Template. Spread Trading Strategies: Calendar. Spread strategy.

Transcription

1 Template Spread Trading Strategies: Calendar Spread strategy 1 Introduction The Calendar Spread strategy is composed of two options of the same type (calls or puts), same strike price, but different expiry date. It differs from Bull Call - Put Spread or Bear Call - Put Spread strategy because this last strategy consists of options of the same type, same expiry date, but different strike price. The Diagonal Spread strategy derives from the combination of options of the same type but with different strike prices and different expiry dates. In other words, this strategy is a mix between a simply Calendar Spread and Bull - Bear Spread strategy. 1

2 1 Introduction Calendar Spread strategy Number of options 1 Trade Date 30/11/2010 Effective Date 30/11/2010 Strike Call / Put n.1 (K1) Strike Call / Put n.2 (K2) NB. (K2 K1) Expiry Date n.1 (T1) 28/02/2011 Expiry Date n.2 (T2) NB.(T2 T1) 31/03/2011 Price Call Strike n.1 at Expiry Date n Price Call Strike n.2 at Expiry Date n Price Put Strike n.1 at Expiry Date n Price Put Strike n.2 at Expiry Date n Spot stock value Payoff (long) Calendar Spread strategy (Call) (long) Calendar Spread strategy (Put) At Effective Date At Expiry Date n.1 -max( ST 1 - K1;0 ) -max( K1 - ST 1;0 ) At Expiry Date n.2 max( ST 2 - K2;0 ) max( K2 - ST 2;0 ) ST 1 = Stock value at Expiry Date n.1 ST 2 = Stock value at Expiry Date n.2 Conventions Day Count Fraction Act/Act Table 1: Example of a long - short position on Calendar Spread strategy with Calls - Puts options template. 2

3 2 Template implementation This section describes the constants, symbols and functions we used for the implementation of the template: 3

4 Calendar Spread strategy on Fairmat Number of options N Trade Date Trading date (simulation start date) Effective Date Contract initial date Strike Call / Put n.1 (K1) K1 Strike Call / Put n.2 (K2) NB. (K2 K1) K2 Expiry Date n.1 (T1) T1 Expiry Date n.2 (T2) NB (T2 T1) T2 Price Call Strike n.1 at Expiry Date n.1 c1 Price Call Strike n.2 at Expiry Date n.2 c2 Price Put Strike n.1 at Expiry Date n.1 p1 Price Put Strike n.2 at Expiry Date n.2 p2 Spot stock value Sv Payoff Calendar Spread strategy (Call) Calendar Spread strategy (Put) At 0 p*(+c1 - c2) p*(+p1 - p2) At T1 p*( -max( V1[T1] - K1;0 ) ) p*( -max( K1 - V1[T1];0 ) ) At T2 p*( max( V1[T2] - K2;0 ) ) p*( max( K2 - V1[T2];0 ) ) p=1 long position on strategy p=-1 short position on strategy Conventions Day Count Fraction Act/Act (default Fairmat setting Table 2: Example of long - short position on Calendar Spread strategy with Calls - Puts options template described through Fairmat objects. 4

5 The variables loaded on Parameters & Functions can be classified into three categories: 1. Contract specific parameters: N: number of options; Sv: stock value at Trading Date (simulation start date); p: position. p=1 means a long position on a Calendar Spread strategy. p=-1 means a short position on a Calendar Spread strategy, both with call and put options; T1: expiry date (or Exercise Date) n.1; T2: expiry date (or Exercise Date) n.2. T1 T2 for Calendar Spread strategy; K1: options strike price n.1; K2: options strike price n.2. K2 K1 for Diagonal Spread strategy; c1: price of a call option with strike price K1 at expiry date n.1 (T1); c2: price of a call option with strike price K2 at expiry date n.2 (T2); p1: price of a put option with strike price K1 at expiry date n.1 (T1); p2: price of a put option with strike price K2 at expiry date n.2 (T2); 2. Market data: zr: zero rate (derived from spot rate); 3. Auxiliary and Instrumental variables: the following elements are other objects and functions that aren t input they are derived from or depend on Contract specific data or Market data inputs but they are useful for use within Option Map enviroment. Call1: payoff of a call option with strike price K1 at expiry date n.1 (T1); Call2: payoff of a call option with strike price K2 at expiry date n.1 (T2); Put1: payoff of a put option with strike price K1 at expiry date n.1 (T1); Put2: payoff of a put option with strike price K2 at expiry date n.1 (T2); Note: the default setting of this template refers to a Calendar Spread strategy on a stock, but Parameters & Functions contains a second strike price, as well, in order to cover a Diagonal Spread strategy, too. 5