Options StrategiesEqisol Financial Solutions

Note: None of the strategies or names in this document are the property of Eqisol financial solutions

Basic Terminology• Option – The right to buy or sell a stock at a certain price at a specific

expiration date.

• Strike price – The price that you can either buy or sell an option at on the expiration date.

• Call – The right to buy a stock at a specific strike price when the expiration date arrives.

• Put – The right to sell a stock at a specific strike price when the expiration date arrives.

Market Tendencies• Bullish – The market is going to rise.

• Bearish – The market is going to fall.

• Low Volatility– The market will stay even.

• High Volatility– The market is swinging a lot, but we are uncertain of which direction it is heading in.

Bullish• There are three basic strategies one can pursue here:

• Buy a call • Sell a put • Buy a future

• The market is unpredictable however, so there are a variety of more complex strategies we employ to protect the position in case of a surprise drop.

Covered Call• Description: Buy the future and sell a call with the strike price above the

future price.

• Benefit: You make money even if the stock price drops, as long as the drop is less than the value of the premium earned on the option.

• Potential profit: Profit made off future, capped when the stock reaches the strike price of the sold call.

• Potential loss: Loss on the future – premium made by selling the call.

• Breakeven point: End price of the stock = Initial price of the future – premium made off call.

Example• Hero Motorcorp’s stock is currently valued

at Rs.1000 and we believe it is going to increase. We buy 250 futures at the current price and sell 250 call options for Rs.15 each at a strike of Rs.1100. • Profit = ((profit from future capped at

100) + premium from options) * number of shares.

• Our profit if the stock price ends at:

y

x

Closing Price Profit

Rs. 1100 Rs. 28750

Rs. 1000 Rs. 3750

Rs. 985 Rs. 0

Max Profit

Money made evenif stock doesn’t rise

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Breakeven price

Rs. 115

Rs. 15

Collar• Description: Buy futures, sell a call above the current price, buy a put

below the current price.

• Benefit: Don’t need to close the position

• Maximum profit: Strike price of short call – purchase price of future + net premium

• Maximum loss: Purchase price of future – strike price of long put – net premium

Example• TCS’s stock is currently valued at Rs. 2565

and we buy 250 futures. We sell 250 call options for Rs.18 each at a strike of Rs. 2600 and buy 250 put options for Rs. 26 each at a strike of Rs. 2550. • Profit = ((money made off future capped

between 27 and -23) + net money from options) * number of shares.

• Profit if stock price ends at:

Closing Price Profit

Rs. 2600 Rs. 6750

Rs. 2573 Rs. 0

Rs. 2550 - Rs. 5750Max Loss

Max Profit

Breakeven price

Profi

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Protective Put• Description: Buy futures and buy a below-the-money put.

• Benefit: Your max loss is capped.

• Potential profit: End price > purchase price of futures + cost of the put option.

• Maximum loss: Purchase price of the futures – strike price of the put + cost of the put option.

Example• Reliance Communication’s stock is

valued at Rs. 70. We buy 4000 units of the futures and buy 4000 units of a put options for $1.20 each at a strike of Rs. 67.50. • An alternative would be to put a stop

loss at $950, however the protective put gives you the chance to wait and see if the stock price will rise after temp. drop, where as a stop loss does not.

• Profit if stock price ends at:

Max Loss

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Breakeven price

Closing Price Profit

73.70 Rs. 14800

71.20 Rs. 0

Rs. 67.50 Rs. -14800

Profi

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Bearish• The basic strategies one can employ are:

• Buy a put • Sell a call • Short a future

• Our strategies minimize potential losses and maximize returns.

Covered Put• Description: Short the future and sell a below-the-money put.

• Benefit: You make money even if the stock price rises as long as the rise is less than the premium received.

• Maximum profit: Stock price falls, profit = difference between initial sell price of the future and buy back price of the future – cost to buy back the option.

• Potential loss: End price > Initial future price + premium from the put.

Example• Company X’s stock is valued at

$1000. We sell 250 shares/futures and sell 250 put options for $20 each at a strike of $950.• Profit = ((Sell price of future – end

price of future) + premium from options) * number of shares.

• Profit if the stock price ends at:• $950: ((1000 – 950) + 20) * 250 =

$17500• $1000: ((1000-1000) + 20) * 250 =

$5000• $1020: ((1020-1000) + 20) * 250 = $0

Max Profit

Breakeven price

Aggressive Put• Description: Buy a put at or below the money and then sell a put below

that.

