Change in Stock Price - NYSE Payback Period - NYSE Change in Stock Price – S&P 500 Payback Period – S&P 500 Call Option - 2034 Put Option - 2034 Long straddle - 2034 Short...
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...risky, has the greatest upside if the risk outweighs the cost. Now, the least upside strategy is the payoff of covered call. Though this strategy does protect from great losses, it doesn’t have great upside potential. The strategy that is most aggressive is the If owned Lotus stock, and as an investor worried about bad news, the strategy to go with is the option strategy. This strategy protects against a stock that has large variations in the price. However, if the price is stable and not much movement in the stock, great losses can pursue from this strategy. In regards to the premium that is purchased, if the stock price doesn’t hit the strike price then the premium on this option will be lost. Therefore, the options strategy is smart to go with if you believe tha the stock is unstable, you are risk adverse, and want to protect from losses. Also, the put strategy has the greatest upside for returns due to the reason that AT&T receives 59% of its revenue from long distance service. Hence, the market share of AT&T dominance in telecommunications has an uphill battle with new technologies coming onto the scene. In order to protect in thos situation of a stock price falling, the put option would have potential to make money. However, Lotus being in the sector of technology has potential to have positive gains, and therefore would be best suited in a call option. This situation is betting on that the stock price may have a great opportunity to have great...
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...UNIVERSITY OF MARYLAND Robert H. Smith School of Business BMGT343 – Investments Fall 2014 I. Information on Instructor Instructor: Professor Xiaohui Gao Bakshi Email: xiaohui@rhsmith.umd.edu (preferred method of contact) Office: 4426 Van Munching Mobile Phone: (240) 507 9877 Course Notes are on Canvas Office Hours: Tuesdays & Thursdays, 2pm to 3pm, and I am always available so always feel free to contact me. Class meeting venue and time: Section 0201 Tuesdays & Thursdays, 11am to 1215pm, VMH 1418 Section 0301 Tuesdays & Thursdays, 1230pm to 145pm, VMH 1418 Review sessions by the TA: some Thursdays, 5pm to 6pm, Review sessions by the instructor: some Fridays, 1245pm to 145pm, II. Course Description and Objectives • Required Textbook “Essentials of Investments”, by Bodie, Kane, and Marcus, McGraw-Hill, 9th edition • Required Course packet Purchase the course packet at: https://cb.hbsp.harvard.edu/cbmp/access/27906209 The course packet contains four cases. • Course Overview This course is an introductory course in investments. We cover the following topics (the chapters are from BKM): Note: The schedule given below is only tentative, and may be changed based on the progress of the class. It is a student’s responsibility to read the assigned chapters, as information in them may be part of a quiz or an exam. Week Week 1 Week 2 Week 3 BMGT343 Topic Introduction Debt securities – I Debt securities – II Reading Chapter 1, 2, and 3 Chapter 10 Chapter 11 Xiaohui Gao Bakshi ...
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...How to benefit from stock futures You are bullish on a stock say Satyam, which is currently quoting at Rs 280 per share. You believe that in one month it will touch Rs 330. Question: What do you do? Answer: You buy Satyam. Effect: It touches Rs 330 as you predicted – you made a profit of Rs 50 on an investment of Rs 280 i.e. a Return of 18% in one month – Fantastic!! Wait: Can it get any better? Yes!! Question: What should you do? Answer: Buy Satyam Futures instead. Effect: On buying Satyam Futures, you get the same position as Satyam in the cash market, but you pay a margin and not the entire amount. For example, if the margin is 20%, you would pay only Rs 56. If Satyam goes upto Rs 330, you will still earn Rs 50 as profit. Now that translates into a fabulous return of 89% in one month. Unbelievable!! But True nevertheless!! This is the advantage of ‘leverage’ which Stock Futures provide. By investing a small margin (ranging from 10 to 25%), you can get into the same positions as you would be able to in the cash market. The returns therefore get accordingly multiplied. Question: What are the risks? Answer: The risks are that losses will be get leveraged or multiplied in the same manner as profits do. For example, if Satyam drops from Rs 280 to Rs 250, you would make a loss of Rs 30. The Rs 30 loss would translate to an 11% loss in the cash market and a 54% loss in the Futures market. Question: How can I reduce such losses? Answer: It is very easy...
