Option Strategies for Retail Investors

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Bern University of Appl ied Sciences

Business

Option Strategies A practical Guideline for

Retail Investors

Bachelor Thesis

Submitted within the study program Bachelor of Science in

Business Administration

By XXX

For the module Bachelor Thesis (BTHE)

Instructor XXX

Co-Supervisor XXX

Submission date Friday, 16 May 2014


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Option strategies A practical Guideline for Retail Investors

Acknowledgment

The development of this paper has been observed and accompanied by instructor Profes-

sor XXX and co-instructor Professor XXX of the XXX. Both of the tutors shall be thanked

gratefully at this point. Furthermore I would like to acknowledge the interviewees for their

advices and information, who made it possible to complete this bachelor thesis.

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Management Summary

This bachelor thesis examines option strategies and what costs and fees an individual

investor will be confronted with when trading such instruments in Switzerland. In theory,

option strategies are an interesting and multifunctional instrument for every market direc-tion. However, in practice, there are several difficulties which retail investors have to over-

come. For example, they have only limited available assets for trading and thus the mar-

gin of the broker and the transaction costs significantly influence the potential profit (econ-

omies of scale). There are also legal restrictions like naked short selling which essentially

complicate trading option strategies efficiently.

The methodology of this paper is mainly based on literary research from the Anglo-Saxon

and German language area as well as interviews with experts in the banking industry. Inthis thesis, the twelve biggest retail banks in Switzerland are analysed in relation to costs

and trading possibilities as well as 45 option strategies for six market expectations.

The results are especially interesting because they initially show that by taking the trans-

action costs of the predefined financial institutions, the average option strategy with an

initial investment of CHF 6000 costs CHF 236.11. Instead EUREX options, investors have

the possibility to trade warrants, which lower the total average trading costs per strategy to

CHF 168.33 (-29%). The most advantageous trading platform is Swissquote ( CHF22.44) and Saxo Bank ( CHF 91.06), where they charge fees on a per-contract basis.

The other banks are clearly offering less attractive conditions and only nine platforms are

providing EUREX options to their clients.

There are also differences in fixed costs, starting from no fees like PostFinance and Saxo

Bank, and ending with Zrcher Kantonalbank (CHF206.40) and Credit Suisse (CHF

448.80). By taking into account the total costs, the range of all banks lies between CHF

28.92 and CHF 458.50 (+1585%). Therefore the average break-even point lies between

0.5% and 7.6% for EUREX options, respectively 0.7% and 4.7% for warrants. As a result,

retail investors are able to trade option strategies with a relatively small investment. It is

important to note that the bid-ask spread, the opportunity costs and the risk premium are

not included.

The outcomes of this thesis are particularly remarkable because they show that investing

in option strategies for a retail investor is not directly connected with high trading fees.

Therefore, besides certain limitations, option strategies are an interesting and efficient

way of maximizing the performance of the investors portfolio even in downside market

trends.

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Table of Contents

1. Introduction ............................................................................................................. 9

1.1. Problem Statement ................................................................................................ 9

1.2. Objectives ............................................................................................................ 10

1.3. Methodology ........................................................................................................ 10

1.4. Challenges for a Retail Investor ........................................................................... 11

2.

Option Strategy a short Introduction ................................................................ 12

3.

Definit ion ................................................................................................................ 14

3.1. Retail Investor ...................................................................................................... 14

3.2.

Regulatory Limitations ......................................................................................... 16

4.

Trading Platforms .................................................................................................. 18

4.1.1. Pre-conditions............................................................................................................ 18

4.2. Universal Banks ................................................................................................... 20

4.2.1. UBS ........................................................................................................................... 20

4.2.2. Credit Suisse Group .................................................................................................. 20

4.3. Cantonal banks .................................................................................................... 21

4.3.1. Zrcher Kantonalbank ZKB ....................................................................................... 21

4.3.2. Berner Kantonalbank BEKB ...................................................................................... 22

4.3.3. Banque Cantonale Vaudoise BCV ............................................................................ 23

4.4. Online Banks ....................................................................................................... 24

4.4.1.

Saxo Bank (Switzerland) Ltd. .................................................................................... 24

4.4.2. Swissquote Bank S.A. ............................................................................................... 24

4.4.3. Cash zweiplus ........................................................................................................... 25

4.5. Other Banks ......................................................................................................... 26

4.5.1. Migros Bank AG ........................................................................................................ 26

4.5.2. Bank Coop AG........................................................................................................... 26

4.5.3. PostFinance AG ........................................................................................................ 27

4.5.4. Raiffeisen ................................................................................................................... 28

4.6.

Stock Exchange and Taxes ................................................................................. 29

5. Conclusion I ........................................................................................................... 29

5.1. Pre-assumptions .................................................................................................. 29

5.2. Conclusion of Trading Platforms .......................................................................... 30

5.2.1. Transaction Cost ....................................................................................................... 30

5.2.2. Fixed Costs ................................................................................................................ 31

5.2.3. Interest Margin........................................................................................................... 32

5.2.4. EUREX Options vs. Warrants ................................................................................... 32

5.2.5. Trading Possibilities .................................................................................................. 33

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5.3. Evaluation with EUREX Options .......................................................................... 34

5.4. Evaluation with Warrants ..................................................................................... 35

6. Option Strategies ................................................................................................... 36

6.1.

Neutral Strategies ................................................................................................ 37

6.2. Volatile Strategies ................................................................................................ 42

6.3. Moderately Bullish Strategies ............................................................................... 46

6.4. Sustained Bullish Strategies ................................................................................ 49

6.5. Moderately Bearish Strategies ............................................................................. 52

6.6. Sustained Bearish Strategies ............................................................................... 54

7.

Conclusion II .......................................................................................................... 56

7.1. Conclusion of Option Strategies ........................................................................... 56

7.1.1.

Neutral Strategies ...................................................................................................... 56

7.1.2. Volatile Strategies ..................................................................................................... 57

7.1.3. Moderately Bullish Strategies .................................................................................... 58

7.1.4. Sustained Bullish Strategies ...................................................................................... 58

7.1.5. Moderately Bearish Strategies .................................................................................. 59

7.1.6. Sustained Bearish Strategies .................................................................................... 59

8.

Final Conclusion .................................................................................................... 60

8.1.

Trading Platform .................................................................................................. 60

8.2. Option Strategies ................................................................................................. 61

8.3. Break-Even Point ................................................................................................. 62

8.4. Evaluation Matrix ................................................................................................. 63

8.4.1. EUREX Options ......................................................................................................... 63

8.4.1. Warrants .................................................................................................................... 64

8.4.2. Break-Even Point ...................................................................................................... 65

9. Disc laimer .............................................................................................................. 66

10. Declaration ............................................................................................................. 66

11. Bibl iography........................................................................................................... 67

11.1.

