| CHAPTER 10 |
Spreading Strategies
Spreading strategies are among the most common strategies done in option markets. In a spreading strategy a trader will take a position in one contract or set of contracts, and an opposing position in a different contract or set of contracts. The opposing positions may be directional (delta), or they may be volatility (gamma or vega) positions.
1. Contracts are trading at the following prices:
What will be your credit (+) or debit (–) if you do each of the following?
a. buy 1 contract A and sell 1 contract C
b. buy 1 contract B and sell 1 contract D
c. buy 1 contract B and sell 2 contract A
d. buy 3 contract D and sell 2 contract C
e. buy 1 contract A, buy 1 contract D, and sell 1 contract C
f. buy 2 contract B, sell 1 contract C, and sell 1 contract D
2. In option trading a trader is said to have sold, or is short, a position if the entire trade results in a credit. A trader is said to have bought, or is long, a position if the entire trade results in a debit.
For each spread position below, identify its name or type, and, where applicable, whether the spread is “long” or “short.” Then, assuming that each position is approximately delta neutral, what is the initial sign (+ or –) of the gamma, theta, and vega?
3. Option contracts are trading at the following prices with the given delta values:
Using the above table, what are the prices and delta values if you “buy” each of the following spreads?
4. For each of the following groups of spreads you are given an underlying price, a directional outlook (bullish or bearish), and an opinion about implied volatility (unusually high or unusually low). Given this information, choose the best spread from among the four possible choices. Assume that all options expire at the same time.
5. Below are several different stock option positions with some suggested changes in market conditions. If the underlying stock is currently trading at 80, for each change in market conditions, is the position making money (+), losing money (–), or staying about the same (0)? Assume that all options are European, and that dividends are paid quarterly. For ratio spreads (the number of long and short market contracts are unequal), assume that the spread is approximately delta neutral.
a.
b.
c.
d.
e.
f.
g.
h.
6. With the underlying contract trading close to 50, in each group of spreading strategies choose both the strategy that will have the highest price and the strategy that will have the lowest price in the marketplace. Assume that there are no interest or dividend considerations, and that April options expire before June options.
a. +1 April 40 call / –1 April 45 call
+1 April 45 call / –1 April 50 call
+1 April 50 call / –1 April 55 call
+1 April 55 call / –1 April 60 call
b. +1 April 35 put / –1 April 45 put
+1 April 40 put / –1 April 45 put
+1 April 40 put / –1 April 50 put
+1 April 45 put / –1 April 55 put
c. +1 June 45 call / –1 June 50 call
+1 June 50 call / –1 June 55 call
+1 April 45 call / –1 April 50 call
+1 April 50 call / –1 April 55 call
d. +1 April 55 call / +1 April 55 put
+1 April 60 call / +1 April 60 put
+1 April 50 call / +1 April 50 put
+1 April 45 call / +1 April 45 put
e. +1 April 50 call / +1 April 50 put
+1 June 50 call / +1 June 50 put
+1 April 55 call / +1 April 55 put
+1 June 55 call / +1 June 55 put
e. +1 April 45 call / –2 April 50 calls / +1 April 55 call
+1 April 40 put / –2 April 50 puts / +1 April 60 put
+1 April 40 call / –2 April 45 calls / +1 April 50 call
+1 April 45 put / –2 April 50 puts / +1 April 55 put
g. +1 April 40 call / –2 April 45 calls / +1 April 50 call
+1 June 50 put / –2 June 55 puts / +1 June 60 put
+1 April 40 put / –2 April 50 puts / +1 April 60 put
+1 June 40 call / –2 June 50 calls / +1 June 60 call
h. +1 June 50 call / –1 April 50 call
+1 June 55 call / –1 April 55 call
+1 June 45 put / –1 April 45 put
+1 June 40 put / –1 April 40 put