Jayantha has been selected as Campus Ambassador at AlgoJi- He is pursuing B. His hobbies include maths and music. They provide many ways to protect and hedge your risks against volatility and unexpected movements in the market. Some of the strategies like covered call, protective put, bull call spread, etc. But in any exchange there are many options are available with different prices and different strike rates.
In this article you will learn how to create your own excel spreadsheet for analysing option strategies. If you go buy a call option, then the maximum loss would be equal to the Premium; but your maximum profit would be unlimited. Since short call, long put and short put are similar, it would be futile to cover that also, so go ahead and implement them on your own in separate spreadsheets. A covered call is when, a call option is shorted along with buying enough stock to cover the call.
A covered call is should be employed when you have a short term neutral view on the stock. This way, you will make money on the premium.
A covered call will protect you against rapid increase in stock price. Again make a table similar to the one for Long Call. Max profit will be realized when the stock price becomes equal to the strike price at the date of expiration of option. A protective put involves going long on a stock, and purchasing a put option for the same stock. A protective put is implemented when you are bullish on a stock, but want to protect yourself from losses in case the stock price decreases.
A Bull Call Spread is implemented when a call is bought at a lower strike price and another call is shorted with a higher strike price. It is implemented when you are feeling bullish about a stock. A Straddle is where you have a long position on both a call option and a put option. This is implemented when you expect the stock to change significantly in the near future, but are unsure of which direction it will swing.
This can be implemented before a major news announcement which is likely to have a substantial impact on the value of a stock. First, enter the same formulas for the Long Call and Long Put as we did in the previous sections.
A collar is an options strategy which is protective in nature, which is implemented after a long position in a stock has proved to be profitable. It is implemented by purchasing a put option, writing a call option, and being long on a stock.
It is meant to prevent excessive losses, but also restricts excessive gains. The Collar is basically a combination of a covered call and a protective put. Enter the max profit, max loss, breakeven and profit formulae for the long put and short call as shown in the previous sections. Maximum profit is realized when the price reaches up to the Call option strike price, this way, there is no loss due to writing of call option, and we realize a profit because we already hold the stock, whose value has increased.
If the stock price remains the same, we neither gain nor lose, therefore our breakeven price is equal to the current stock price itself. Now that you have created your own options trading Excel spreadsheet for options analysis, not only is it easier for you to evaluate different strategies, you have also gained a deeper understanding of the different types of strategies.More...