List of Illustrations .......................................................................................... 67

11.2. Literature ....................................................................................................... 68

11.3. Interviews ...................................................................................................... 68

11.4. Online Sources .............................................................................................. 69

11.5. Legislative Texts ............................................................................................ 77

12. Appendix ................................................................................................................ 78

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List of Abbreviations

BCV ............................................ Banque Cantonal Vaudoise

BE .............................................. Break-even point

BEKB ......................................... Berner Kantonalbank

CFD ............................................ Contract For Difference

ERX ............................................ EUREX Options

FINMA ........................................ Swiss Financial Market Supervisory Authority

LEAPS ....................................... Long-Term Equity Anticipation Securities

LIBOR ........................................ London Interbank Offered Rate

OTC ........................................... Over-the-Counter

ROI............................................. Return on Investment

SFBC ......................................... Swiss Federal Banking Commission

SNB ............................................ Swiss National Bank

VAT ............................................ Value Added Tax

WRT ........................................... Warrants

ZKB ............................................ Zrcher Kantonalbank

List of Figures

Figure 1: How short selling works .................................................................................... 17

Figure 2: Symbol icon ...................................................................................................... 36

Figure 3: Long Condor Spread .......................................................................................... 1

Figure 4: Long Butterfly Spread ......................................................................................... 1

Figure 5: Short Straddle .................................................................................................... 1

Figure 6: Short Strangle .................................................................................................... 1

Figure 7: Short Gut Spread ............................................................................................... 1

Figure 8: Long Iron Butterfly Spread .................................................................................. 1

Figure 9: Long Box Spread ................................................................................................ 1

Figure 10: Long Call Ladder Spread .................................................................................. 1

Figure 11: Ratio Call Write ................................................................................................ 1

Figure 12: Ratio Put Write ................................................................................................. 1

Figure 13: Double Butterfly Spread ................................................................................... 1

Figure 14: Variable Ratio Write ........................................................................................ 41

Figure 15: Long Straddle ................................................................................................... 1

Figure 16: Long Strangle ................................................................................................... 1

Figure 17: Long Gut Spread .............................................................................................. 1

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Figure 18: Call Ratio Back Spread .................................................................................... 1

Figure 19: Strap................................................................................................................. 1

Figure 20: Strip .................................................................................................................. 1

Figure 21: Short Condor Spread ........................................................................................ 1

Figure 22: Short Butterfly Spread ...................................................................................... 1

Figure 23: Short Call Ladder Spread ................................................................................. 1

Figure 24: Collar ................................................................................................................ 1

Figure 25: Long Call Spread .............................................................................................. 1

Figure 26: Short Ratio Call Spread .................................................................................... 1

Figure 27: Uncovered Put .................................................................................................. 1

Figure 28: Covered Combination ....................................................................................... 1

Figure 29: Zero-Cost Collar ............................................................................................... 1

Figure 30: Covered Short Call ........................................................................................... 1

Figure 31: Cash-Secured Put ............................................................................................ 1

Figure 32: Protective Put ................................................................................................... 1

Figure 33: Long Call .......................................................................................................... 1

Figure 34: Synthetic Long Stock ........................................................................................ 1

Figure 35: Bull Spread Spread .......................................................................................... 1

Figure 36: Cash-Secured Call ........................................................................................... 1

Figure 37: Call Back Spread ............................................................................................ 51

Figure 38: Long Combo Spread ........................................................................................ 1

Figure 39: Short Call Spread ............................................................................................. 1

Figure 40: Uncovered Call ................................................................................................. 1

Figure 41: Short Ratio Put Spread ..................................................................................... 1

Figure 42: Covered Short Put ............................................................................................ 1

Figure 43: Bear Spread Spread ......................................................................................... 1

Figure 44: Long Put ........................................................................................................... 1

Figure 45: Synthetic Short Stock ....................................................................................... 1

Figure 46: Short Combo Spread ........................................................................................ 1

Figure 47: Put Back Spread .............................................................................................. 1

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List of Tables

Table 1: Conditions of UBS ............................................................................................. 20

Table 2: Conditions of Credit Suisse ................................................................................ 21

Table 3: Conditions of Zrcher Kantonalbank .................................................................. 22

Table 4: Conditions of Berner Kantonalbank ................................................................... 22

Table 5: Conditions of Banque Cantonale Vaudoise ........................................................ 23

Table 6: Conditions of Saxo Bank (Switzerland) Ltd. ....................................................... 24

Table 7: Conditions of Swissquote .................................................................................. 25

Table 8: Conditions of Cash zweiplus .............................................................................. 25

Table 9: Conditions of Migros Bank AG ........................................................................... 26

Table 10: Conditions of Bank Coop AG ........................................................................... 27

Table 11: Conditions of PostFinance AG ......................................................................... 27

Table 12: Conditions of Raiffeisen ................................................................................... 28

Table 13: Conclusion of Trading Platforms - EUREX Options vs. Warrants ..................... 33

Table 14: Neutral Strategies ............................................................................................ 37

Table 15: Volatile Strategies ............................................................................................ 42

Table 16: Moderately Bullish Strategies .......................................................................... 46

Table 17: Sustained Bullish Strategies ............................................................................ 49

Table 18: Moderately Bearish Strategies ......................................................................... 52

Table 19: Sustained Bearish Strategies ........................................................................... 54

Table 20: Evaluation Option Strategies - Neutral Strategies ............................................ 56

Table 21: Evaluation Option Strategies - Volatile Strategies ............................................ 57

Table 22: Evaluation Option Strategies - Moderately Bullish Strategies ........................... 58

Table 23: Evaluation Option Strategies - Sustained Bullish Strategies ............................ 58

Table 24: Evaluation Option Strategies - Moderately Bearish Strategies ......................... 59

Table 25: Evaluation Option Strategies - Sustained Bearish Strategies ........................... 59

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1. Introduction

Nowadays, investors have won a deeper interest in trading financial instruments not

only institutional clients but also wealthy private clients. Due to the leverage of derivatives,

investors are able to make huge amounts of profit with small investments in a short periodof time; in contrast, there is also the risk of losing the whole amount. For solving this criti-

cal problem, option strategies are constructed to overcome those difficulties as they mini-

mize risks and maximize profits in a certain market expectation.

With increasing possibilities for trading financial derivatives such as options and warrants

by the internet (which have lower transaction costs), retail investors are also keen to in-

vest in such strategies. But still, the limitations for individual investors are substantial, es-

pecially when it comes to questions about costs, technically feasibility and knowledge

about handling option strategies effectively. A retail investor has to overcome those hur-

dles when he would like to be a successful option strategy-trader.

1.1. Problem Statement

As we know, theories are rarely the same as in practice, but at least there are similarities

or high positive correlation between them. In the area of options and especially option

strategies, the theories have some limitations and we are knowingly ignoring some as-

pects in this area. In theory, when dealing with option strategies, we do not take into ac-

count transaction costs like brokerage fee, stamp duty or any other fees like safekeeping

account-fees. Moreover, there are certain limitations of the instruments, which are not

allowed to be used for a retail investor. In addition, the possibility of short selling stocks

shares and the spread of the broker (margin of the bank) have an important influence on

option strategies and their performance (profit or loss).

Furthermore, the theory doesnt take into consideration that retail investors rarely have the

possibility to use the risk-free interest rate properly and that they have to pay interest for a

margin account. Last but not least, retail clients do not often have the necessary

knowledge about option strategies and how to use them effectively. In other words, the

financial institutions do not provide small investors with the important information and plat-

forms to trade option strategies, because of too high costs and a too low profitability.

Therefore, option strategies are a relatively unknown field for retail investors in Switzer-

land.

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1.2. Objectives

Main objective of this bachelor thesis is to analyze which option strategies, we know in

theory, are the most efficient for retail investors. This includes a theoretical description of

each option strategy and in general options as a financial instrument. Moreover, I will de-fine in more detail what a retail investor is and what costs he will face when dealing such

instruments. In addition, this bachelor thesis will not only provides the reader with an ana-

lyze of the costs for an option strategy, but it will also show which trading platform is the

best in relation to costs and trading possibilities for a retail investor.

In the end, the reader should be able to decide clearly which option strategy is the best for

a certain expectation (bullish, bearish, etc.) relative to transaction costs. Furthermore, as a

result from my analysis, I will clearly evaluate the different trading platform in comparisonto costs and fees for a Swiss retail investor.

The final outcome from this Bachelor thesis will be a broad and detailed Matrix-summary

with the most important Swiss retail banks and option strategies, where the investor can

easily find the most efficient strategy and trading platform in terms of costs and fees.

1.3. Methodology

For my bachelor thesis I will use several approaches to get the necessary information,

statements and data. The following paragraph will give a short summary, but it does not

represent a complete methodology.