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...CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS February 1994 1997 through 2012 Supplements included BATS Exchange, Inc. 8050 Marshall Drive Lexena, Kansas 66214 C2 OPTIONS EXCHANGE, INCORPORATED 400 South LaSalle Street Chicago, Illinois 60605 CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED 400 South LaSalle Street Chicago, Illinois 60605 INTERNATIONAL SECURITIES EXCHANGE, LLC 60 Broad Street New York, New York 10004 NASDAQ OMX BX, INC. 101 Arch Street Boston, Massachusetts 02110 NASDAQ OMX PHLX, INC. 1900 Market Street Philadelphia, Pennsylvania 19103 NASDAQ STOCK MARKET, LLC One Liberty Plaza 165 Broadway New York, New York 10006 NYSE AMEX LLC 11 Wall Street New York, New York 10005 NYSE ARCA, INC. 100 South Wacker Drive Chicago, Illinois 60606 1994 American Stock Exchange, LLC, Chicago Board Options Exchange, Incorporated, New York Stock Exchange, Inc., NYSE Arca, Inc. and Philadelphia Stock Exchange, Inc. CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS TABLE OF CONTENTS Page CHAPTER I—INTRODUCTION . . . . . . . . . . . . . . 1 CHAPTER II—OPTIONS NOMENCLATURE . . . . . . 5 CHAPTER III—OPTIONS ON EQUITY SECURITIES 18 Features of Stock Options . . . . . . . . . . . . . . . . . 18 CHAPTER IV—INDEX OPTIONS . . . . . . . . . . . . . 23 About Indexes . . . . . . . . . . . . . . . . . . . . . . . . 23 Features of Index Options . . . . . . . . . . . . . . . . . 26 CHAPTER V—DEBT OPTIONS . . . . . . . . . . . . . . 29 Rates, Yields and Prices of Debt Securities ....
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...to sell her stock options at any time after she joins Telstar she has several options. She can either choose to take the cash bonus, the stock options and sell it, or she can take the option and keep it until it is worth use. Let’s compare the three situations that we choose to analyse : 1- She takes the cash bonus and decide to invest it in a 5-year bond which has a anualize rate of 6.02%. So at the end she will win 5310$ (=5000*1.0602). 2- She takes the options in order to sell her stock options. Let’s assume that it is easy to find someone who want to buy the option at the value of the call option. Using the exhibit 3, the standard deviation of the Telstar common stock is 30%. S= 18.75 K= 35 r= 6.02% t= 5 σ= 30% So C= 2.9245 Assuming that she can easily and quickly find someone to buy her options, she can sell it at 3000*2.9245= 8773.5$ Then she could even invest these 8773,5$ in a 5years bond and win 8773,5*1,0602=9301,7$ 3- She keeps the options until it is worth use it and sell her shares. If she wants to earn more than she could have won by taking the cash bonus we have to find the value of the stock that would make her win more than 5301$ (X-35)*3000=5301 => X= 36,767 So when the value of the stocks is greater than 36,767, it will be worth using the option and sell the shares after. Sally Jameson will win more than 5301. If she want to earn more than she could have won by selling the options, she will have to...
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...view on the stock but also concerned about the fall in the price. Hence a combination of collar strategy and protective put was adopted, as they are more appropriate for a short term period. Only one stock was shorted. Also we seek a target return of 10% annualized. Benefits & Risks - Our profit potential is not limited, so if the share price rise, we still benefit from increase in value of share. The strategy being effective for a short period. The options chosen were of shorter time period as the time decay works in our favour which have been written, time erodes faster when option approaches expiry. Also out of the money options were chosen as there was an expectation that calls would not be realised as the stock price would reasonably grow. This led to increase participation in share price rise while the trade-off is on premium received which is lower for out of money options. A detailed explanation has been provided in APPENDIX A. Portfolio Construction A portfolio of 6 stocks from ASX200 and their related options was constructed on 03rd Sep’15 to be held for 2 weeks and then squared off at the end of the period. The top performing stocks from well diversified sectors were identified based on fundamental and market analysis. 1) Energy sector - AGL Energy Limited (AGL) 2) Healthcare sector -Sonic Healthcare Limited (SHL) 3) Information Technology sector - Computershare Limited (CPU) 4) Financial Services -Macquarie Group Limited – (MQG) 5) Telecommunication...
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...Introduction to Options Markets Chap 9 Options, Futures, and Other Derivatives, 8th Edition, John C. Hull 2011 1 Review of Option Types • A call is an option to buy • A put is an option to sell • A European option can be exercised only at the end of its life • An American option can be exercised at any time 2 Derivatives - Options Give the holder the right to buy or sell the underlying at a certain date for a certain price. (European options) • • • • • Right to buy call option Right to sell put option Payoff function: call: C(T)= max{S(T)-K, 0}, put: P(T)=max{K-S(T),0} Cash settlement Exchanges: CBOE, CBOT, Eurex, LIFFE, ... Derivatives - Options • • • • Strike K Maturity T Buy option Sell option you can buy or sell for that price date when the option expires long position (holder) short position (writer) Exercising ... ... only at maturity possible European ... at any date up to maturity possible American Option Positions • • • • Long call Long put Short call Short put 5 Long Call (Figure 9.1, Page 195) Profit from buying one European call option: option price = $5, strike price = $100, option life = 2 months 30 Profit ($) 20 10 70 0 -5 loss 80 90 100 Terminal stock price ($) 110 120 130 6 Short Call (Figure 9.3, page 197) Profit from writing (selling) one European call option: option price = $5, strike price = $100 Profit ($) 5 0 -10 -20 110 120 130 70 80 90 100 Terminal stock...
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