Question

Are these strategies speculative or basically for long term investing? Give an example of when you would position an investment in these. What are the desired risk/reward profile would fit with the strategy? When do you buy the call vs put and why? Or do you buy both? 1. Synthetic Call (Put-Call Parity). 2. Covered Calls 3. Straddle, Strangle. 4. Spreads (Bull, Bear, Butterfly, Box, Condors). Be certain to cite your sources!

Answer 1

Call options gives their holder right to buy the underlying at specified price at specified date in future while Put options gives their holder right to sell the underlying at specified price at specified date in future. This instruments are used to protect oneself from adverse movement in prices of underlying. For example if one is holding 1000 shares then he faces riskt that the price of share might decline. To hedge this risk one can buy put option or can sell call option. similary if some one is short on shares he can buy call oprion to hedge the risk Thus this intruments are use to hedge

When one is unsure about the movement in market i.e will it go up or down, one can buy both call and put option to capture one side big movement in the market

Synthetic Call : This is option strategy wher performance of call option is copied. Here no call options are bounght. This strategy is created by buying stocks and buying at the money put option. Thus investor here is hedging himself from down fall in prices of shares. This strategy is used when investor is bullish on stock, howerever wants to hedge himself if he goes wrong.This is basically for long term strategy

Covered Calls : Covered call strategy involves buying at the money call option of same underlying which are being held by investor. here aim of investor is to collect premium as he expects share price to remain range bound. This is basically for long term strategy

Straddle, Strangle : When one is unsure about the movement in market i.e will it go up or down, one can buy both call and put option to capture one side big movement in the market. This is called straddle and stangle strategy. This is speculative in nature

Spreads : This involves buing of put option and call option in order to create cash flow. For example in butterfly spread, two at the money call option are sold, one in the money and one out of money call option is bought. Here investor expects market to be range bound. Since no underlying is bought this is speculative in nature