The methodology of this paper is mainly based on literary research. Therefore I will con-

sider as the basis of my thesis books, theories, online articles and intellectuals of the An-

glo-Saxon and German language area. The fields of research are concentrated around

the broad subject of option strategies and in general about options and other financial

instruments. To get a deeper understanding of the whole subject, it is indispensable to

use the internet, especially trading platforms, forums, online interviews with experts and

articles out of professional journals. An important source will have the option strategy-

platforms for investors, where they get a comprehensive and detailed understanding of

such investment opportunities.

Furthermore, as an additional source of information, I will have several interviews with

experts from the banking industry, especially from the retail business as well as from the

trading area.

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From those conversations, I am able to fill gaps which provide me with a broader overview

about the subject. The experts have a wide range of knowledge about options and how

they can be used in the daily business. Because of their experience in this field, they will

have all the necessary background they needed to answer my questions. The questionswill be mainly about options strategies, their transaction costs and the possibility of using

other financial derivatives, but also partly about the legal environment for trading stocks

and other securities in Switzerland.

1.4. Challenges for a Retail Investor

In theory, when talking about financial instruments and possibilities, the term investor is

often used inappropriately. By definition an investor is is a person or organization that

buys stocks or shares, or pays money into a bank in order to receive a profit.1Therefore

it is neither defined the possibilities and limitations of trading nor the amount for investing.

In reality, a retail investor is confronted with several challenges he has to overcome to

trade option strategies successfully. First of all, such an investor has only limited assets

on the bank account for his disposal and thus the economies of scale are much smaller

compared to institutional or professional investors. Those have in general a broader

knowledge about the security market as well as a higher available amount of cash for

trading. Especially when we are talking about transaction costs like fees for account man-

agement, brokerage fee or deposit fees, the small investor is getting discriminated by the

institutional investor. In addition, the theory does not take into account the spreads (inter-

mediate charges of the trading platform) between ask and bid prices of options and other

financial instruments. Such spread are decreasing the potential profit or increasing the

potential loss of the investment.

According to Daniel Ballarin, Associate Director and Training Manager at Swissquote

Bank S.A., these costs are in general between three to seven percentages, depending on

trading volumes, market expectation and margin requirements of the counterparty.2

Generally, the theory is fading out legal restriction when dealing with options and option

strategies liked naked short selling. To this point I will go into more detail later on (see

chapter3.2 Regulatory Limitations).

1Reverso (2014).

2All material in this section is derived from Interview Ballarin (2014).

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Last of all, small investors have only limited knowledge about financial instruments be-

cause of their educational background, their daily interests and their financial situation.

This will have a negative impact on the performance of an individual investor when deal-

ing with questions about how to use options and other financial derivatives effectively. Inpractice, banking institutions are providing useful information and data about the market

as well as analysis and researches of investment ideas to their clients. Such a service is

viewed in general as a premium service to clients, where the bank earns a certain spread

(profitability). For a retail client with a limited amount on the bank account, such services

is often limited or not offered.

2. Option Strategy a short IntroductionBefore diving into the world of option strategy for retail investors, it is important to provide

clear definitions of the terms most used in my bachelor thesis option strategy and retail

investor.

To start, I would like to explain briefly options, especially what option strategies are in the-

ory and how an investor can use them effectively. An option by definition is a [] finan-

cial contract that derives their value from an underlying reference asset 3. Basically there

are two types of options a call option, which gives the holder of the option the right to

buy the underlying asset by a specific time in the future for a fixed price. On the other

side, a put option gives the holder the right to sell the underlying by a certain date for a

certain price.4The buyer of a call option believes in an increasing underlying price where-

as on the other hand, the holder of a put option is betting on a falling price of the underly-

ing.

There are always two sides for every trade of option contracts. On one side, there is the

buyer (investor) who has bought the option contract (long position), whereas on the other

side, there is the seller (short position), who has written the option and who will receive

the option price (credit) for selling the rights.

Another way to distinguish options can be done by looking at the time of exercise the

rights. An American option can be exercise at any time prior to their time to maturity (expi-

ration date), while European options can only be exercised on the expiration date.5

3

Banks/Siegel (2007, p. 3).4Hull (2009, p. 179).

5All material in this section is derived from Hull (2009, p. 773).

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Lets turn on to the option strategy. An option strategy also called option based investment

strategy is a way of buying and selling simultaneously one or more option with different

option variables. It can also include an underlying, which could be a stock, a commodity or

a pair of currencies (forex).6

This combined strategy is considered by the trader as a sin-gle position. Option strategies are also defined as spread trading, which involves taking

two or more positions at the same time. An option may be traded against the underlying,

two or more different options can be traded against each other or they can be combined

together with different strike level or maturity dates.7

Moreover the time effect and the holding period of an option strategy are important fac-

tors. According to Bouzoubaa/Osseiran (2010, p. 39ff), the effect of the time decay for an

option strategy always depends on what position the investor has. For example, if he isshort and has sold options, a decreasing time to maturity makes the options cheaper and

therefore the investor can profit.

In contrary, an investor who has bought an option is in a detrimental position, because the

time value, also called extrinsic value, will decrease when time runs out. In general we

can say, that the time value of an option will lose 67% of its value in the last month till ex-

piration whereas only 33% in the time before.8

The exact holding period for options in an option strategy is highly dependent on what

positions the investor is holding in the market and thus hard to define on an exact number.

Nevertheless he should not hold an option strategy with options with lower time to maturity

than 1/3 of the whole time frame. Lastly, the appropriate time period for a certain option

strategy is something between one and three months (rather one and two months), de-

pending of the underlying, the construction of the strategy, the volatility and the market

expectation of the investor.9

There are several advantages when trading option strategies. First of all, an investor has

the possibility to vary all different instruments to one single investment strategy and there-

fore he can adapt the strategy to his unique expectation- and risk-profile. Moreover, gen-

erally speaking, the investor knows from the beginning on what will be the maximum re-

ward- and loss-potential and so he is able to calculate the worst- and best-case scenarios.

6Rhoads (2011, p. 8).

7

Cohen (2005, p. 21).8All material in this section is derived from Jensen (2009, p. 132f).

9All material in this section is derived from Cohen (2005, p. 34).

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An additional advantage is the profit opportunity when the market is in a sideway moving

trend. In other words, the underlying is not upwards nor downwards moving with low vola-

tility during the lifetime of the option strategy. In such a scenario, a normal investor would

have a low return on income (ROI) when investing in stocks or fixed income-products. Thesolution therefore is to invest in option strategies, whereas he is able to maximize his prof-

it in the short-term in every market forecast.

In contrary, there are also a few drawbacks, which an investor has to overcome. Firstly,

those option strategies are hard to understand in relation to their Greeks, especially for a

retail investor, who doesnt have the necessary information and data. Secondly, as previ-

ously mentioned, an option strategy is often resulted in higher transaction costs when buy-

ing and selling options, stocks, warrants and other financial instruments. This refers main-ly to economies of scale, where a retail investor is getting discriminate against an institu-

tional investor. As a result, the break-even point (how much the investment has to perform

to be equal off) is clearly higher for a retail investor. Last but not least, option strategies

have the disadvantage that they are traded rarely and mostly from experts and profes-

sionals in the market. So there is a lack of knowledge as well as experiences when deal-

ing with these investments.

3. Definition

3.1. Retail Investor

In this chapter I will define the term retail investoralso called small or individual investor,

especially when it comes to questions about quantity (numbers of trades per period and

the trading volume) and quality (experiences and knowledge of the investor). This part will

be important in relation to transaction costs (economies of scale) and trading possibilities.

Moneyland10, the leading financial comparison service in Switzerland, has published a

comprehensive report11about the Swiss trading market. In their analysis, they are using

three different trading profiles. First of all, profile No. 1 is a trader, who trades only by a

few occasions and has assets in his portfolio of CHF 56000.

