Derivatives Strategy Guide

HDFC Securities Ltd.
Derivatives Strategy Guide
Structured by:
1
Strategy Guide - Table

Market Outlook Volatility Estimate
Bullish
Long Call Call Ratio Backspread
Neutral
Long Straddle Long Strangle Long Strap Long Strip Long Condor Short Condor Long Butterfly Short Butterfly
Bearish
Long Put Put Ratio Backspread
Rising Neutral Falling
Long Futures Long Semi Futures Bull Call Spread Bull Put Spread Short Put
Short Futures Short Semi Futures Bear Put Spread Bear Call Spread
Short Straddle Short Call Short Strangle Short Strap & Strip Put & Call Ratio Spread
All the above strategies have same expiration
Risk Return Profile

Return Risk
Limited
Bull Call Spread (18) Bull Put Spread (21) Long & Short Condor (44 & 50) Long & Short Butterfly (41 & 47) Bear Put Spread (86) Bear Call Spread (89)
Unlimited
Long Call & Put (4 & 72) Call Ratio Backspread (8) Long Straddle & Strangle (28 & 31) Long Strap & Strip (35 & 38) Put Ratio Backspread (76)
Limited
Unlimited
Short Put & Call (24 & 92) Long Futures (11) Short Straddle & Strangle (53 & Long Semi Futures ( 15) 56) Short Futures ( 79) Short Strap & Strip (60 & 63) Short Semi Futures ( 83) Put Ratio Spread (69) Call Ratio Spread (66)
Figures in brackets are page numbers
3
Long Call
View
Profit Loss Breakeven
Comment
Unlimited, Increases as the spot price increases Limited to the premium paid Strike price + premium
Time Decay Hurts Use Volatility Margin

Very bullish outlook Volatility increase helps the position No

4
Long Call - Payoff

Profit
Strike Price Premium Break Even
Loss
5
Long Call Variant

Protective Put Have Underlying or Long Futures, and Buy Put (Downside Risk is hedged) Max. Loss : If Futures < Put strike = Premium - (Strike Futures) If Futures > Put strike = (Futures - Strike) + premium Breakeven = Put Strike + Max. Loss
6
Profit
Protective Put Payoff

Long Futures Long Call
Strike Price Max. Loss Break Even Long Put
Loss
Call Ratio Backspread

View
Comment
Increases as the spot price increases (B A) + (debit premium) or (credit premium) B + Max. Loss

Market is near B and outlook is bullish Volatility increase helps the position Yes
8
Call Ratio Backspread (CRB)

Formation Sell a lower strike (A) call and, Buy 2 higher strike (B) calls Variant Sell a lower strike (A) put, Buy 2 higher strike (B) calls and, Short Futures
9
Call Ratio Backspread - Payoff

Profit
Short Call B
Breakeven
Net Premium (Credit)
A
Max. Loss
Long Calls
Loss
10
Long Futures
View
Comment
Increases as the spot price increases Increases as the spot price decreases Purchase price + Brokerage
Time Decay No impact Use Volatility Margin

Very bullish outlook No impact Yes

11
Long Futures Payoff

Profit
Purchase Price
Loss
12
Long Futures Variant

Formation Buy Call A and Sell Put A Going Long at A + Call Premium Put Premium
13
Long Futures Variant Payoff

Profit Long Futures
Short Put
Long Call
Loss
14
Long Semi Futures

View
Comment
Increases as the spot price increases Increases as the spot price decreases Call Strike (B) + Premium debit or Put Strike (A) - Premium credit Put
Time Decay Mixed Hurts for Long Call and helps for Short Use Volatility Margin
Bullish outlook Neutral Yes

15
Long Semi Futures

Formation Sell Put A and, Buy Call B Variant Sell Call A, Buy Futures and, Buy Call B
16
Long Semi Futures Payoff

Profit
Short Put A Long Call B Breakeven
Loss
17
Bull Call Spread

View
Comment
Limited, Max. Profit = (B A) - Net Premium Limited, Max. Loss = Net Premium Strike A + Max. Loss Call
Time Decay Mixed Hurts for Long Call and helps for Short Use Volatility Margin

18
Bull Call Spread

Formation Buy Call A and, Sell Call B Variant Buy Call A, Sell Put B and, Short Futures
19
Bull Call Spread Payoff

