Bull Put Spread - Bullish Strategy

Bull Put Spread

Bull Put Spread is a strategy is opted when the investor is moderately bullish on the market and expects the underlying to move in upward direction in near future.

This Strategy is formed while buying of an Out of the money Put option and selling of an in the money put option of the same underlying and the same expiry.

This Strategy is also named as Bull Put Credit Spread as overall result of this strategy results in net credit of premium

Investor view: Moderately bullish on the Stock/ Index.

Risk: Limited.

Reward: Limited to the premium received.

Breakeven: Strike price of Short Put - premium received.

Illustration

Bull Put Spread Pay-off Diagram

Underlying	RELIANCE
Nifty Lot Size	250
ITM Put Option	Reliance May 800 Call Sold at Rs 30
OTM Put Option	Reliance May 780 Call Purchased at Rs 20
Total Premium Received	Rs 10 ( 30-20)
Breakeven Point	Strike Price of Short Put – Premium Received

Reward Potential

•  Maximum Profit = Net Premium Received

•  Profit Achieved, When Reliance Settlement Price >= Strike Price of Short Put

Risk Potential

•  Maximum Loss = Short Put Strike Price – Strike Price of Purchased Put – Net Premium Received

•  Max Loss, When Reliance Settlement Price  <= Strike Price of Short Put

Reliance Closing Price @	Profit/Loss
760	2500 (Loss)
780	2500 (Loss)
800	2500 (Profit)
820	2500 (Profit)
840	2500 (Profit)

Let us assume Reliance is at 780 ,investor believes that reliance is going to rally soon and forms a bull put spread by buying a May 780 put for Rs 20 and sells a MAY 800 put for Rs 30. thus, investor receives a credit of Rs 2500/- ([30-20] X 250 Lot Size )

Scenario 1 : Reliance at 840 on expiration date. Both options expire worthless and the investor is benefited with entire profit of Rs 2500 which is his maximum profit possible.

Scenario 2 : Reliance at 760 on Expiration Date. Both put options expire in-the-money with May 780 put having an intrinsic value of Rs 20/- and the May 800 put having an intrinsic value of Rs 40.so the total spread is Rs 20/- on expiry date. Since the investor had received a credit of Rs 10 while entering the spread, net loss comes to Rs 2500 ([40 - 20 ] - 10 X 250 Lot Size). This also remains his maximum possible loss.

Bull Call Spread - Bullish Strategy

Bull Call Spread:

Bull Call Spread is an option trading strategy used when option trader is moderately bullish in the market and expects the underlying to give decent returns in near term.

A Bull Call Spread is formed by buying an “In-the-Money Call Option” (lower strike) and selling an “Out-of- the-Money Call Option” (higher strike). Both the call options must have the same underlying security and expiration month.

The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) strategy.

The investor will benefit if the underlying Stock/Index rallies. However, the risk is limited on the downside if the underlying Stock/Index makes a correction.

Investor view: Moderately bullish on the Stock/ Index.

Risk: Limited.

Reward: Limited to the net premium paid.

Breakeven: Strike price of Purchased Call + net premium paid.

Illustration



Bull Call Spread payoff Diagram



Index	Nifty
Nifty Lot Size	50
ITM Call Option	Nifty May 5600 Call Purchased @ Rs 122/-
OTM Call Option	Nifty May 5700 Call Sold @ Rs 74/-
Total Premium Paid	Rs 48 (122-74)
Breakeven Point	Strike Price of Purchase Call + Net Premium Paid

Reward Potential

Ø  Maximum Profit = Short Call Strike Price – Strike Price of Purchased call – Net Premium Paid (When both option exercised)

Ø  Profit Achieved When Nifty Settlement Price >= Strike Price of Short Call

Risk Potential

Ø  Maximum Loss = Net Premium paid (When both options unexercised)

