Bull - Spread - Bear - Spread - 2 PDF

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Bull Spread

Strategy name -Using calls bull call spread -Using puts bull put spread

Spread Bear Spread

-Using calls bear call spread -Using puts bear put spread

Bull Spread When we use bull spread ? You expected that it is a moderate increase in stock price and don’t want to go long the stock since any price reduction would hurt you !!

Bull Call Spread Example : Two 30-days calls are available : GET Berhad, RM 9.50 call @ c=RM 0.15 GET Berhad, RM 10.50 call @ c=RM 0.05 The bull call spread would require the purchase of the call with the lower exercise price and sale of the call with the higher exercise price.

Strategy : LONG RM9.50 call @ c=RM 0.15 SHORT RM 10.50 call @ c=RM 0.05

The payoff to the two call positions : Stock Price at Maturity

Profit/Loss to Long 9.50 Call @ .15

Profit/Loss to Short 10.50 Call @ .05

Value of Combined Position

8.00 9.00 9.50 9.60 10.00 10.50 11.00 11.50

(.15) (.15) (.15) (.05) .35 .85 1.35 1.85

.05 .05 .05 .05 .05 .05 (.45) (.95)

(.10) (.10) (.10) 0 .40 .90 .90 .90

P/L

Bull Put Spread Example : Two 30-days put options are available : GET Berhad, RM 9.50 put @ p=RM 0.10 GET Berhad, RM 10.00 put @ p=RM 0.58 The bull put spread would require the purchase of the put with the lower exercise price and sale of the put with the higher exercise price. Strategy : LONG RM9.50 put @ p=RM 0.10 SHORT RM 10.00 put @ p=RM 0.58 The payoff to the two call positions : Stock Price at Maturity

Profit/Loss to Long 9.50 Put @ .10 1.40 .40 (.10) (.10) (.10) (.10) (.10) (.10)

Profit/Loss to Short 10.00 Put @ .58 (1.42) (0.42) 0.08 .10 .58 .58 .58 .58

Value of Combined Position (.02) (.02) (.02) 0 .48 .48 .48 .48

Strategy Bull Call Spread

Break-Even Point Lower exercise price + Difference in premium

Maximum Loss Difference in premium

Bull Put Spread

Higher exercise price Difference in premium

Difference in exercise price – Difference in premium

Maximum Profit Difference in exercise price – Difference in premium Difference in premium

8.00 9.00 9.50 9.52 10.00 10.50 11.00 11.50

( No t et h a t t h ema x i mu mp r o fi t a n dl o s st ot h et wos t r a t e g i e sa r ed i a g o n a l l yo p p o s i t e . )

Bull Call / Bull Put Spread When to use : When one is neutral to bullish or moderately bullish about the underlying asset price. Risk profile : Limited downside, limited upside. Break-even : As described above. Described objective : To take advantage of expected marginal up movement while also limiting downside risk

Bear Spread When we use bear spread ? You expected the drop of stock price but not by much, you want to make money without exposing yourself to large potential losses if the stock price in fact goes up.

Bear Call Spread Example : Two 90-days call options on TEG Corporation stock are available : TEG Corporation, RM 6.50 call @ c=RM 0.87 TEG Corporation, RM 7.50 call @ c=RM 0.12 The bear call spread would require the purchase of the call with the higher exercise price and sale of the call with the lower exercise price. (opposite with bull call spread - long lower exercise call, short higher exercise call) Strategy : SHORT RM6.50 call @ c=RM 0.87 LONG RM 7.50 call @ c=RM 0.12 The payoff to the two call positions :

Stock Price at Maturity 6.00 6.50 7.00 7.25 7.50 8.00 8.50

Profit/Loss to Short 6.50 Call @ .87 .87 .87 .37 .12 (.13) (.63) (1.13)

Profit/Loss to Long 7.50 Call @ .12 (.12) (.12) (.12) (.12) (.12) .38 .88

Value of Combined Position .75 .75 .25 0 (.25) (.25) (.25)

Bear Put Spread Example : Two 90-days put options on TEG Corporation stock are available : TEG Corporation, RM 6.50 call @ p=RM 0.35 TEG Corporation, RM 7.50 call @ p=RM 0.75 Long the higher exercise put, short the lower exercise put. (opposite with bull put spread - long lower exercise put, short higher exercise put) Strategy : SHORT RM6.50 call @ p=RM 0.35 LONG RM 7.50 call @ c=RM 0.75 The payoff to the two call positions : Stock Price at Maturity 6.00 6.50 7.00 7.10 7.50 8.00 8.50 Strategy

Profit/Loss to Short 6.50 Put @ .35 (0.15) 0.35 0.35 0.35 0.35 0.35 0.35 Break-Even Point

Profit/Loss to Long 7.50 Put @ .75 0.75 0.25 (0.25) (0.35) (0.75) (0.75) (0.75) Maximum Loss

Value of Combined Position 0.60 0.60 0.10 0 0.40 0.40 0.40 Maximum Profit

Bear Call Spread

Lower exercise price + Difference in premium

Bear Put Spread

Higher exercise price Difference in premium

Difference in exercise prices – Difference in premium Difference in premium

Difference in premium

Difference in exercise prices – Difference in premium

( No t e: Th ema x i mu mp r o fi t a n dl o s st ot h et wos t r a t e g i e sa r ed i a g o n a l l yo p p o s i t e . )

Bear Call / Bear Put Spread When to use : When one is neutral to bearish or moderately bearish about underlying asset price. Risk profile : Limited downside, limited upside. Break-even : As described above. Described objective : To take advantage of expected marginal fall in underlying asset price while limiting loss potential...