10Moneyland (2014a).

11Moneyland (2014b).

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The second trader, profile No. 2, is one who trades only seldom and has assets on his

safekeeping account of CHF 20000, whereas the profile No. 3 is an investor who trades

regularly and has assets for his investments of about CHF 76000. Therefore in my point

of view, I would define an individual investor like the trading profile No. 1 with assets onthe bank account of CHF 56000.

To use a second source for defining in more detail, I interviewed another expert from the

trading industry Mr. Daniel Ballarin from Swissquote. According to him, a retail investor

doesnt have a clear definition in theory. Rather it is depended on the numbers of trades

during a fixed period as well as the trading volume. In this sense, a wealthy private client

is considered as a retail investor if he doesnt trade frequently. On the other hand, a client

with only 50000 Swiss franc on his account, but with a high number of trades, can be re-garded as a VIP-clientor Premium client. Unfortunately he is not permitted to define the

clear term of a retail investor for Swissquote due to their business secret. 12Nevertheless,

in their annual report 201313and their presentation of the results for the business year

201314, they published several interesting and informative statistics. Those numbers are

particularly interesting because Swissquote is a typically retail bank, where most custom-

ers are using this platform for trading financial instruments.

Initially, the average client at Swissquote has assets on his account of CHF 46603, which

includes the deposit and safekeeping account. Moreover the average retail client has five

different asset categories in his portfolio. He invested 43% (CHF 20039) in shares, 20%

(CHF 9320) in funds, 8% (CHF 3728) in bonds, 2% (CHF 932) in options and other

speculative derivatives and a total of 27% (CHF 12582) as a deposit on the account. Fur-

ther to this, Swissquote has over 163000 trading accounts with assets of total CHF 9.1

billion, which results in average assets per trading client account of CHF 55700.

This number is in comparison with results from the last few years clearly higher (historical

average CHF 45000). The report also stated that the average transaction per client in

2013 was 12.5.15

12All material from this section is derived from Interview Ballarin (2014).

13

Swissquote (2013a).14Swissquote (2013b).

15All material from this section is derived from Swissquote (2013b, p. 7f).

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Finally I will define the term retail investor by considering the numbers previously stated

from Swissquote and Moneyland as well as the discussions held with Daniel Ballarin and

Thomas Liechti16. In this bachelor thesis, a typical retail investor has CHF 40000 on his

whole bank account whereof CHF 25000 ( the proportion of shares, derivatives and halfof funds) are available assets for option strategies and other investments on the capital

market and CHF 15000 ( the proportion of cash, fixed income and half of the funds) is

regarded as a cash deposit on the account.

3.2. Regulatory Limi tations

First of all, we have to be aware that there are two similar terms, which are very different

in theory and practice. Therefore we will separate the terms Short sellingor Shortingand Naked short sellingor Naked shorting.The first term means by definition the sale

of securities like shares or bonds that is not owned by the seller17and that they have to

get borrowed from another person. In other words a short seller has to borrow the shares

from a lender and has to pay for this transaction a fee.18

In contrast to short selling, naked short selling means that the seller does not first borrow

the securities or ensures that the securities can get borrowed. He rather takes the obliga-

tion to buy back the securities in the future and thus closing his naked position. Naked

means in this sense, that he does not own the securities.

With the strategy of short selling and naked short selling the investor is speculating of fall-

ing stock prices so he can sell it high at the right moment and buy back on lower prices

later on. The difference between the two prices is his profit. Short selling can also be used

for hedge a position in the market of decreasing market prices.

In general, such transactions increase the pressure for a downturn of the stock market

and reinforce the negative market trend.19Therefore, regulators started to set up certain

limitations when it comes to naked short selling and so countries like France, Italy or

Spain ban it to ease market pressure.

16Interview Liechti (2014).

17

Investopedia (2014).18All material in this section is derived from Securitieslendingtimes (2014).

19Neate et al. (2011).

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Figure 1: How short selling works 20

Naked short selling Short selling

Source: Diffen (2014).

Now lets turn to Switzerland and how the SIX Exchange and the Swiss regulators are

handling naked short selling and short selling. In general naked short selling, as I de-

scribed above is not permitted and the Swiss Federal Banking Commission will prosecute

any abusive behaviours. This emphasises the SFBC on September 19th2008 in their me-

dia release.21Further to this, financial institutions are responsible when selling securities

on behalf for clients that they are able to deliver the securities on the settlement date.22

According to Dr. Alain Bichsel, Head Media Relation of the SIX Swiss Exchange group,

short selling is permitted as long as the seller is able to deliver the securities within the

deadline set for this.23In addition to this, the rule book of the SIX Swiss Exchange Ltd.24

and the Trading-Directive No. 3 clearly state that [] short selling of securities traded on

SIX Swiss Exchange is permitted as long as the short party can settle the short sale at

the latest upon execution of the trade [].25

20Diffen (2014).21SFBC (2008).22SIX Swiss Exchange (2013a).

23

All material from this section is derived from Interview Bichsel (2014).24SIX Swiss Exchange (2013b).

25Directive 3: Trading, Para. VI, Art. 19, No. 2.

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As we will see later on, only a limited number of Swiss banks are offering short selling to

their clients as a business, mostly wealthy private and institutional clients. In this case,

they lend the securities from one client, who is long in the underlying and pass on the se-

curities to a third party, who will then have a short position in his portfolio.There is only one exception namely the Saxo Bank, where customers can trade CFDs

(Contract for Difference), which will be explained later on.26

To sum up, naked short selling is not allowed by law whereas short selling in general is

permitted, as long as the short selling party is able to deliver the securities upon a certain

period of time.

4. Trading Platforms

After clearly defining the term retail investor and what difficulties he has to overcome for

trading option strategies, I will now analyze the trading platforms in Switzerland in relation

to costs and possibilities for trading options and other financial instruments.

In Switzerland, there are currently over 290 financial institutions and approximately 180

banks are offering products and services to retail clients.27For this bachelor thesis, I will

put the focus on the twelve biggest banks in the retail banking market and so covering the

main players.

4.1.1. Pre-conditions

Before analyzing the different platforms for trading options, warrants and shares, it is in-

dispensable to make some pre-conditions:

1. We only take into account stocks, options, warrants and other financial instru-ments, which are actively traded on the SIX Swiss Exchange and EUREX Ex-

change.

2. For minimizing the transaction costs, I will only consider the fees and costs related

to online banking. The transaction costs emerging when trading by phone or di-

rectly with the relationship manager are much higher than by the internet.

26Saxo Bank (2013).

27SwissBanking (2014).

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3. Naked short selling, as mention above, is not permitted and short selling is only

possible when the investor is able borrow the shorted securities.

4. Value Added Tax (VAT): All costs are without VAT and will be added at the end inthe evaluation part.

5. The analysis is always related to a one year-period and has to be adapted to the

lifetime of an option strategy. This will be primarily relevant for the indirect costs

like the safekeeping account fee.

6. Due to lowering the complexity for the analysis, the possibility of lower debit inter-

est rate in form of a Lombard loan for financing certain option strategies will be ig-

nored. Moreover, in practice most financial institutions have a minimum amount for

a Lombard loan between CHF 20000 and CHF 50000. Therefore by considering

the collateral rate of 60% for Blue-chip stocks and 0% for options, a retail investor

needs more than CHF40000, which would excess his maximum deposits he has

on the bank account.28

7. Information collected end of March 2014.

28SIX Securities Services (2013).

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4.2. Universal Banks

4.2.1. UBS

UBS employs over 62000 worldwide (about 22000 in Switzerland) and has CHF 2230billion assets under management.29In Switzerland, it is the biggest bank in relation to cap-

italisation, numbers of clients and employees. UBS has over 300 branches in every can-

ton and every third household and about 40% of Swiss companies have an account at

UBS.30

Table 1: Conditions o f UBS31

Trading Fees and other related Costs

Basic fee / Safekeeping account fee 0.30% p.a.

