PRODUCT INFORMATIONThere are three applications in this section. The first one prices Bull, Bear, Butterfly and Strangle spread option strategies, the second one prices the Straddle, Strip and Strap spread option strategies, while the last one prices the Calendar and Reverse Calendar spread option strategies. The descriptions in this section are brief. Click on the respective application link button to get to the application site, then click on the valuation procedure link for more details.
OPTION STRATEGIES
Bull spread option strategy. This is structured by buying a European call option with a certain strike price and selling a European call option on the same underlying with a higher strike price. The maturities of both options are the same. It results in a profit profile at maturity that has lower and upper bounds with higher bound associated with higher underlying prices.
Bear spread option strategy. This is structured by buying a European put option with a certain strike price and selling a European put option on the same underlying with a lower strike price. The maturities of both options are the same. It results in a profit profile at maturity that has lower and upper bounds with higher bound associated with lower underlying prices.
Butterfly spread option strategy. This is structured by buying a European call option with a certain strike price and buying another European call option on the same underlying with a higher strike price, and the selling two call options on the same underlying with strike price half-way between that of purchased call options. The maturities of all options are the same. It results in a profit profile at maturity that has a peak when the underlying price equals the value of the middle strike price.
Strangle spread option strategy. This is structured by buying a European call option with a certain strike price and buying European put option on the same underlying with a lower strike price. The maturities of all options are the same. It results in a profit profile at maturity that has a constant lower bound when the underlying price is between the two strike prices.
Straddle spread option strategy. This is structured by buying a European call option with a certain strike price and buying European put option on the same underlying with the same strike price. The maturities of the options are the same. It results in a profit profile at maturity that has a minimum when the underlying price equals the strike price.
Strip spread option strategy. This is structured by buying a European call option with a certain strike price and buying two European put options on the same underlying with the same strike price as the call option. The maturities of the options are the same. It results in a profit profile at maturity that has a minimum when the underlying price equals the strike price but profit increase more rapidly if the undelying price moves to the left of the strike price than it does if it moves to the right.
Strap spread option strategy. This is structured by buying two European call options with a certain strike price and buying one European put option on the same underlying with the same strike price as the call option. The maturities of the options are the same. It results in a profit profile at maturity that has a minimum when the underlying price equals the strike price but profit increase more rapidly if the undelying price moves to the right of the strike price than it does if it moves to the left.
Calendar spread option strategy. This is structured by buying a European call option with a certain strike price and selling another European call option on the same underlying with the same strike price but with lower maturity. It results in a profit profile at maturity of lower maturity option that has a peak when the underlying price is near the strike price.
Reverse calendar spread option strategy. This is a short position in the Calendar spread option strategy.