ICFAI UNIVERSITY

DEHRADUN

Name: Gopal Krishan

Enrollment No. 09BS0002792
IUD No: 0901202792
Course Code: SLFI608
Course Name: Financial Risk Management
Faculty Name: C. M. Madtha
Date: November 05, 2010
Title of the assignment: Option strategies
payoff diagrams for Siemens

Sign Student Sign Faculty

Buy call option for Siemens expiring
This strategy can be used by an
26th Aug, 2010 investor who is very bullish on
the market. Under this strategy
Strike Price Premium Spot Price Payoff Profit & Loss the investor pays the seller of the
620 109.25 340 0 -109.25 option a premium to buy an
620 109.25 380 0 -109.25 option to buy shares at a price in
620 109.25 420 0 -109.25 future.
620 109.25 460 0 -109.25
620 109.25 500 0 -109.25
620 109.25 540 0 -109.25
620 109.25 580 0 -109.25
620 109.25 620 0 -109.25 The strike price of this option to
620 109.25 660 40 -69.25 buy is w620 and the premium for
620 109.25 700 80 -29.25 the contract is w109.25.
620 109.25 740 120 10.75
620 109.25 780 160 50.75
620 109.25 820 200 90.75
620 109.25 860 240 130.75
The breakeven point for the
contract is f620+ f109.25=
f729.25.
Buy
300 Call Option for Siemens Payoff
diagram
250
200
150 This strategy limits the losses at
100 the lower level to the extent of the
50 premium to be paid and there are
0 no limits to the profits if prices
-50 move high.
-100
-150

Payoff Profit & Loss

Sell call option for Siemens expiring
26th Aug, 2010
This strategy can be used by an
Strike Profit & investor who is very bearish on the
Price Premium Spot Price Payoff Loss market. Under this strategy the
620 109.25 340 0 109.25 seller receives premium and sells a
620 109.25 380 0 109.25
right to the buyer to buy shares if
620 109.25 420 0 109.25
prices rise above the strike price.
620 109.25 460 0 109.25
620 109.25 500 0 109.25
620 109.25 540 0 109.25
620 109.25 580 0 109.25
620 109.25 620 0 109.25
\620 109.25 660 -40 69.25
The strike price of this option to
620 109.25 700 -80 29.25 buy is w620 and the premium for
620 109.25 740 -120 -10.75 the contract is w109.25.
620 109.25 780 -160 -50.75
620 109.25 820 -200 -90.75
620 109.25 860 -240 -130.75

The breakeven point for the

contract is f620+ f109.25=
f729.25. (from the point of call
buyer)

This strategy limits the gains to the

amount of premium received but
the losses can be unlimited. Thus it
is a highly risky and aggressive
strategy usually followed by an
person who is very bearish on
market.
 Buy put option for Siemens expiring
This strategy is used by a person
who is bullish on market. The
26th Aug, 2010
This strategy
investor expectsisthea bearish strategy
stock prices
tofollowed
move upbyand a thus
person who
sells is
Strike Spot Profit &
Price he
Premium Price Payoff Loss
aggressive
option to selland expecting
shares market to
at a certain
fall. If
Under 620
this strategy 17.95
the buyer 595 25 7.05
price. the stock price
620 increases
17.95 600 20 2.05
pays astrike
above premium tothe
price,620 buyinvestor
a right to
17.95 605 15 -2.95
sell stocks
makes money at a equal
higher topricethe
than
620 17.95 610 10 -7.95
the strike
premium price.
received. 620 17.95 615 5 -12.95
620 17.95 620 0 -17.95
620 17.95 625 0 -17.95
620 17.95 630 0 -17.95
620 17.95 635 0 -17.95
The strike price
This strategy limits of this option
to to
620the gains 17.95 640 0 -17.95
thebuy is w620
amount of and the premium
premium
620 received for
17.95 645 0 -17.95
thethe
but contract is w17.95.
chances of620 17.95
losses is huge 650 0 -17.95
and can increase with decline 17.95
620 in 655 0 -17.95
prices. 620 17.95 660 0 -17.95

The breakeven point for the

contract is f620-f17.95= f602.05.

