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MIS 4500 (31)

Chapter 42.docx

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Management Info. Systems
MIS 4500
Pourang Irani

Chapter 42 Risk Management Applications of Option StrategiesRisk Management Strategies w Options and the Underlying Reduce exposure to underlying by 1 selling a call or 2 buying a putCovered call underlying plus short call 0maxcXSSSo Profit00TT Protective put underlying plus long put 0maxpSXSSo Profit00TTo Can be viewed as insuranceMoney Spreads o as compared to time spreads which differ by expiration date o Bull spreads makes money if market rises long position in call w exercise price and short position in call w higher exercise price 0max0maxXSXSV Value at expiration21TTT0max0maxccXSXS Profit2121TTccXX Maximum profit 2112cc Maximum loss 21ccXS Breakeven price211To Bear spreads makes money if market goes down sell call w exercise price and buy call w higher exercise price or buy put w exercise price and sell put w lo
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