CHAPTER 12 Trading Strategies Involving Options

We discussed the profit pattern from an investment in a single option in Chapter 10. In this chapter we look at what can be achieved when an option is traded in conjunction with other assets. In particular, we examine the properties of portfolios consisting of (a) an option and a zero-coupon bond, (b) an option and the asset underlying the option, and (c) two or more options on the same asset.

A natural question is why a trader would want the profit patterns discussed here. The answer is that the choices a trader makes depend on the trader’s judgment about how prices will move and the trader’s willingness to take risks. Principal-protected notes, discussed in Section 12.1 appeal to individuals ...

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