The losses in this strategy are

limited to the premium paid but
there is a possibility of huge
Sell put option for Siemens expiring
profits. Thus it is a good strategy if 26th Aug, 2010
market seems to be bearish.
Strike Spot Profit &
Price Premium Price Payoff Loss
620 17.95 595 -25 -7.05
620 17.95 600 -20 -2.05
620 17.95 605 -15 2.95
620 17.95 610 -10 7.95
620 17.95 615 -5 12.95
620 17.95 620 0 17.95
620 17.95 625 0 17.95
620 17.95 630 0 17.95
620 17.95 635 0 17.95
620 17.95 640 0 17.95
620 17.95 645 0 17.95
620 17.95 650 0 17.95
620 17.95 655 0 17.95
 620 17.95 660 0 17.95

Sell put option for Siemens payoff

diagram
30

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-10

-20

-30

Payoff Profit & Loss

Covered call for Siemens for option expiring on 26th Aug

2010
Strik Spot Payoff
e Pric Profit on Net profit
Price Premium e Payoff & Loss Long and Loss
620 109.25 340 0 109.25 -280 -170.75
620 109.25 380 0 109.25 -240 -130.75
620 109.25 420 0 109.25 -200 -90.75
620 109.25 460 0 109.25 -160 -50.75
620 109.25 500 0 109.25 -120 -10.75
620 109.25 540 0 109.25 -80 29.25
620 109.25 580 0 109.25 -40 69.25
620 109.25 620 0 109.25 0 109.25
620 109.25 660 -40 69.25 40 109.25
620 109.25 700 -80 29.25 80 109.25
620 109.25 740 -120 -10.75 120 109.25
620 109.25 780 -160 -50.75 160 109.25
 620 109.25 820 -200 -90.75 200 109.25
620 109.25 860 -240 -130.75 240 109.25

This strategy is used by a person Protected Put for Siemens for option
who is having a ling position in the
stock and is expecting the market expiring on 26th Aug 2010
not to move up significantly or to
Strike Profit & Payoff on
move sideways in the near term.
Price Premium Spot Price Payoff Loss Long Net payoff
Thus the investor can sell buy calls
620 17.95 595 -25 -7.05 25 17.95
and make money 620 equal to the
17.95 600 -20 -2.05 20 17.95
premium received.620 17.95 605 -15 2.95 15 17.95
620 17.95 610 -10 7.95 10 17.95
620 17.95 615 -5 12.95 5 17.95
620 17.95 620 0 17.95 0 17.95
620 17.95 625 0 17.95 -5 12.95
620 17.95 630 0 17.95 -10 7.95
620 17.95 635 0 17.95 -15 2.95
In this strategy, the long stock
620 17.95 640 0 17.95 -20 -2.05
position and short
620 put position
17.95 645 0 17.95 -25 -7.05
eventually makes620 the payoff 17.95 650 0 17.95 -30 -12.05
diagram look like
620 a short put
17.95 655 0 17.95 -35 -17.05
strategy. This 620
strategy can 17.95
be 660 0 17.95 -40 -22.05
exercised and investor can make
gain equal to the premium received
even if the stock price doesn’t
increase in market. Thus it is a
good strategy to make profits from
stocks which are not expected to
move up or rather expected to go
sideways.
 Protected Put payout diagram for
Siemens
This strategy is used by an
30 investor who is neutral to bearish
20 on the stock prices. If the investor
10 believes that the prices will not fall
much and profits cannot be made
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
on the short position of stocks.
-10 Thus the investor sells put options
-20 and get returns. If prices doesn’t
increase or move sideways the
-30
premium earned becomes the profit
-40 for the investor.
-50

