Unit study guide · NISM Series XIII
Option Trading Strategies – Strategies using Equity Options and Currency options
4 questions in this unit
What this unit covers
- Which pair of options creates a long straddle at one strike and expiry?
- Which combination of holdings and option contracts forms a basic protective put strategy?
- Which combination forms a basic equity collar on an existing long share position?
- A bull call spread buys a ₹100 call for ₹12 and sells a ₹110 call for ₹6. At expiry the share is ₹120. What is net profit per unit?
Key ideas
From the practice bank · 1
Which pair of options creates a long straddle at one strike and expiry?
A long straddle buys a call and a put with the same and . Remember: Long straddles buy both directions at a common strike.
Hint Common mistake: Do not confuse a straddle with a strangle using different strikes. Think about owning exposure to moves in either direction.
XIII-097From the practice bank · 2
Which combination of holdings and option contracts forms a basic protective put strategy?
A protective put combines a long underlying position with a purchased put on the exposure. Remember: A protective put provides downside insurance at a premium cost.
Hint Common mistake: The put must be purchased, not written. Identify ownership combined with downside protection.
XIII-098From the practice bank · 3
Which combination forms a basic equity collar on an existing long share position?
A collar commonly combines long shares, a purchased protective put and a written call. Remember: A collar trades upside potential for downside protection.
Hint Common mistake: Do not confuse buying and writing the protective put. Think of a floor financed partly by an upside cap.
XIII-099From the practice bank · 4
A bull call spread buys a ₹100 call for ₹12 and sells a ₹110 call for ₹6. At expiry the share is ₹120. What is net profit per unit?
Long call payoff = ₹20, short call payoff = −₹10, net payoff = ₹10. Net premium paid = ₹12 − ₹6 = ₹6. Profit = ₹10 − ₹6 = ₹4. Remember: A vertical call spread has a capped payout.
Hint Common mistake: Deduct the net premium from combined leg payoff. Calculate the combined intrinsic payoff and initial net premium.
XIII-100The strike price is the level at which an option can be exercised.
Read moreExpiry day is the last day on which a derivative contract can be traded.
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