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Trading Strategies & Simulation

Trading Strategies & Simulation. Working Basic Profiles. Buy Call Sell Call Buy Put Sell Put. First Applications. Protective Put Covered Call. Protective Put. Combine Long Stock with Purchase of Put Choose Expiry to match horizon of desired protection of downside.

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Trading Strategies & Simulation

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  1. Trading Strategies &Simulation

  2. Working Basic Profiles • Buy Call • Sell Call • Buy Put • Sell Put

  3. First Applications • Protective Put • Covered Call

  4. Protective Put • Combine Long Stock with Purchase of Put • Choose Expiry to match horizon of desired protection of downside. • Choose Strike around (usually just above) current Stock Price • Protects Stock Price from loss beyond put premium • Very Similar to Car Insurance (although everyone’s strike is below the current car value due to deductibles)

  5. Covered Calls • Combine Long Stock with Sale of Call • Choose Strike around (usually just above) current Stock Price • Protects Stock Price from loss less than call premium • Guarantees Sale Price (X + Prem Recv’d)

  6. Writing Calls to Generate Income • Can be very conservative or very risky, depending on the remainder of the portfolio • An attractive way to generate income with foundations, pension funds, and other portfolios that will always hold the stock used in the cover • A very popular activity with individual investors

  7. Writing Calls to Generate Income (cont’d) • Writing calls may not be appropriate when • Option premiums are very low • The option is very long-term

  8. Simulation

  9. Simulation • Brokerage Account and Delayed Data from Exchanges • Activate Some Strategies • Document Intent, Execute and Resolve • Make Some Money, Have Some Fun!

  10. Exchanges • Chicago Board of Trade • www.cbot.com • Chicago Merchantile Exchange • www.cme.com • New York Board of Trade • www.nybot.com • New York Merchantile Exchange • www.nymex.com

  11. CBOT • Agricultural • Corn (C), Soybeans (S), Soybean Oil (BO), Soybean Meal (BM), Wheat (W), Oats (O) • Interest Rates • 10y Notes (TY), 30y Bond (US) • Indexes • Dow Jones 30 (DJ)

  12. CME • Meats • Live Cattle (LC), Feeder Cattle (FC), Lean Hogs (LH), Pork Bellies (PB) • Lumber (LB) • Indexes • Equity: S&P 500 (SP), NASDAQ 100 (ND) • Foreign Exchange • British Pound (BP), Canadian $ (CD), Japanese Yen (JY), Swiss Franc (SF), Euro (UR) • Interest Rates • Euro$ (ED), T-Bill (TB)

  13. NYBOT • Food & Fiber • Cocoa (CC), Coffee (KC), Sugar-World (SB), FCOJ (OJ) • Cotton (CT) • Indexes (NYFE) • US$-Index (DX)

  14. NYMEX • Energy • Light, Sweet Crude Oil (CL), Heating Oil (HO), Unleaded Gasoline (HU), Natural Gas (NG) • Metals • Gold (GC), Silver (SI), Copper (HG)

  15. Positions • $500,000 portfolio • No more than $150,000 in any one position • At least 4 option and 2 futures trades • 4 options as we discuss options • 2 futures as we discuss futures • Each position must have: • Documented opinion • Documented Security information • Initial Trade Price • Daily Closing Prices • Final Closing Price

  16. Documented Security Information • Contract/Position Size • Contract/Position Value • Last Trading Day of Contract • Contract/Position Initial Margin Deposit

  17. Multi-Option Trading Strategies Take a position in: • A mixture of calls & puts • This is known as a combination • 2 or more options of the same type • This is known as a spread

  18. Trading Strategies

  19. A Long Straddle Combination • Figure 4-1: Buy 1 Call & 1 Put @ Same X Profit X ST Prices are expected to move, but don’t know which way.

  20. A Short Straddle Combination • Figure 4-2: Sell 1 Call & 1 Put @ Same X Profit X ST Prices are not expected to move, either way (RISKY!!!). Get to keep premiums, but possible unlimited losses.

  21. A Long Strangle Combination • Figure 4-3: Buy 1 Call @ Hi X & Buy 1 Put @ Low X Profit X1 X2 ST Prices are expected to move BIG, but don’t know which way, and willing to give up some profit to pay less for position.

  22. A Short Strangle Combination • Figure 4-3: Sell 1 Call @ Hi X & Sell 1 Put @ Low X Profit X1 X2 ST Prices are not expected to move beyond X1 or X2, but not willing to bet they might move between. Get to keep premiums, but unlimited possible losses.

  23. Bull Spread Using Calls • Figure 4.7: Buy 1 Low X Call, and Sell 1 Hi X Call Profit X1 X2 ST Prices are expected to rise, but only modestly (not above X2). Willing to give up “above X2” to pay less for position (compare to naked call).

  24. Bull Spread Using Puts • Buy 1 Low X Put and Sell 1 Hi X Put Profit X1 X2 ST

  25. Bear Spread Using Puts • Sell 1 Lo X Put and Buy 1 Hi X Put Profit X1 X2 ST Again, as you are willing to give up move “below X1”, position costs less than naked put.

  26. Bear Spread Using Calls • Figure 4-8 : Buy 1 Hi X Call, and Sell 1 Lo X Call Profit X1 X2 ST Prices are expected to fall, but only modestly (not below X1). Willing to give up “below X1” to pay less for position (compare to naked put).

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