Brokerage fees

EUREX Options*: 1.20% or minimum 180 CHF

Stocks and Warrants traded on SIX Swiss Exchange:0.9% or minimum CHF 40

Account management Private current account: CHF 5 per month

Interest rate on credit balances 0.025% p.a.

Interest rate on debit balances Overdrafts on account: 12.5% p.a.

Short selling of shares Not possible

*No online trading available EUREX options are only tradable by phone with the client

relationship manager.

4.2.2. Credit Suisse Group

At Credit Suisse there are working currently 47400 employees all over the world. In Swit-

zerland, out of 19000 employees, approximate 2100 employees have direct contact with

customers, either by phone, physically at their 229 branches or by mail. There are over

100000 companies and about two million private people, who have an account at Credit

Suisse.32

29The Wall Street Journal (2013).

30

All material in this section is derived from UBS (2014a).31UBS (2011), UBS (2014b), UBS (2014c).

32Credit Suisse (2014a).

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Table 2: Conditions o f Credit Suisse33


Basic fee / Safekeeping account fee 0.3% p.a. or minimum CHF 5 per position and per month

Brokerage fees

EUREX Options: 0.94% or minimum CHF 55

Stocks and Warrants traded on SIX Swiss Exchange:0.79% or minimum CHF 55

Account management Private account: CHF 5 per month



Short selling of shares Not possible*

*Naked short selling is not allowed for retail clients, but there is the possibility for wealthy

private clients and institutional investors to short selling stocks.

4.3. Cantonal banks

4.3.1. Zrcher Kantonalbank ZKB

As the biggest cantonal bank, the Zrcher Kantonalbank has a leading position in the

banking business in Switzerland, especially in the canton of Zurich as well as in the

neighbour cantons.34Since the founding year 1870, ZKB is offering a wide range of ser-

vices and products to their clients. In the year 2013, the bank has over CHF 191 billion

assets under management.35

33

Credit Suisse (2013), Credit Suisse (2014b), Credit Suisse (2014c).34Zricher Kantonal Bank (2014a).

35Zrcher Kantonal Bank (2014b).

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Table 3: Condit ions of Zrcher Kantonalbank 36


Basic fee / Safekeeping account fee 0.25% p.a. or minimum CHF 2.50 per position and per month

Brokerage fees

EUREX Options: CHF 60 and 0.5% of thetransaction volume

Stocks traded on SIX Swiss Exchange: 0.5% or minimumCHF 50

Warrants traded on SIX Swiss Exchange: 0.5% or mini-mum CHF 60

Account management Private account: CHF 12 p.a.




4.3.2. Berner Kantonalbank BEKB

Berner Kantonalbank has over 500000 clients and 75 branches in the canton of Bern and

Solothurn. As a classic retail bank, they are offering mainly products for payments, sav-

ings, investing, pensions, mortgages and private banking.37The trading platform of BEKB

is Money-Net, where shares, bonds, funds and warrants are traded. EUREX-options in

contrary are traded at the BEKB directly.

Table 4: Conditions o f Berner Kantonalbank 38


Basic fee / Safekeeping account fee 0.017% or minimum CHF 50 p.a.

Brokerage fees

EUREX Options*: 1.0% + CHF 60 or minimum CHF 80

Stocks and Warrants traded on SIX SwissTrading volume:CHF 1001 5000 : CHF 25CHF 5001 10000 : CHF 35

Account management Private current account: CHF 30 p.a.


36Zrcher Kantonalbank (2013a), Zrcher Kantonalbank (2013b), Zrcher Kantonalbank (2014c).

37

Berner Kantonalbank (2014a).38Berner Kantonalbank (2014b), Berner Kantonalbank (2014c, p. 2ff), Berner Kantonalbank

(2014d, p. 4ff), Money-Net (2014).

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Interest rate on debit balances

Overdrafts on account: 9.0% p.a.

Besides the EUREX-rates for the margin account, there is anadditional blocking amount of CHF 5000.


*No online trading available only tradable by phone with the trading desk of BEKB.

4.3.3. Banque Cantonale Vaudoise BCV

Banque Cantonal Vaudoise is the second-largest cantonal bank in Switzerland and one of

the top full-service banks. BCV has 70 branches in the canton of Vaud and more than

2000 employees.39All trades are executed over Trade Direct (former E-sider), the external

trading platform of BCV.

Table 5: Conditions o f Banque Cantonale Vaudoise40


Basic fee / Safekeeping account fee 0.025% or minimum CHF 10 per quarter

Brokerage fees

EUREX Options: Not offered

Stocks and Warrants traded on SIX SwissTrading volume:

CHF 751 2000 : CHF 17.90CHF 2001 10000 : CHF 29.90

Separate execution fee (exchange fee): 0.06 or minimumCHF 2.00

Account management Private account: No fees




39Banque Cantonal Vaudoise (2014a).

40Banque Cantonale Vaudoise (2014b), TradeDirect (2014).

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4.4. Online Banks

4.4.1. Saxo Bank (Switzerland) Ltd.

Saxo Bank, the Danish mother company, is a world leading international investment bank-ing group and specialises in online trading of any securities, mainly derivatives and cur-

rencies. Saxo Bank (Switzerland) Ltd. was founded in the year 1992 and with its attractive

conditions and trading possibilities makes it a key player in online trading in Switzerland.41

At Saxo Bank, clients are able to trade CFD (Contract For Difference), which is a special

derivative and has the same characteristics as short selling.

Table 6: Conditions o f Saxo Bank (Switzerland) Ltd. 42


Basic fee / Safekeeping account fee No fees

Brokerage fees

EUREX Options: CHF 8 per contract

Stocks traded on SIX Swiss Exchange: 0.10% or minimumCHF 18

Warrants: Not offered



Interest rate on debit balances Overdrafts on account: 8.02% p.a. (Libor 3M + 8.0%)

Short selling of shares Not possible, but CFD-contracts are tradable:0.10% or minimum fee CHF 18

4.4.2. Swissquote Bank S.A.

Swissquote, domiciled in Gland VD, is the leading bank when it comes to online banking,

especially to online trading of stocks, bonds, forex and derivatives.

43

The bank has over201000 clients with CHF 10.1 billion assets under custody and was founded in the year

1990 by Marc Brki and Paolo Buzzi.44

41Saxo Bank (2014a).

42

Saxo Bank (2014b).43Swissquote (2012a).

44Swissquote (2012b).

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Table 7: Conditions of Swissquote45


Basic fee / Safekeeping account fee 0.025% or minimum CHF 15 per quarter

Brokerage fees

EUREX Options: CHF 1.50 per contract

Stocks and Warrants traded on SIX Swiss Exchange:transaction volume:

CHF 501 20000CHF 20CHF 2001 10000 CHF 35

Separate fee per transaction of CHF 0.85

Account management Private current account: no fees




4.4.3. Cash zweiplus

As a relatively young joint-Venture of the bank zweiplus and Cash, publisher of financial

and economic information, the Bank Cash zweiplus is an online bank focused on retail

banking46. They are mainly offering products and services for payments, saving and in-

vesting.47

Table 8: Conditions o f Cash zweiplus 48


Basic fee / Safekeeping account fee CHF 20 per quarter

Brokerage fees

EUREX Options: Not offered

Stocks and Warrants traded on SIX Swiss Exchange:CHF 29

Account management Current account: No fees if deposit is higher than CHF 10000,otherwise CHF 5 per month




45Swissquote (2014).

46

Bank zweiplus (2014a).47Cash (2014a).

48Cash (2014b), Cash (2013).

