Examination Study Guide Futures and Options (Module 14) [Applicable to Examination Study Guide Module 14 First Edition, 2013] UPDATES

Similar documents
Module 14 Futures and Options

Lecture 7: Trading Strategies Involve Options ( ) 11.2 Strategies Involving A Single Option and A Stock

Market Strategies. Navin Bafna Investment Banking Jan 2008

Module 14 Futures and Options

5. You purchase one IBM September 160 put contract for a premium of $2.62. What is your maximum possible profit? (See Figure 15.1.

10 Trading strategies involving options

Module 12 Investment Management and Corporate Finance

Finance 527: Lecture 30, Options V2

Options. Investment Management. Fall 2005

Option Trading Strategies

SECURITIES BORROWING AND LENDING GUIDELINES

FINM2002 NOTES INTRODUCTION FUTURES'AND'FORWARDS'PAYOFFS' FORWARDS'VS.'FUTURES'

The Bull Call Spread. - Debit Spread - Defined Risk - Defined Reward - Mildly Bullish

Basic Option Strategies

Module 10 Asset and Funds Management

Adjusting The Bull Call Spread

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Financial Economics

The Poorman s Covered Call. - Debit Spread - Defined Risk - Defined Reward - Mildly Bullish

Additional Reading Material on USD RBD Palm Olein Futures Contract. 1. Module 14 (Futures and Options)

CENTRE Option Snippets

Module 10 Asset and Funds Management

Commodity Futures and Options

Module 18 Securities and Derivatives Trading [Products and Analysis]

Final Exam. Please answer all four questions. Each question carries 25% of the total grade.

Strategies for a flat market

Week 5. Options: Basic Concepts

Econ 174 Financial Insurance Fall 2000 Allan Timmermann. Final Exam. Please answer all four questions. Each question carries 25% of the total grade.

Module 7 Financial Statement Analysis and Asset Valuation

Methods for Getting Long Volatility

Fin 5633: Investment Theory and Problems: Chapter#20 Solutions

Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan Options

Copyright 2015 by IntraDay Capital Management Ltd. (IDC)

MATH4210 Financial Mathematics ( ) Tutorial 6

Chapter 15. Learning Objectives & Agenda. Economic Benefits Provided by. Options. Options

Derivative Instruments

Options Markets: Introduction

Module 9 Funds Management Regulation

MULTIPLE CHOICE. 1 (5) a b c d e. 2 (5) a b c d e TRUE/FALSE 1 (2) TRUE FALSE. 3 (5) a b c d e 2 (2) TRUE FALSE. 4 (5) a b c d e 3 (2) TRUE FALSE

GUIDELINES FOR FUTURES BROKERS AND FUTURES BROKER S REPRESENTATIVES UNDER THE FUTURES INDUSTRY ACT 1993

FINA 1082 Financial Management

Currency Option Combinations

Using Position in an Option & the Underlying

BURSA MALAYSIA DERIVATIVES BERHAD

Indiana University South Bend. Presenter: Roma Colwell-Steinke

STRATEGIES WITH OPTIONS

The exam will be closed book and notes; only the following calculators will be permitted: TI-30X IIS, TI-30X IIB, TI-30Xa.

CALL OPTION If you are the buyer of the CALL option, you are bullish the market

Commodity Options : Gold, Crude, Copper, Silver

Large cap investment exposure at a fraction of the price. warrants. Structured Warrants. Listed on Bursa Malaysia

Bursa Malaysia Derivatives Berhad

Market Services Providers (Guidelines) take effect?

Strategies Using Derivatives

Managing the Risk of a Defined Benefit Plan in a Volatile Market

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE SOLUTIONS Financial Economics

CHAPTER 20 Spotting and Valuing Options

RMSC 2001 Introduction to Risk Management

Forex, Futures & Option Basics: Chicago-NW Burbs Trading Club. Nick Fosco Sep 1, 2012

Template. Spread Trading Strategies: Calendar. Spread strategy.

