12

OPTIONS – FROM BUILDING BLOCKS TO PORTFOLIOS

12.1 The building block approach

12.2 Option spreads – vertical, horizontal and diagonal

12.3 Volatility structures

12.4 Range structures

12.5 Arbitrage structures

One of the main reasons why options have enjoyed such extraordinary growth since the 1980s is their tremendous versatility – options can be assembled in myriad combinations and permutations. As such, they can be thought of as elemental building blocks which can be put together to form a wide range of financial structures. This chapter demonstrates how options can form the basic building blocks for a number of financial structures, and reviews some of the most common option combinations.

12.1 The building block approach

Consider an ...

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