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Derivatives and Risk Management by Sundaram Janakiramanan

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13

Combinations of Options: Trading Strategies

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

  • What is the rationale for combining options and the underlying security?

  • What is meant by covered call writing?

  • What is meant by a protective put?

  • What is meant by spread trading using options?

  • What is meant by straddle trading using options?

  • What are strips, straps and strangles?

BOX 13.1 Dealing in Straddles

Nicholas Leeson, a trader of Barings Bank in Singapore, earned substantial profits by trading straddles on the Nikkei 225 index from 1992 to 1995 when Nikkei 225 Index was in the range of 16,000 to 20,000. A straddle involves trading in calls and puts at the same time, and as long ...

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