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4.5. Other Banks

4.5.1. Migros Bank AG

Gottlieb Duttweiler founded Migros Bank AG in 1958 with the aim of providing a premiumservice for attractive conditions.49Nowadays, this bank is one of the top ten retail banks in

Switzerland and has over 800000 clients.50

Table 9: Condit ions of Migros Bank AG51


Basic fee / Safekeeping account fee 0.19% or minimum fee CHF 30 p.a.

Brokerage fees

EUREX Options: CHF 200 per trade

Stocks and Warrants traded on SIX Swiss Exchange:CHF 40





4.5.2. Bank Coop AG

Bank Coop was founded in the year 1927 under the name of Bank der Genossenschaf-

ten und Gewerkschaften (English: bank of associations and labor unions).52 2001, the

cantonal bank of Basel (BKB) took over the controlling shareholding of Bank Coop. By

end of the first semester 2013, the bank managed CHF 18.32 billion client assets and is

represented with 32 branches all over Switzerland.53

49Migros Bank (2014a).

50Migros Bank (2014b).

51

Migros Bank (2014c), Migros Bank (2014d).52Bank Coop (2014a).

53Bank Coop (2014b).

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Table 10: Conditions of Bank Coop AG54


Basic fee / Safekeeping account fee CHF 10 per position or minimum CHF 60 p.a.

Brokerage fees

EUREX Options: 1.75% or minimum CHF 140 + CHF 0.15per contract

Stocks and Warrants traded on SIX Swiss Exchange:0.726% or minimum CHF 40, respectively CHF 58 forWarrants

Account management Private account: No fees if total deposits are more than CHF25000, otherwise CHF 5 per month




4.5.3. PostFinance AG

Founded over 100 years ago as the financial service unit of the Federal Mail Service

(Swiss Post), PostFinances main duty was and still is conducting the national and interna-

tional payments. Since then, the bank gained in the year 2013 the license for banking and

is now the fifth largest retail financial institution in Switzerland.55 From autumn 2015,

Swissquote will operate as the trading platform for PostFinance and handling all trading

orders placed by the customers of PostFinance.56

Table 11: Conditions of PostFinance AG57


Basic fee / Safekeeping account fee No fees

Brokerage fees

EUREX Options: Not offered Stocks and Warrants traded on SIX Swiss Exchange:

Trading volume:CHF 0 5000CHF 25CHF 5001 10000 CHF 35

Additional fee: 0.006% of the trading volume or minimumCHF 2

54Bank Coop (2014c), Bank Coop (2013a, p. 1f), Bank Coop (2013b, p. 1).

55

PostFinance (2014a).56Swiss Post Ltd (2014).

57PostFianance (2014b), PostFinance (2014c), PostFinance (2014d).

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Account management Current account: No fee if deposit is higher than CHF 7500,otherwise CHF 5 per month




4.5.4. Raiffeisen

With a market share of 19% in the saving and investment business and 1032 branches,

Raiffeisen is one of the biggest Swiss banks for retail clients. Over 10500 employees are

responsible for 3.7 million of client accounts with a total deposits of CHF 138 billion. Raif-

feisen is a cooperative bank with 1.8 million cooperative members.58

In the analysis bellow I will consider the terms and conditions from the Raiffeisen group,

which are rather a recommendation and thus not binding. Therefore the terms and condi-

tions of each Raiffeisen branch may vary.

Table 12: Conditions of Raiffeisen59


Basic fee / Safekeeping account fee 0.20% or minimum CHF 5 per position p.a.

Brokerage fees EUREX Options*: 0.75% + CHF 150

Stocks and Warrants traded on SIX Swiss Exchange:0.66% or minimum fee of CHF 40

Account management Private account: No fees if deposit is higher than CHF 5000otherwise CHF 30 p.a.




*No online trading available only tradable by phone with the client relationship manager

58Raiffeisen (2014a).

59Raiffeisen (2014b, p. 1), Raiffeisen (2014c), Raiffeisen (2014d, p. 1).

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4.6. Stock Exchange and Taxes

The federal security transfer tax is a stamp duty and is charged by the government for

trading certain securities. For Swiss securities, the stamp duty is 1.5(0.15%) from the

total trading volume. This tax is only being charged when trading stocks, bonds and othersecurities and is not applicable when trading financial derivatives like options and war-

rants.60Further to this, the stock exchange is also charging a small fee 61, which includes

the reporting, trading and participant fee as well as the royalty for the Swiss Financial

Market Supervisory Authority (FINMA). In general this fee represents only a fraction

amount of the stamp duty, and thus it will be ignored for this analysis.

Lastly, in Switzerland the basic fees for the safekeeping account as well as for the ac-

count management are liable to VAT of 8.00%. In practice the VAT is already included inthe fee for account management, whereas this tax has to be added to the basic fee of the

safekeeping account (excluded). In contrary, all other transaction costs like brokerage

fees or fees for account management are exempt from this tax.62

5. Conclusion I

5.1. Pre-assumptions

After defining in chapter3.1 the term retail investor more accurately, I can now determine

the exact portfolio size and transactions in more detail. The average small investor in this

thesis has CHF 25000 on his safekeeping account and CHF 15000 cash on his deposit

account. Due to lowering the unsystematic risk, he will diversify his portfolio by investing

into several asset-categories.63Therefore he invests maximal CHF 6000 per strategy or

about one seventh of the whole amount on his bank account. On the basis of the numbers

from the documents of Swissquote64

, the average trading client of the bank is executing12.5 transactions per year. Thus by taking into account the average transactions per op-

tion strategy of about 365, I assume that the typical retail investor will invest in four to five

option strategies per year.

60All material in this section is derived from Eidgenssische Steuerverwaltung ESTV (2011).

61SIX Swiss Exchange (2014).

62Federal Act on Value Added Tax, Para. 21, Art. 19 lit. e).

63

Evans/Archer (1968, p. 761).64Swissquote (2013b, p. 7f)

65Chapter8.4 Evaluation Matrix.

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Moreover to diversify the portfolio, the retail investor is also invested in six other invest-

ments like bonds or stocks. Those securities are in his safekeeping account and as a re-

sult, the fixed costs have to be divided by 10, which is an approximation for allocating a

fraction of the fixed costs to every investment he has (including the different instrumentsfor option strategies). The quotient of this calculation has to be added to the transaction

costs for every option strategy for comparing the different trading platform effectively.

In addition, for some option strategies like Long Butterfly Spread or Strap and Strip, we

use for constructing two or more equal options. For the calculations I only consider those

transactions as one, because it is one trade with double or threefold option contracts. The

reason for this is that banks are considering such transactions only as one and thus they

charge the trading fee only once. The exception is Swissquote, Saxo Bank and Bank Co-op, where they charge a fee based on numbers of contracts. As we will see, such costs

are only a smaller fraction of the whole transaction fee. Last but not least, according to

Daniel Ballarin, the average price for one EUREX-contract may vary but for this analysis I

will fix the price at CHF 3.00 and thus the investor will buy about five option contracts (to-

tal CHF 1500).66

These mentioned assumptions are mainly due to minimizing the complexity as well as

increasing the logical understanding of the analysis.

5.2. Conclusion of Trading Platforms

In conclusion, I can assess that there are significant differences between the twelve trad-

ing platforms, which I will divide into four parts. The detailed summaries of the trading plat-

forms are in the chapters5.3 and5.4 as well as in the chapter8.4 Evaluation Matrix.

5.2.1. Transaction Cost

The most attractive trading platform for retail investor is Swissquote, where the average

option strategy costs CHF 22.44 (without fixed costs) followed by Saxo Bank with CHF

91.06 (+406%). Both banks have attractive conditions for trading option strategies for indi-

vidual investors because they are offering brokerage fee, which is based on a per-

contract-basis. As a result, the brokerage fee is minimal when trading only several con-

tracts instead investing a bigger amount of money.