• Benefit: Potential loss is capped to net cost of premium

• Maximum Profit: When stock price drops below the lower put strike price, profit is the difference in strike prices – net cost of options.

• Maximum loss: Net cost of options.

Example• Sun Pharmaceutical's stock is valued at

$924. We buy 250 put options for Rs. 22 at a strike of Rs. 920 each and buy 250 put options for Rs. 13 each at a strike of $900.• Profit = ((Strike of higher put – end price

of stock capped at lower put) + net price of options) * number of shares.

• If the stock even moves down, you make money by closing the options.

• Profit if stock price ends at:

Max Profit

Max Loss

Breakeven price

Closing Price Profit

Rs. 900 Rs. 2750

Rs. 911 Rs. 0

Rs. 920 Rs. -2250

Low Volatility• Often times, the market is quite stagnant, however this does not mean we

can’t make you money.

• These strategies usually require the options to expire before we see returns, as closing the strategies is often more expensive than it is worth.

Butterfly Spread• Sell two call/put contracts at-the-money, buy a call/put contract above the

money, and buy a call/put contract equidistance below- the money.

• Potential profit: When the end price of the stock stays within the two purchased options with a max profit in the center, with max profit when end price = strike price of short options.

• Max loss: Loss is capped to the net cost of premiums.

Example• Infosys’s stock is valued at Rs. 1000.

We sell 500 call options for Rs. 27 each at a strike of Rs. 1000, buy 250 call options for Rs. 55 each at a strike of Rs. 950 and buy 250 call options for Rs. 10 each at a strike of Rs. 1025.• Profit = (profit from options + net of

premiums) * number of shares.

• Our profit if the stock price ends at:

Max Profit

Max Loss

Breakeven prices

Closing Price Profit

Rs. 1000 Rs. 9375

Rs. 1037.5 or Rs. 967.5 Rs. 0

Rs. 1050 or Rs. 950 Rs. - 3125

Profi

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Butterfly 2.0• Description: The premise is the almost the same as above, however in this

case, we believe the stock is more inclined to shift slightly towards one direction, but not enough to be bullish/bearish towards it.

• Difference: • If we believe the stock will go up a little – we buy the below-the-money call

closer to the short strike price than the above the money call. • If we believe the stock will go slightly down – buy the above-the-money put

closer to the short strike price than the below-the-money put.

• Benefit: This minimizes the initial price of the premiums (maximizing profit), and as long as the stock moves in the direction we believe it will, we make money.

Example• Reliance Communication’s stock is valued at

Rs. 67.5. We think it will either stay the same, or go down a little. We sell 8000 call options at a strike of Rs. 67.5 for Rs. 2.85 each, we buy 4000 call options at a strike of Rs. 72.5 for Rs. 1.15 each, and we buy 4000 call options at at a strike of Rs. 65 for Rs. 4.3 each. • Profit = (profit from options + net of

premiums) * number of shares.

• Profit if stock price ends at:

No loss ifstock falls

Max Profit

Max Loss

Breakeven price

Closing Price Profit

72.5 Rs. -9000

Rs. 70.25 Rs. 0

Rs. 67.5 Rs. 11,000

Rs. 65 or lower Rs. 1000

11,000

1000

65 67.5 70.25 72.5

High Volatility• These are often the best times to make (or lose) money in the market.

• This often happens to individual stocks right before a big monthly report comes in, a major international problem is about to be fixed or exacerbated, or a court case is about to be decided which impacts a company.

• Just knowing that a stock will shift is enough for us.

Strangle/Straddle• Buy a put and a call at-the-money or a put right below-the-money and a

call right above-the-money.

• Benefit: as long as the market shifts beyond either strike price sufficiently, we make money.

• Potential profit: End price > strike price of call + cost of the options OR End price < strike price of put – cost of the options.

• Max loss: Premiums paid for the options.

Example• Company X’s stock is valued at $1000

and results are about to come in. We buy 250 call options at $1025 for $20 each and 250 put options at $975 for $20 each. If the stock moves above $1065 or below $935 we make a profit. • Profit = ((End price - call or put strike

price) – premiums cost) * number of shares.

• Profit if stock price ends at: • $1100: ((1100 – 1025) – 40) * 250 =

$8750• $900: ((975-900) – 40) * 250 = $8750• $1000: (0 – 40) * 250 = -$10000

Limitless ProfitPotential

Max Loss