Profit
Short Call
A Long Call
B Breakeven
Loss
20
Bull Put Spread

View
Comment
Limited, Max. Profit = Net Premium Limited, Max. Loss = (B A) Net Premium Strike A + Max. Loss Put
Time Decay Mixed Hurts for Long Put and helps for Short Use Volatility Margin

21
Bull Put Spread

Formation Buy Put A and, Sell Put B Variant Buy Put A, Sell Call B and Long Futures
22
Bull Put Spread Payoff

Profit Short Put
Breakeven
Long Put
Loss
23
Short Put
View
Comment
Limited to the premium received Unlimited, increases as the spot price decreases Strike price Premium
Time Decay Helps Use Volatility Margin

Bullish outlook Volatility decrease helps the position Yes

24
Short Put Payoff

Profit
Breakeven Strike
Premium received
Loss
25
Short Put Variant

Covered Call Have Underlying or Buy Futures, and Write a Call
Max. Profit : Futures < Strike = Prem. + (Strike Futures) Futures > Strike = Prem. (Futures Strike) Breakeven = Call Strike Max. Profit
26
Short Put Variant Payoff

Profit Long Futures
Short Call Premium received Breakeven Strike A
Loss
27
Long Straddle
View
Unlimited Limited to the net premium paid Low BEP = Strike price net premium High BEP = Strike price + net premium
Comment

Expecting a large breakout, Uncertain about the direction Volatility increase improves the position No
28
Long Straddle
Formation Buy Call A and, Buy Put A Variant Buy 2 Calls A & Short Futures or Buy 2 Puts A & Long Futures
29
Long Straddle Payoff

Profit
Low Breakeven
Common Strike A
High Breakeven Max. Loss Long Put
Long Call Long Straddle
Loss
30
Long Strangle
View
Unlimited Limited, Premium (B A), if Call Strike is A Limited to premium, if Call Strike is B Low BEP = A Loss High BEP = B + Loss
Comment

Expecting a large breakout, Uncertain about the direction Volatility increase improves the position No
31
Long Strangle
Formation Buy Call A and Buy Put B Variants Buy Put A and Buy Call B Buy Put A, Buy Put B and Long Futures Buy Call A, Buy Call B and Short Futures
32
Long Strangle Payoff

Profit
Low Breakeven
High Breakeven
A
Long Call
B
Long Put
Loss
Call Strike = A, Put Strike B
33
Profit
Long Strangle Payoff
Low Breakeven Long Call
High Breakeven Long Put
Loss
Call Strike = B, Put Strike A
34
Long Strap
View
Unlimited Limited to the net premium paid Low BEP = Strike price net premium High BEP = Strike price + (net premium / 2)
Comment

Expecting a large breakout, Uncertain about the direction. Increase in the stock more likely. Volatility increase improves the position No
35
Long Strap
Formation Buy 2 Calls A and, Buy Put A Variant Buy 3 Calls A & Short Futures
36
Profit
Long Strap Payoff
Common Strike A
High Breakeven Long Put Max. Loss
Loss
37
Long Strip
View
Unlimited Limited to the net premium paid Low BEP = Strike price (net premium / 2) High BEP = Strike price + net premium
Comment

Expecting a large breakout, Uncertain about the direction. Decrease in the stock more likely. Volatility increase improves the position No
38
Long Strip
Formation Buy 2 Puts A and, Buy Call A Variant Buy 3 Puts A & Long Futures
39
Long Strip Payoff

Profit
Common Strike A
High Breakeven Max. Loss Long Put
Loss
40
Long Butterfly
View
Comment
Limited to [(B A) or (C B)] Net premium Limited to the net premium paid Low BEP = Middle Strike Profit High BEP = Middle Strike + Profit
Time Decay Neutral Use Volatility Margin

Large stock price movement unlikely. Often used as a follow up strategy Neutral Yes
41
Long Butterfly
Formation Buy Call A, Sell 2 Calls B, Buy Call C Variants Buy Put A, Sell 2 Puts B, Buy Put C Buy Call A, Sell Put & Call B, Buy Put C Buy Put A, Sell Put & Call B, Buy Call C
42
Profit
Long Butterfly Payoff

Common Strike B Low Breakeven High Breakeven
Loss
43
Long Condor
View
Comment
Limited, Maximum when spot is between B & C Limited, Maximum when spot is < A & > D Low BEP = B Profit High BEP = C + Profit