Profit & Loss Payoff on Long

Net payoff

The payoff for this strategy shows

that using this strategy gives a
return equal to the premium
received. The option sold is
generally OTM and the combined
payoff of short position and option
gives a payoff which is same as
sell call option.
 Long Straddle for Siemens expiring on 26th Aug 2010
Strike Spot Profit Spot Profit Net
Price Premium Price Payoff & Loss Premium Price Payoff & Loss payoff
620 109.25 340 0 -109.25 17.95 340 280 262.05 152.8
620 109.25 380 0 -109.25 17.95 380 240 222.05 112.8
620 109.25 420 0 -109.25 17.95 420 200 182.05 72.8
620 109.25 460 0 -109.25 17.95 460 160 142.05 32.8
620 109.25 500 0 -109.25 17.95 500 120 102.05 -7.2
620 109.25 540 0 -109.25 17.95 540 80 62.05 -47.2
620 109.25 580 0 -109.25 17.95 580 40 22.05 -87.2
620 109.25 620 0 -109.25 17.95 620 0 -17.95 -127.2
620 109.25 660 40 -69.25 17.95 660 0 -17.95 -87.2
620 109.25 700 80 -29.25 17.95 700 0 -17.95 -47.2
620 109.25 740 120 10.75 17.95 740 0 -17.95 -7.2
620 109.25 780 160 50.75 17.95 780 0 -17.95 32.8
620 109.25 820 200 90.75 17.95 820 0 -17.95 72.8
620 109.25 860 240 130.75 17.95 860 0 -17.95 112.8

Net payoff of long straddle

200
This
150 strategy is a
combination of long put and
100
long call. It is used when the
50
stock prices are extremely
0
volatile. Under this strategy a
340 380 420 460 500 540 580 620 660 700 740 780 820 860
call
-50option is bought and a
put
-100option is bought at the
same strike price and
-150
maturity. Short Straddle for
Net payoff
There are 2 breakeven points Siemens expiring on
for this strategy. One being
the strike price + net 26th Aug 2010
premium and lower one
Strike Spot Profit & Spot Profit & Net
being strike price – net
Price Premium Price Payoff Loss Premium Price Payoff Loss Payoff
premium paid.
620 109.25 340 0 109.25 17.95 340 -280 -262.05 -152.8
If620
stock price
109.25are above
380 the 0 109.25 17.95 380 -240 -222.05 -112.8
620 breakeven
upper 109.25 420 it’ll
level 0 109.25 17.95 420 -200 -182.05 -72.8
yield returns and if460stock
620 109.25 0 109.25 17.95 460 -160 -142.05 -32.8
620
price is109.25
below 500 lower 0 109.25 17.95 500 -120 -102.05 7.2
620 109.25 540 0 109.25 17.95 540 -80 -62.05 47.2
breakeven it’ll yield profits.
620 109.25 580 0 109.25 17.95 580 -40 -22.05 87.2
Only between the 2 levels
620 109.25 620 0 109.25 17.95 620 0 17.95 127.2
it’ll be in loss.
 620 109.25 660 -40 69.25 17.95 660 0 17.95 87.2
620 109.25 700 -80 29.25 17.95 700 0 17.95 47.2
620 109.25 740 -120 -10.75 17.95 740 0 17.95 7.2
620 109.25 780 -160 -50.75 17.95 780 0 17.95 -32.8
620 109.25 820 -200 -90.75 17.95 820 0 17.95 -72.8
620 109.25 860 -240 -130.75 17.95 860 0 17.95 -112.8

This strategy is again a

combination of long put and
long call. It is used when the
stock prices are expected not
to move significantly. Under
this strategy a call option and
a put option is sold at the
same strike price and
maturity.
There are 2 breakeven points
for this strategy.
If stock price are above the
upper breakeven level it’ll be
in loss and if stock price is
below lower breakeven it’ll
be in loss. Only between the
2 levels it’ll be in profit.
Thus it is a risky strategy to
exercise and should be
practiced only when stock
prices are not expected to
move much