Options

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Types of Options



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Combination of Underlying Asset and an Option:

Covered Call:      A Long Position in the stock accompanied by short sale of a call to collect the option premium.




Protective Put:   A Long Position in the stock accompanied by purchase of a put to protect the downside.


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Put - Call Parity





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Two Classes of Options - Straddle & Strangle

Combine a call and Put with the same strike price and maturities called  straddle
Long Straddle : Buying a call and a put with the same maturity and strike price.
Short Straddle : Selling a call and a put with the same maturity and strike price
Straddle will benefit from a large price move up or down.

Combine a call and Put with the different strike price and maturities called  Strangle




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One Class of Options  - Spreads

Vertical Spreads refers to different strike prices
Horizontal Spreads refers to different Maturities
Diagonal Spreads move across maturities and strike prices.

Bull spread -  is positioned to take advantage of an increase in price of the underlying asset.
Bear spread - is bet on a falling price.

Spreads involving more than 2 positions are referred to as butterfly or sandwich spreads.

Butterfly spread involves three types of options with the same maturity.
a long call at a strike price K1
two short calls at a higher strike price k2,
long call at a even higher strike price k3.

Sandwich spread is a opposite of butterfly spread.

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The Basel II Capital Accord [63] identifies
three main sources of risk: credit risk, market risk and operational risk.


Credit risk is typically represented by means of three factors:
default risk,loss risk and exposure risk.



Risk management is primarily concerned with reducing earnings volatility
and avoiding large losses.

In a proper risk management process, one needs
to identify the risk, measure and quantify the risk and develop strategies to
manage the risk.


Risk management is primarily concerned with reducing earnings volatility
and avoiding large losses. In a proper risk management process, one needs
to identify the risk, measure and quantify the risk and develop strategies to
manage the risk.

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