The trusted way to trade gold in Malaysia FGLD. Gold Futures. Traded on Bursa Malaysia

Trading Strategies with Options

A READY RECKONER TO OPTIONS STRATEGY

STRATEGY GUIDE I. OPTIONS UNIVERSITY - STRATEGY GUIDE I Page 1 of 16

I n f o r m a t i o n o n c o m m o d i t y o p t i o n s

P1.T3. Financial Markets & Products. Hull, Options, Futures & Other Derivatives. Trading Strategies Involving Options

True/False: Mark (a) for true, (b) for false on the bubble sheet. (20 pts)

Option Pricing: basic principles Definitions Value boundaries simple arbitrage relationships put-call parity

CHAPTER 27: OPTION PRICING THEORY

Bull Call Spread. This training guide shows you How to use Thinkorswim to :

Additional Reading Material on Over-the-Counter Derivatives

Incorporating International Tax Laws Nontraditional Hedging Techniques in Multinational Capital Budgeting

DUAL CURRENCY INVESTMENT (DCI)

Options Strategies. Liuren Wu. Options Pricing. Liuren Wu ( c ) Options Strategies Options Pricing 1 / 19

Lecture 5. Trading With Portfolios. 5.1 Portfolio. How Can I Sell Something I Don t Own?

LICENSING EXAMINATION STUDY OUTLINE. For January to June 2014 Examinations (Issued in November 2013)

Black Scholes Option Valuation. Option Valuation Part III. Put Call Parity. Example 18.3 Black Scholes Put Valuation

KEY OPTIONS. Strategy Guide

Interactive Brokers Webcast. Bearish Spreads. April 19, 2017

Profit settlement End of contract Daily Option writer collects premium on T+1

Bursa Malaysia Derivatives Berhad

Trading Strategies Involving Options

Homework Set 6 Solutions

University of California, Los Angeles Department of Statistics. Final exam 07 June 2013

PROVEN STRATEGIES. for trading options on CME Group futures

Advanced Options Strategies Charles Schwab & Co., Inc. All rights reserved. Member: SIPC. ( )

EXAMINATION STUDY GUIDE: STOCK MARKET & SECURITIES LAW (MODULE 6)

Part A: The put call parity relation is: call + present value of exercise price = put + stock price.

I. Reading. A. BKM, Chapter 20, Section B. BKM, Chapter 21, ignore Section 21.3 and skim Section 21.5.

Options and Derivative Securities

Options Strategies. BIGSKY INVESTMENTS.

Valuing Put Options with Put-Call Parity S + P C = [X/(1+r f ) t ] + [D P /(1+r f ) t ] CFA Examination DERIVATIVES OPTIONS Page 1 of 6

Copyright 2009 Pearson Education Canada

Mathematics of Financial Derivatives

Chapter 1 Introduction. Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull

Winged and Ratio Spreads

SOCIETY OF ACTUARIES EXAM IFM INVESTMENT AND FINANCIAL MARKETS EXAM IFM SAMPLE QUESTIONS AND SOLUTIONS DERIVATIVES

Butterflies, Condors and Risk Limiting Strategies. The Options Industry Council

Options Trading Strategies

REQUEST FOR PROPOSAL FOR ALLOCATION FROM THE VENTURE CAPITAL FUND. 3 May 2018

FUTURES OPTIONS A TRADING STRATEGY GUIDE STRATEGY GUIDE OPTIONS ON FUTURES CONTRACTS:

PRACTICE QUESTIONS DERIVATIVES MARKET (DEALERS) MODULE

Transcription:

Examination Study Guide Futures and Options (Module 14) [Applicable to Examination Study Guide Module 14 First Edition, 2013] UPDATES (As at July 2017) Copyright 2017 Securities Industry Development Corporation 3, Persiaran Bukit Kiara Bukit Kiara, 50490 Kuala Lumpur (This document consists of six (6) pages including the cover page)

