- The first strategy we present is the “example strategy”, with more detailed explanations.
- Within the framework of the explanations, we will always relate to two dates:
- The start date – the date of the strategy purchase.
- The end date – the strategy exercise date (which is the expiry date of the options making up the strategy).
- Each strategy presented in based on an example with market data also for the start date.
- The start DJ Index is common to all the strategies, and is 100 points.
The discussion of strategies in this book is a discussion of principle and is designed to give a general explanation of the strategy and its implications. In order to maintain simplicity of explanation we ignore the characteristics of the strategy and the factors influencing them during the period between the start date and the end date.
For further explanation of the subject, see Annex B on page 54.
The strategy calculations do not include commissions.
|Forecast Dexelopment of DJ Index||Name of Suitable Strategy||Strategy Number|
|Rising index||Purchasing a Call option
Writing Put option
Purchasing a “Futures Contract”
Purchasing a “Covered” Put option
Purchasing an “Optimistics Spread”
|Falling index||Writing a Call option
Purchasing a put option
Selling a “Futures Contrat”
Purchasing an “Pessimistic Spread”
|Stable index||Selling a “Straddle”
Selling a “Straddle”
Purchasing a “Butterfly”
|Volatile index||Purchasing a “Straddle”
Purchasing a “Straddle”
Selling a “Butterfly”
Buying a “Strip”
Purchasing a “Strip”
As you can see from Table B, each forecast of the development of the DJ Index is suited to a number of different strategies. How to choose between them is a subject for an advanced book, but there are a number of factors affecting your choice:
- Cost of the strategy.
- Degree of certainty of the forecast.
- Personal taste, particularly with regard to the level of risk/return.
- Expectations of behavior of the strategy up until exercise.
- Level of tradability of the strategy components.
You will use these strategies while learning this book.