66Interview Ballarin (2014).

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With such a pricing, retail investors can highly benefit because there is no minimum fee.

After those two platforms, Credit Suisse with CHF 132.11 (+589%) is on the third rank,

followed by Zrcher Kantonalbank (CHF 159.20; +709%), Berner Kantonalbank (CHF

171.88; +766%), Bank Coop (CHF 321.11; +1431%), Raiffeisen (CHF 366.88; +1635%),Migros Bank (CHF 408.74; +1821%) and UBS (CHF 453.39; +2020%). PostFinance,

Cash zweiplus and Banque Cantonal Vaudoise are on the last rank and not numerical

rated because they are not offering EUREX options and thus, option strategies cannot be

constructed at those platforms.

When taking into account the total transaction costs and including the fixed costs, the rank

is still the same. The average transaction cost of the nine banks, where EUREX options

are offered, is CHF 236.11 and when including fixed costs CHF 246.49.

5.2.2. Fixed Costs

Fixed costs, which are the basic fee for the safekeeping account and the management fee

for the deposit account, are not related directly to transaction costs. Nevertheless they

have to take into consideration when investing into securities because they negatively

influence the net performance of a portfolio.

In my analysis, these costs are not directly evaluated because they are less weighted in

relation to the direct transaction costs. However, there are significant differences, which

affect the profit of a retail investor. Only two banks do not charge any fees for the safe-

keeping account Saxo Bank and PostFinance. Therefore it is the most attractive possi-

bility to keep the securities in the portfolio at those two trading platforms. On the third

rank, there is Banque Cantonal Vaudoise with total indirect costs of CHF 43.20, followed

by Migros Bank (CHF 51.30), Raiffeisen (CHF 54.00), Swissquote (CHF 64.80), Bank

Coop (CHF 66.10), Berner Kantonalbank (CHF 84.00), Cash zweiplus (CHF 86.40), UBS

(CHF 141.00), Zrcher Kantonalbank (CHF 206.40) and Credit Suisse (CHF 448.80).

This numbers are illustrating how significant the differences between the banks are and

therefore such indirect costs are affecting the performance of option strategies or any oth-

er investments highly.

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5.2.3. Interest Margin

The interest margin, which is the difference between the interest on the debit and credit

account, shows how much spread takes the bank. The smaller this rate is, the smaller the

margin of the bank and thus, the less costly it is for a retail investor to borrow money or

more attractive to deposit money on the account.

The best conditions are offering Swissquote with a spread of 4.15%, Cash zweiplus and

Migros Bank with 6.625% respectively 7.90%. On the other side, the universal banks and

two cantonal banks have a spread which is higher than 12%.

5.2.4. EUREX Options vs. Warrants

As we saw in the previous analysis (Chapter5.2.1 Transaction Cost), the differences inthe total transaction costs are massive when trading option strategies. As an investor,

there is also the possibility to trade warrants. A warrant is issued by a financial institution

and entitles the buyer of the derivative with the same rights as a EUREX option, but the

investor can only be on the buying-side and not selling them. 67

Due to the reason that warrants are standardized and have a higher margin for the issuing

bank, the conditions for trading such products are in general much more attractive for in-

vestors, especially when it comes to brokerage fee. Warrants are also traded on the SIX

Swiss Exchange and therefore banks are using the same tools for trading warrants as for

stocks and bonds, which leads to economies of scale. Therefore in Chapter5.4 Evaluation

with Warrants,my analysis is mainly based on warrants, where this instrument is possible

for constructing option strategies (only for the long-side of options). As a result only nine

strategies are solely tradable with warrants and 36 strategies are still involving shorting

options and thus, the investor has still to trade EUREX options.

Trading warrants is less expensive and it is not required to set up a margin account. For

that reason the average net transaction costs are CHF 169.66 (excl. PostFinance, Cash

zweiplus and Banque Cantonal Vaudoise) and in average about 29% (-CHF 66.12)

cheaper than only with EUREX options. By using warrants instead of EUREX options, a

retail investor is able to diminish the transaction costs and increase the possible maximal

profit of his strategy.

67All material in this section is derived from Oxford Dictionaries (2014).

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Table 13: Conclusion of Trading Platforms - EUREX Options vs. Warrants

Transaction Costs w/ EUREX Options and Warrants

Transaction Cost of Option Strategies Change

in %EUREX Options Warrants

1. Swissquote 22.44 35.74 + 59%

2. Saxo Bank 91.06 92.60 2%

3. Credit Suisse 132.11 110.00 -17%

4. Berner Kantonalbank 171.88 117.23 -32%

5. Zrcher Kantonalbank 159.20 151.01 -5%

6. Bank Coop 321.11 230.66 -28%

7. Raiffeisen 366.88 234.35 -36%

8. UBS 408.74 255.72 -37%

9. Migros Bank 453.39 278.41 -39%

10. PostFinance X 45.22* X

11. Cash zweiplus X 48.33* X

12. Banque Cantonal Vaudoise X 33.39* X

Transaction Costs in CHF 236.31 169.66 / 137.82*-29% /

-42%*

*Only the average transaction costs of nine out of 45 strategies.

5.2.5. Trading Possibil iti es

Every trading platform has their own trading policies on what products and services they

want to offer to their clients. For retail investor, only Saxo Bank is offering all products and

services, which are necessary to trade all option strategies. With their own CFD-products,

clients are able to selling the underlying security without owning it and thus shorting the

stock naked. All other banks do not offer short selling of stocks to retail clients. It remains

to mention that Saxo Bank do not offer warrants, which is not a clear disadvantages, be-

cause customers still have the possibility to buy and sell EUREX options.

Moreover, as already mentioned, PostFinance, Cash zweiplus and Banque Cantonal

Vaudoise are not offering EUREX options and therefore there are only nine option strate-

gies, which can be constructed on their platform.

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5.3. Evaluation with EUREX Options

Table 1 : Evaluation with EUREX Options 68

Terms and Conditions

Swisquote

SaxoBank

Credit

Suisse

ZKB

BEKB

BankCoop

Raiffeisen

UBS

Migros

Bank

PostFinance

Cash

zweiplus

BCV

Total

Transaction

Basic

Fee*1

% of Transaction 0.03% 0.00% 0.30% 0.25% 0.017% 0.00% 0.20% 0.30 0.19% 0.00% 0.00% 0.025%

Minimum Fee in CHF (per posi-

tion and per month)0.00 0.00 5.00 2.50 0.00 0.85 0.40 0.00 0.00 0.00 0.00 0.00

Minimu m Fee in CHF p.a. 60.00 0.00 0.00 0.00 50.00 60.00 0.00 0.00 30.00 0.00 80.00 40.00

EUREX

Options*1

% of Transaction 0.00% 0.00% 0.94% 0.5% + CHF

60.00

1.0% +

CHF 60.001.75% 0.75% +

CHF 150.00

1.20% 0.00% X X X

minimum Fee in CHF 0.00 0.00 55.00 80.00 140.00 +

0.15

180.00 200.00 X X X

Fee per contract in CHF 1.50 8.00 0.00 0.00 0 0.00 0.00 0.00 X X X

Stocks*1% of Transaction 0.00% 0.10% 0.79% 0.50% 0.00% 0.726% 0.66% 0.90% 0.00% 0.00% 0.00% 0.00%

Minimum Fee in CHF 20.00 18.00 55.00 50.00 25.00 40.00 40.00 40.00 40.00 25.00 29.00 17.90

Short selling i n CHF X 18.00 X X X X X X X X X X

Separate Transaction Fee in CHF 0.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00 X 0.00

Acc oun t Manag emen t Fee per m ont h in CHF 0.00 0.00 5.00 1.00 2.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Interest Margin (Difference between credit

and debit interest)4.15% 8.02% 12.475% 12.45% 8.90% 11.45% 9.95% 7.90% 7.90% 9.45% 6.625% 10.90%

Federal Security Transfer Tax and VAT 8.15%

Option Strategy in CHF*2 22.44 91.06 132.11 159.20 171.88 321.11 366.88 408.74 453.39 X X X 236.11

Fixed Costs in CHF*3 6.48 0.00 44.88 20.64 8.40 6.61 5.40 14.10 5.13 0.00 8.64 4.32 10.38

Total Transaction Costs per Option Strat-

egy in CHF 28.92 91.06 176.99 179.84 180.28 327.72 372.28 422.84 458.52 (0.00) (8.64) (4.32) 246.49

*1Either or not possible that two or more fees are getting charged only one fee per category.

