Name Graph Description Payoff Profit Comments Long Forward ST F ST F Commitment to purchase commodity at some point in the future at a pre specified price No premium Asset price contingency Always Maximum Loss F Maximum Gain Unlimited Short Forward See above Long Call Purchased Call Short Call Written Call Long Put Purchased Put Commitment to sell commodity at some point in the future at a pre specified price Right but not obligation to buy a commodity at some future date F ST F ST Max 0 ST K Max 0 ST K FV PC Commitment to sell a commodity at some future date if the purchaser exercises the option Max 0 ST K Max 0 ST K FV PC Right but not obligation to sell a commodity at some future date Max 0 K ST Max 0 K ST FV PP No premium Asset price contingency Always Maximum Loss Unlimited Maximum Gain F Premium paid Asset price contingency ST K Maximum Loss FV PC Maximum Gain Unlimited COB Call is an Option to Buy Call me up Call purchaser benefits if price of underlying asset rises Premium received Asset price contingency ST K Maximum Loss FV PC Maximum Gain FV PC Premium paid Asset price contingency K ST Maximum Loss FV PP Maximum Gain K FV PP POS Put is an Option to Sell Put me down Put purchaser benefits if price of underlying asset falls Short with respect to underlying asset but long with respect to derivative 1 Short Put Written Put Floor Cap Covered call writing Covered put writing Commitment to buy a commodity at some future date if the purchaser exercises the option Max 0 K ST Max 0 K ST FV PP Premium received Asset price contingency K ST Maximum Loss K FV PP Maximum Gain FV PP Long with respect to underlying asset but short with respect to derivative Long Position in Asset Purchased Put Short Position in Asset Purchased Call Used to insure a long position against Profit graph is identical to that of a price decreases purchased call Payoff graphs can be made identical by adding a zero coupon bond to the purchased call Used to insure a short position against Profit graph is identical to that of a price increases purchased put Payoff graphs can be made identical by adding a zero coupon bond to the purchased put Long Position in Asset Sell a Call Option Graph similar to that of a written put Short Position in Asset Write a Put Option Graph similar to that of a written call Long Index Payoff max 0 ST K FV PC Long Index Payoff max 0 K ST FV PP 2 Synthetic Forward Bull Spread Bear Spread Box Spread Bull Call Spread Synthetic Long Forward Synthetic Short Forward Buy Call at K1 Sell Call at K2 Buy Put at K2 Ratio Spread Bear Put Spread Sell Put at K1 Purchase Call Option Write Put Option with SAME Strike Price and Expiration Date max 0 ST K FV PC max 0 K ST FV PP Mimics long forward position but involves premiums and uses strike price rather than forward price Put call parity Call K T Put K T PV F0 T K Purchase Call Option with Strike Price K1 and Sell Call Option with Strike Price K2 where K2 K1 OR Purchase Put Option with Strike Price K1 and Sell Put Option with Strike Price K2 where K2 K1 Sell Call Option with Strike Price K1 and Purchase Call Option with Strike Price K2 where K2 K1 OR Sell Put Option with Strike Price K1 and Purchase Put Option with Strike Price K2 where K2 K1 Consists of 4 Options and creates a Synthetic Long Forward at one price and a synthetic short forward at a different price Buy m calls at strike price K1 and sell n calls at strike price K2 OR Buy m puts at strike price K1 and sell n puts at strike price K2 max 0 ST K1 FV PC1 max 0 ST K2 FV PC2 Investor speculates that stock price will rise Although investor gives up a portion of his profit on the purchased call this is offset by the premium received for selling the call max 0 ST K1 FV PC1 max 0 ST K2 FV PC2 Investor speculates that stock price will fall Graph is reflection of that of a bull spread about the horizontal axis Guarantees cash flow into the future Purely a means of borrowing or lending money Costly in terms of premiums but has no stock price risk Enables spreads with 0 premium Useful for paylater strategies 3 Purchased Collar Written Collar Collared Stock Zero cost collar Straddle Buy at the money Put Option with strike price K1 Sell out of the money Call Option with strike price K2 where K2 K1 Collar width K2 K1 Sell at the money Put Option with strike price K1 Buy out of the money Call Option with strike price K2 where K2 K1 Buy index Buy at the money K1 strike put option sell out of the money K2 strike call option where K2 K1 Purchased Put insures the index Written Call reduces cost of insurance Buy at the money Put Sell out of the money Call with the same premium collars For any given stock there is an infinite number of zero cost If you try to insure against all losses on the stock including interest then a zero cost collar will have zero width Buy a Call Buy a Put with the same strike price expiration time and underlying asset This is a bet that volatility is really greater than the market assessment of volatility as reflected in option prices High premium since it involves purchasing two options Guaranteed payoff as long as ST is different than K Profit ST K FV PC FV PP 4 Strangle Written Straddle Butterfly Spread Asymmetric Butterfly Spread Cash and carry Cash and carry arbitrage Buy an out of the money Call Buy an out of the money Put with the same expiration time and underlying asset Reduces high premium cost of straddles Reduces maximum loss but also reduces maximum profit Sell a Call Sell a Put with the same strike price expiration time and underlying asset Bet that volatility is lower than the market s assessment Combination of a written straddle and insurance against extreme negative outcomes Out of the Money Put insures against extreme price Out of the Money Call insures against extreme price Sell a K2 strike Call Sell a K2 strike Put AND AND Buy out of the money K3 strike Put Buy out of the money K1 strike Call K1 K2 K3 K3 K2 K3 K1 Buy K1 strike calls Buy 1 K3 strike calls K2 K1 1 K3 K1 K2 K3 decreases increases Buy Underlying Asset Short the Offsetting Forward Contract No Risk Payoff ST F0 T ST F0 T Cost of carry Can be created if a forward price F0 T is available such that r F0 T S0e r T Buy Underlying Asset Sell it forward 5 Reverse cash and carry Cash Flow at t 0 S0e T …