Large stock price movement unlikely. Often used as a follow up strategy Neutral Yes
44
Long Condor
Formation Buy Call A, Sell Call B & C, Buy Call D Variants Buy Put A, Sell Put B & C, Buy Put D Buy Put A, Sell Put B & Call C, Buy Call D Buy Call A, Sell Call B & C, Buy Put D
45
Profit
Long Condor Payoff

B C
High Breakeven
Low Breakeven
Loss
46
Short Butterfly
View
Comment
Limited to the net premium received Limited to [(B A) or (C B)] Net premium Low BEP = Middle Strike Loss High BEP = Middle Strike + Loss

Large stock price movement expected. Often used as a follow up strategy Neutral Yes
47
Short Butterfly
Formation Sell Call A, Buy 2 Calls B, Sell Call C Variants Sell Put A, Buy 2 Puts B, Sell Put C Sell Put A, Buy Put & Call B, Sell Call C Sell Call A, Buy Put & Call B, Sell Put C
48
Profit
Short Butterfly Payoff

A C
Low Breakeven
High Breakeven
Loss
49
Short Condor
View
Comment
Limited, Maximum when spot is < A & > D Limited, Maximum when spot is between B & C Low BEP = B Loss High BEP = C + Loss

Large stock price movement expected. Often used as a follow up strategy Neutral Yes
50
Short Condor
Formation Sell Call A, Buy Call B & C, Sell Call D Variants Sell Put A, Buy Put B & C, Sell Put D Sell Put A, Buy Put B & Call C, Sell Call D Sell Call A, Buy Call B & Put C, Sell Put D
51
Profit
Short Condor Payoff

A D
Low Breakeven
High Breakeven
Loss
52
Short Straddle
View
Unlimited Low BEP = Strike price net premium High BEP = Strike price + net premium
Comment
Limited to the net premium received

Expecting a tight sideways movement Volatility decrease helps the position Yes
53
Short Straddle
Formation Sell Call A and, Sell Put A Variant Sell 2 Calls A & Long Futures or Sell 2 Puts A & Short Futures
54
Short Straddle Payoff

Profit Common Strike A Sell Call Sell Put
Low Breakeven
High Breakeven
Loss
55
Short Strangle
View
Comment
Limited, Premium (B A), if Call Strike is A Limited to premium, if Call Strike is B Unlimited Low BEP = A Profit High BEP = B + Profit

Expecting a moderate sideways movement. Volatility decrease helps the position Yes
56
Short Strangle
Formation Sell Call A and Sell Put B Variants Sell Put A and Sell Call B Sell Put A, Sell Put B and Short Futures Sell Call A, Sell Call B and Long Futures
57
Profit
Short Strangle Payoff

Short Put
Short Call
Low Breakeven
High Breakeven
Loss
Call Strike = A, Put Strike B
58
Short Strangle Payoff

Profit
Short Call Low BeP
Short Put High BeP
Loss
Call Strike = B, Put Strike A
59
Short Strap
View
Unlimited Low BEP = Strike price net premium High BEP = Strike price + (net premium / 2)
Comment

Expecting a tight sideways movement. Decrease in the stock more likely. Volatility decrease helps the position Yes
60
Short Strap
Formation Sell 2 Calls A and, Sell Put A Variant Sell 3 Calls A & Long Futures
61
Short Strap Payoff

Profit Short Calls
Short Put Low BeP Common Strike A High BeP
Loss
62
Short Strip
View
Unlimited Low BEP = Strike price (net premium / 2) High BEP = Strike price + net premium
Comment

Expecting a tight sideways movement. Increase in the stock more likely. Volatility decrease helps the position Yes
63
Short Strip
Formation Sell 2 Puts A and, Sell Call A Variant Sell 3 Puts A & Short Futures
64
Short Strip Payoff

Profit Short Puts Short Call Low BeP Common Strike A High BeP
Loss
65
Call Ratio Spread

View
Comment
(B A) - (debit premium) or + (credit premium) Increases as the spot price increases B + Profit

Expecting a tight sideways movement. Biased towards a decrease in stock price. Volatility decrease helps the position Yes
66
Call Ratio Spread

Formation Buy Call A & Sell 2 Calls B Variant Buy Put A, Sell 2 Calls B & Long Futures
67
Profit
Call Ratio Spread Payoff
Short Calls
Max. Profit
Breakeven
A Long Call
Loss
68
Put Ratio Spread

