Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition

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Option Trading Strategies (1)

INTRODUCTION

A long (bought) call is a bull strategy - if the price of the underlying asset rises the call increases in value. Conversely, a long put is a bear position and profits from a fall in the value of the underlying. However, these are far from being the only possibilities on offer. Options are extremely flexible tools that can be used in many combinations to construct strategies with widely differing risk and return characteristics.

Nowadays even more tools are available due to the creation of exotic options - products such as barriers and compound options encountered previously. In this and subsequent chapters further new instruments are introduced: average price options, digital options, forward start options, choosers and cliquet (ratchet) options designed to lock in intervening gains resulting from movements in the price of the underlying.

The Structuring Desk

The structuring desk of a modern securities business is where these various products are brought together. The firm’s sales and marketing staff speak to a client about trading, investment or hedging needs, map out the problem, and ask their colleagues in the structuring desk to help to design an appropriate solution. There is considerable opportunity for creativity in the process.

The first set of ideas presented to a client may not be very appealing because the premium cost is too high, or there are unattractive currency exposures, or there are tax implications, or the levels ...