It has been a while since I wrote something about options.
Recently I found myself in a need for simple tool for visualizing option strategies.
Option strategy is a combination of a number of option positions - both long and short - and sometimes underlying assets (such as equities) - i.e. it has multiple "legs".
To calculate the payoff (*) of the option strategy one needs to know:
- types of assets used to construct a particular strategy - possibilities include CALL and PUT options, as well as underlying assets
- type of positions opened - options can be bought or sold (written); underlying assets can be bought or sold short
- option strike prices - any option has a price at which it "activates"; for example CALL option with a strike price of 100, generates profit only when the price of underlying asset is above 100
- option premiums - buying an option has a price, writing it generates some income
- amount of assets utilized - for example you can buy more than 1 option
Transaction costs are not cover by my simplistic model.
(*) payoff is the value of the strategy at expiration; it should not be confused with the theoretical value derived from option pricing models such as Black-Scholes
Probably the simplest options-related investment strategy is a purchase of some stock and hedging it with PUT option - as a result, while one have unlimited profit potential, his loss is limited with the help of PUT option:
> assets.mat
trans type strike price amount
[1,] "buy" "base" "40" "0" "1"
[2,] "buy" "put" "35" "2" "1"
A pure option strategy is Bull Call Spread, when one simultaneously buys and sells CALL options with different strike prices:
> assets.mat
trans type strike price amount
[1,] "buy" "call" "40" "3" "1"
[2,] "sell" "call" "45" "1" "1"
Option strategy can consist both long and short positions, and different amounts of options at opposing sides - like in the Call Backspread:
> assets.mat
trans type strike price amount
[1,] "sell" "call" "40" "4" "1"
[2,] "buy" "call" "45" "2" "2"
Option strategy can be composed with more than two legs - like in the Condor:
> assets.mat
trans type strike price amount
[1,] "buy" "call" "35" "11" "1"
[2,] "buy" "call" "55" "1" "1"
[3,] "sell" "call" "40" "7" "1"
[4,] "sell" "call" "50" "2" "1"
Obviously there are many more different option strategies. You can learn about them at the following places:
And you can experiment with them and any other ideas connected with option strategies with the R code I have prepared. Enjoy!
[ R Source ]
1 comment:
Great Article
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