View
Comment
(B A) - (debit premium) or + (credit premium) Increases as the spot price decreases If credit premium = [A (B A)] premium If debit premium = [A + (B A)] premium

Expecting a tight sideways movement. Biased towards an increase in stock price. Volatility decrease helps the position Yes
69
Put Ratio Spread

Formation Sell 2 Puts A & Buy Put B Variant Sell 2 Puts A, Buy Call B & Short Futures
70
Profit
Put Ratio Spread

Short Puts
Max. Profit
Breakeven
Long Put
Loss
71
Long Put
View
Comment
Unlimited, Increases as the spot price decreases Limited to the premium paid Strike price - premium

Very bearish outlook Volatility increase helps the position No

72
Long Put Payoff

Profit
Strike Price Break Even Premium
Loss
73
Long Put - Variant

Protective Call
Sell Underlying or Sell Futures, and Buy Call (Upside Risk is hedged) Max. Loss: If Futures < Strike = (Strike Futures) + Premium If Futures > Strike = Premium (Futures - Strike) Breakeven = Call Strike - Max. Loss Margin required for position in Futures
74
Long Put Variant Payoff Profit

Futures Long Put
Strike Price Break Even Long Call Max. Loss
Loss
75
Put Ratio Backspread

View
Comment
Increases as the spot price decreases (B A) + (debit premium) or (credit premium) A - Loss

Market is near A and outlook is bearish Volatility increase helps the position Yes
76
Put Ratio Backspread

Formation Buy 2 lower strike (A) puts & Sell a higher strike (B) put. Variant Buy 2 lower strike (A) puts, Sell a higher strike (B) call & Long Futures
77
Put Ratio Backspread Payoff

Profit Short Put
Breakeven
B
Max. Loss
Long Puts
Loss
78
Short Futures
View
Comment
Increases as the spot price decreases Increases as the spot price increases Sell price + Brokerage
Time Decay No impact Use Volatility Margin

Very bearish outlook No impact Yes

79
Short Futures
Profit
Sale Price
Loss
80
Short Futures Variant

Formation Buy Put A & Sell Call A Going Short at A + Call Premium Put Premium
81
Short Futures Variant Payoff Profit
Short Call
Long Put A
Loss
82
Short Semi Futures

View
Comment
Increases as the spot price decreases Increases as the spot price increases Call Strike (B) + Premium credit or Put Strike (A) - Premium debit call
Time Decay Mixed Hurts for Long put and helps for Short Use Volatility Margin
Bearish outlook Neutral Yes

83
Short Semi Futures

Formation Buy Put A & Sell Call B Variant Buy Put A, Sell Put B & Short Futures
84
Profit
Short Futures Payoff

Short Call
Breakeven A B Long Put
Loss
85
Bear Put Spread

View
Comment
Limited, Max. Profit = (B A) - Net Premium Limited, Max. Loss = Net Premium Strike B - Max. Loss
Time Decay Mixed Hurts for long put and helps for short put Use Volatility Margin

86
Bear Put Spread

Formation Buy Put B and Sell Put A Variant Buy Call B, Short Futures & Sell Put A
87
Bear Put Spread Payoff Profit

Short Put
B Breakeven Long Put
Loss
88
Bear Call Spread

View
Comment
Limited, Max. Profit = Net Premium Limited, Max. Loss = (B A) Net Premium Strike B - Max. Loss call
Time Decay Mixed Hurts for long call and helps for short Use Volatility Margin

89
Bear Call Spread

Formation Buy Call B & Sell Call A Variant Buy Call B, Sell Put A & Short Futures
90
Bear Call Spread Payoff

Profit Short Call
B Long Call A Breakeven
Loss
91
Short Call
View
Comment
Limited to the premium received Unlimited, increases as the spot price increases Strike price + Premium

Bearish outlook Volatility decrease helps the position Yes

92
Short Call Payoff

Profit
Premium received
Breakeven Strike
Loss
93
Short Call Variant

Covered Put Short Futures, and Sell Put A
Max. Profit: If Futures < Strike = Premium - (Strike Futures) If Futures > Strike = Premium + (Futures Strike) Breakeven = Put Strike + Max. Profit
94
Short Call Variant Payoff Profit

Short Put
Premium received Breakeven Strike A
Short Futures Loss

95
Thank You
96

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HDFC Securities Ltd.