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trading

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  MIF)
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Four Basic Strategies
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Value of Option at Expiration
Payoff
Payoff
Holder
Writer
Premium
Premium
0
0
Stock price
Stock price
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Why Option
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Put Option at Expiration
Short Put
Long Put
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Income Strategies
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StrategyCovered CallAction Buy Stock Sell
OTM Call
Stock
Covered Call
Written call
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StrategyCovered Call

• Action Buy Stock Sell OTM CallOutlook
  Neutral to BullishRationale
• Buy stock for medium to long term and capturing
  monthly income by selling call every month
• If the stock rise sell the stock to deliver
• If stock falls, keep the premium

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Protective Put
Payoffs
Stock
Put
Protective put
0
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Bull Put Spread

• Long lower strike put
• Write OTM put

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Bear Call Spread

• Action
• Sell lower strike call
• Buy OTM call
• Outlook bearlish or neutral to bearish

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Long Iron Butterfly

• Buy lower strike putsell middle strike put and
  callBuy higher strike call

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Other Income Strategies

• Covered Short Straddle
• Buy stock Sell put Sell call
• Outlook Bullish
• Covered Short Stragle
• Long stock Short OTM put Short OTM call
• Outlook bullish
• Calendar call
• Buy long maturity call Sell Short term call

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Volatility Strategies
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Volatility Trading Definition

• Trading strategies designed to speculate on
  change in the volatility of the market or stock
  instead of its direction.
• The point is that you dont care which direction
  it moves (up or down), as long as it moves
  explosively in one direction or the other.
• The trick is spotting something thats about to
  make that move

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Volatility Trading

• Long volatility
• Buy call sell stock
• Buy put buy stock
• Short volatility
• Sell call buy stock
• Sell put sell stock

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Volatility Trading Call Put Value VS Stock
Price
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Volatility Trading
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Long Volatility 1Long Call Short Stock
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Long call Short stock
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Long Call Short Stock Delta neutral
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Delta neutral VS Not neutral
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Long Volatility using Long call Short Stock
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Long Volatility using Long call Short Stock
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Long Call Short Stock with changing volatility
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Long Volatility Buy Put Buy Stock
Payoffs
Stock
Put
Protective put
0
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Long Volatility Buy Put Buy Stock
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Long volatility using Long Put Long Stock
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Short VolatilityCovered Call Short OTM call
Long Stock
Stock
Covered Call
Written call
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Short Volatility I Covered call
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Short volatility using covered call
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Short volatility Sell put Sell stock
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Short volatility Sell put Sell stockPayoff
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Short volatility Sell put Sell stockPayoff
Zoom
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Other Strategies

• Straddle
• Long Call and Long Put
• Strangle
• Strip
• Strap
• Short Bitterfly
• Short Condors

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Straddle

• Long call long put with same exercise price

A
Long call
Long put
B
Straddle
C
PC
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A Straddle Combination

• A straddle involves buying a call and put with
  the same strike price and expiration date.

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Straddle
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Long volatility using straddle
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Strip

• A strip consists of a long position in one call
  and two puts with the same strike price and
  expiration date.

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Strap

• A strap consists of a long position in two calls
  and one put with the same strike price and
  expiration date.

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Using Volatility
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Volatility

• Implied volatility is a market forecast of the
  future volatility of the underlying stock or
  index
• Long volatility position gains when realized
  volatility is higher than implied volatility at
  inception
• Changes in implied volatility affect the MTM of
  the position

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Can volatility be forecasted?

• Volatility cannot be predicted over long periods
  of time
• Option market can provide market forecasts for
  period ranging from 1 month to 1 year
• Statistical models may be used to forecast
  volatility over short periods of time
• Importance of taking into exogenous news and
  events, macro news

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VIX Index

• VIX is the ticker symbol for the Chicago Board
  Options
• Exchange Volatility Index, a popular measure of
  the implied volatility of SP 500 index options.
  Referred to by some as the fear index, it
  represents one measure of the market's
  expectation of volatility over the next 30 day
  period.

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VIX Index
Russia/LTCM
ENRON
WCOM
SE Asia
Shanghai Surprise
Subprime
Figure 3 VIX index of SP implied volatility
Source MFC, Bloomberg
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Russia/LTCM
ENRON
WCOM
SE Asia
Shanghai Surprise
Subprime
Figure 4 SP 500 and VIX index of SP implied
volatility
Source MFC, Bloomberg
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Traditional SD GARCH
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SET50 Volatility(EGARCH)
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Using MA Traditional SD for Trading Signal
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GARCH MA as a signal (1 Yr data)