This updates as at July 2017 supersedes the update as at July 2014. Purpose of this update is to reflect the following: 1. All topics: All reference to futures trading participants and futures participant shall refer to trading participant 2. Topic 3: Trading the Futures Contract: Topic 3.08 Negotiated Large Trade (NLT) and Topic 3.09 Exchange for Related Positions (EFRP) (Page 3 11) Please refer to the latest information relating to NLT and EFRP facilities in Bursa Malaysia website. 3. Topic 7: Trading Strategies with Options: A. Topic 7.04 - Bull put spread (Page 7-5) A bull put spread employs two puts on the underlying instrument, buying the lower strike put and selling the higher strike put. The downside to this strategy is the width of the put spread minus the net premium and this occurs when the underlying spot expires below the far strike. The maximum upside to the strategy is limited to the net premium outlay (cost of put bought minus premium received from put sold). An example of a bull put spread is given below: Buy 1-month 1,500 OKLI put for 30 points Sell 1-month 1,600 OKLI put for 60 points The combined payoff for this strategy is given below: 1,350 1,400 1,450 1,500 1,550 1,600 1,650 1,700 1,750 1,500 OKLI 120 70 20-30 -30-30 -30-30 -30 1,600 OKLI -190-140 -90-40 10 60 60 60 60 Combined payoff -70-70 -70-70 -20 30 30 30 30 2

Diagram 6: 1,500-1,600 OKLI bull put spread payoff 30 Maximum profit of 30 if above 1,600 1,500 1,570 1,600-70 From the example you will conclude: (i) (ii) (iii) Maximum loss of this strategy is the width of spread that is bought minus the net premium outlay. The width of the spread is 100 (1,600 minus 1,500) and the net premium outlay is 30, then the maximum loss is 70 (100 minus 30). Maximum loss occurs when is below the lower strike (1,500) at expiry of the bull put spread; Maximum profit is the net premium outlay which is 30 (60-30) and this occurs when the is above the higher strike (1,600) at the expiry of the options; and Break even for this strategy occurs within the put spread (1,570). It is calculated by deducting the net premium outlay from the higher strike (1,600-30). B. Topic 7.04 - Bear put spread (Page 7-7) A bear put spread is the opposite of the bull put spread. This strategy involves buying the higher strike put option and selling the lower strike put option. The downside to this strategy is limited to the net premium outlay (cost of put bought minus premium received from put sold). The maximum upside is the width of the put spread minus the net premium and this occurs when the underlying spot expires below the lower strike. An example of a bear put spread is given below: Buy 1-month 1,600 OKLI put for 60 points Sell 1-month 1,500 OKLI put for 30 points 3

The combined payoff for this strategy is given below: 1,350 1,400 1,450 1,500 1,550 1,600 1,650 1,700 1,750 1,600 OKLI 1,500 OKLI Combined payoff 190 140 90 40-10 -60-60 -60-60 -120-70 -20 30 30 30 30 30 30 70 70 70 70 20-30 -30-30 -30 Diagram 7: 1,600-1,500 OKLI bear put spread payoff Profit /Loss 70 Maximum gain of 70 if is below 1,500 at expiry 1,500 1,570 1,600-30 You will conclude the following: (i) Maximum loss of this strategy is the net premium received which is 30 (60-30). Maximum loss occurs when is above the higher strike (1,600) at expiry; (ii) (iii) Maximum profit is the width of the spread (100) that is sold minus the net premium received so maximum profit for this strategy is 70. This occurs when the is below the lower strike (1,500) at the expiry of the options; and Break even for this strategy occurs within the put spread (1,570). It is calculated by deducting the net premium received from the higher strike (1,600-30). 4

4. The following is to replace the existing payoff diagrams on Topic 7: Trading Strategies with Options due to misalignment of prices. A. Diagram 5: 1,500-1,600 OKLI bull call spread payoff (Page 7-4) 1 st Strike price 2 nd Strike price 70 Maximum profit of 70 if above 1,600 1,500 1,530 1,600-30 B. Diagram 7: 1,500-1,600 OKLI bear call spread payoff (Page 7-6) 30 Maximum gain of 30 if is below 1,500 at expiry 1,500 1,530 1,600-70 5

C. Diagram 9: Long 1,600 OKLI straddle payoff (Page 7-9) Straddle exercise price 1,600-100 Maximum loss of 100 if spot expires at 1,600 D. Diagram 10: Short 1,600 OKLI straddle payoff (Page 7-9) Straddle exercise price 100 Maximum profit of 100 if spot expires at 1,600 1,500 1,600 1,700 6