Abstract
This chapter focuses on investor applications of equity options and covers five themes:
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Portfolio downside protection
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Expressing directional views
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Trades that benefit when the market is trading in either a volatile or range-bound manner
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Yield enhancement
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Outperformance strategies
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Notes
- 1.
Even then the investor would only pay for this protection if they believed that implied volatility was trading cheap to some notion of fair value.
- 2.
Example assumes constant volatility.
- 3.
The option premium is already a present value.
- 4.
This was calculated as 52 % divided by the square root of the number of 3-month trading periods in a year, that is, the square root of 4, which is 2.
- 5.
It follows that a bear spread could also be created using calls, which would generate premium income but would have a different risk–return profile.
- 6.
This strategy is sometimes referred to as a call ratio spread.
- 7.
Assume that 1 option = 1 share.
Bibliography
Tompkins, R. (1994) Options explained 2 Palgrave Macmillan
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Schofield, N.C. (2017). Investor Applications of Equity Options. In: Equity Derivatives. Palgrave Macmillan, London. https://doi.org/10.1057/978-0-230-39107-9_11
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DOI: https://doi.org/10.1057/978-0-230-39107-9_11
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Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-230-39106-2
Online ISBN: 978-0-230-39107-9
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