*2Including transaction costs of EUREX options and stocks, separate transaction fees, federal security transfer tax and VAT.

*3Including fix costs like basic fee for the safekeeping account and the account management fee.

68All material in this table is derived from chapter8.4 Evaluation Matrix.

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5.4. Evaluation wit h Warrants

Table 2: Evaluation with Warrants 69

Terms and Conditions

Swisquote

SaxoBank

BEKB

ZKB

Credit

Suisse

BankCoop

Raiffeisen

UBS

Migros

Bank

PostFinance

Cash

zweiplus

BCV T

otal

Transaction

Basic Fee*1

% of Transaction 0.03% 0.00% 0.017% 0.25% 0.30% 0.00% 0.20% 0.30% 0.19% 0.00% 0.00% 0.025%

Minimum Fee in CHF (per

position and per month)0.00 0.00 0.00 2.50 5.00 0.85 0.40 0.00 0.00 0.00 0.00 0.00

Minimum Fee in CHF p.a. 60.00 0.00 50.00 0.00 0.00 60.00 0.00 0.00 30.00 0.00 80.00 40.00

EUREX Op-

tions*1

% of Transaction 0.00% 0.00%1.0% +

CHF 60.00

0.5% +

CHF 60.000.94% 1.75%

0.75% +

CHF

150.00

1.20% 0.00% X X X

minimum Fee in CHF 0.00 0.00 80.00 55.00 140.00 +

0.15

180.00 200.00 X X X

Fee per contract in CHF 1.50 8.00 0 0.00 0.00 0.00 0.00 0.00 X X X

Stocks*1% of Transaction 0.00% 0.10% 0.00% 0.50% 0.79% 0.726% 0.66% 0.90% 0.00% 0.00% 0.00% 0.00%

Minimum Fee in CHF 20.00 18.00 25.00 50.00 55 .00 40.00 40.00 40.00 40.00 25 .00 29.00 17.90

Warrants*1% 0.00% X 0.00% 0.50% 0.79% 0.726% 0.66% 0.90% 0.00% 0.00% 0.00% 0.00%

Minimum Fee in CHF 20.00 X 25.00 60.00 55.00 58.00 40.00 40.00 40.00 25.00 29.00 17.90

Short selling i n CHF X 18.00 X X X X X X X X X X

Separate Transaction Fee in CHF 0.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00 0.00 2.00

Acc oun t Manag ement Fee per m ont h in

CHF0.00 0.00 2.50 1.0 1.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00

Interest margin (Difference between credit

and debit interest)4.15% 8.02% 8.90% 12.45 12.475% 11.45% 9.95% 12.475% 7.90% 9.45% 6.625% 10.90%

Federal Security Transfer Tax and VAT 8.15%

Option Strategy in CHF*2 35.74 92.60 117.23 151.01 131.11 230.66 234.35 255.72 278.51 (45.22) (48.33) (33.39) 169.66

Fixed Costs in CHF*3 6.48 0.00 6.61 20.64 44.88 6.61 5.40 14.10 5.13 0.00 8.64 4.32 10.38

Total Transaction Costs per Option

Strategy in CHF42.22 92.60 123.84 171.65 175.99 237.27 239.73 269.73 283.64 (45.22) (56.97) (37.71) 180.04

*1Either or not possible that two or more fees are getting charged only one fee per category.

*2Including transaction costs of EUREX options and stocks, separate transaction fees, federal security transfer tax and VAT.

*3Including fix costs like basic fee for the safekeeping account and the account management fee.

69All material in this table is derived from chapter8.4 Evaluation Matrix.

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6. Option Strategies

Now we turn on to option strategies. In the following chapter the reader will receive a short

but comprehensive overview of over 45 strategies. Every strategy is unique in relation to

the expectation, the set up or the risk profile. In general, some option strategies are tech-

nically feasible either with call or put options, but by reasons of simplicity I will discuss

only call options in such a scenario.

Furthermore I will not examine calendar spread, because the spread is created with dif-

ferent time of maturity of the used options. The reason for this is that on one hand that for

those strategies an investor needs a deeper knowledge about the set up and especially

the Theta (time value of the option). On the other hand, in practice, it is hard to handle the

different times to mature, especially when it comes to calculations and when to execute

the rights.

In addition, in the following analysis I will merely consider American options instead of

European options, because American options are traded more often, especially on the

EUREX Exchange. Moreover, European options are only traded on the OTC market and

therefore are related to higher transaction costs and not tradable by online banking.70

Explanation for the tables:

ATM = At-the-money

ITM = In-the-money

OTM = Out-the-money

K = Strike level (K1is the lowest strike level and then increases by K2, K3etc.)

* = This strategy can also be constructed with Put options

For one option contract = 100 underlying securities

Figure 2: Symbol icon

Beginner Intermediate Expert

Source: own illustration, according to Archeolog-home (2014).

70EUREX Exchange (2014).

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6.1. Neutral Strategies

For this strategy, investors are expecting in general that the prices of the underlying assets will move only sideways with low upside and downside

peaks. In other words, he is mainly looking for low volatility during the lifetime of the option strategy and thus bearish on volatility.

Table 14: Neutral Strategies

Strategy The SetupMaximum Potential

Profit

Maximum Potential

LossTransactions Payoff-diagram

Long Condor

Spread*

1 x Long ITM Call option with K1(A)

1 x Short ITM Call option with K2(B)

1 x Short OTM Call option with K3(C)

1 x Long OTM Call option with K4(D)

Limited reward

(K2 K1 net debit

paid)

Limited risk

(Net debit paid)

4 transactions:

Buying two differentoptions (A), (B)

Selling two differentoptions (C), (D)

Figure 3: Long Condor Spread

Source: own illustration, according to

Optionsplaybook (2014).

Long Butterfly

Spread*

1 x Long ITM Call option with K1(A)

2 x Short ATM Call options with K2(B)

1 x Long OTM Call option with K3(C)

Limited reward

(K2 K1 Net debit

paid)

Limited risk

(Net debit paid)

3 transactions:

Buying two differentoptions (A), (C)

Selling two equaloptions (B)

Figure 4: Long Butterfl y Spread


Optionsplaybook (2014).

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Strategy The SetupMaximum Potential

Profit

Maximum Potential

LossTransactions Payoff-diagram

Short Straddle 1 x Short ATM Call option with K1(A)

1 x Short ATM Put option with K1(B)

Limited reward

(Net credit received)

Unlimited risk 2 transactions:

Selling two differentoptions (A), (B)

Figure 5: Short Straddle

Source: own illustration, according toTheOptionsGuide (2009).

Short Strangle 1 x Short OTM Put option with K1(B)

1 x Short OTM Call option with K2(A)

Limited reward



Selling two differentoptions (A), (B)

Figure 6: Short Strangle


TheOptionsGuide (2009).

Short Gut

Spread

1 x Short ITM Call option with K1(A)

1 x Short ITM Put option with K2(B)

Limited reward



Selling two differentoptions (A), (B),

Figure

Option Strategies for Retail Investors

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