Investment Theory and Risk Management, + Website

Option Strategies

Go to the companion website for more details (see Options Simulator under Chapter 16 Examples).

The Excel workbook titled options simulator contains examples of several options strategies that can be simulated and their payoffs graphed. The option spreadsheet in this workbook consists of several lattices for pricing up to three independent call options and two put options along with a Black-Scholes pricing model that provides a continuous time check against the discrete form lattices. The Black-Scholes-Merton pricing model is derived in Chapter 17. These options are linked to the payouts provided on the Strategy spreadsheet (columns A to G). For example, consider a six-month call option on a share with current spot price at $100 and with annual volatility 20 percent. The strike price of the call is and with annual risk-free rate of 5 percent. This option is priced at $13.44, using the lattice, and $13.50, using Black-Scholes. The profit schedule for this call is given in column C on the strategy spreadsheet. Columns D through G contain profit positions corresponding to various spot prices (given in column A) for two more calls and two puts ranging over three strikes (K₁, K₂, K₃). These five basic options strategies can be used to generate the profit schedules for ...