Ø  Max Loss, when Nifty Settlement Price <= Strike Price of Purchased call

Nifty Closing Price @	Profit/Loss
5400	2400   (Loss)
5500	2400   (Loss)
5600	2400   (Loss)
5700	2600   (Profit)
5800	12600 (Profit)

Let us assume Nifty is trading at 5816 in May 2013.An options trader setups a bull call spread by buying a Nifty May 5600 put for Rs 122 and sells  a Nifty 5700 May call for Rs 74. The net debit taken to enter the trade is Rs 2400 ((122-74) X 50 Lot Size)

Scenario 1 :  At Expiry if Nifty dips down to 5500 , both the call option expires out of the money resulting in overall loss of Premium paid of Rs 2400/-

Scenario 2: Let us assume nifty if Trading at 5800 levels , Nifty 5600 Call option would be having an Intrinsic Value of Rs 200 and nifty 5700 Call Option Sold will be having an intrinsic value of Rs 100/- , resulting in Rs 300/- as profit in overall spread but since the option trade has already paid of premium of Rs 48 to enter the trade , Overall Profit if Rs 300-48 = 12600/- (252 X 50 Lot Size)

Synthetic Short Call - Bearish Strategy

SYNTHETIC SHORT CALL

Synthetic Short Call is a combination of buying a put and selling a call, It is similar to short sale of the underlying stock or index. If the underlying stock or Index declines, the value of the put increases, and the option investor of the Short Synthetic call will profit, similar to someone shorting the stock. If the stock instead advances option trader is at risk on the short call. This Strategy is used when the investor is bearish on the market direction and expects market to fall down in the near term.

The risk and the reward are unlimited in synthetic short call

Investor View: Bearish on direction of the Stock / Index.

Risk: Unlimited.

Reward: Unlimited.

Breakeven: Strike Price of Put option + net premium received

Illustration

 

Synthetic Short Call Payoff Chart

Index	Nifty
Nifty Lot Size	50
Underlying Strike Price	5700
ATM Call Premium	Rs 120    (Call Premium Received)
ATM Put Premium	Rs 100    (Put Premium Paid)
Breakeven Point	5720 (Nifty Strike Price + Net Premium Received)

Reward Potential

Ø  Maximum Profit = Unlimited

Ø  Profit Achieved When Nifty Settlement Price < Strike Price of Put option + Net Premium Received

Ø  Profit = Strike Price of Long Put – Settlement Price of Nifty + Net Premium Received

Risk Potential               

Ø  Maximum Loss = Unlimited

Ø  Loss Occurs When Settlement Price of nifty > Strike Price of Call option i.e 5700 + Net Premium Received i.e. Rs 20

Ø  Loss = Nifty Settlement Price - Strike Price of Call Option - Net Premium Received + (Brokerage + Statutory Charges)

Nifty Closing Price @	Profit/Loss
5500	9000 (Profit)
5600	4000 (Profit)
5700	1000 (Profit)
5800	4000 (Loss)
5900	9000 (Loss)

Let us assume Nifty is trading at 5716 in May 2013.An options trader setups a synthetic short stock combo by buying a Nifty May 2013 5700 put for Rs 100 and sells  a Nifty 5700 May 2013 call for Rs 120. The net credit taken to enter the trade is Rs 20.

If Nifty at the day of expiry rallies to 5800 on expiration in May'13, the Nifty 5700 put purchased at Rs 100 will expire worthless but the Short Nifty 5700 Call sold at Rs 120 expires in the money and has an intrinsic value of Rs 100. Option Trades loss will be (Call Option Premium Received i.e 120 - Put Option Premium Paid i.e Rs 100 - Intrinsic Value Rs100) = Rs 80 X 50 Lot Size resulting in overall loss of Rs 4000

If Nifty at the day of expiry Slides to 5600 on expiration in May'13, the Nifty 5700 Call Sold at Rs 120 will expire worthless but the Short Nifty 5700 Put purchased at Rs 100 expires in the money and has an intrinsic value of Rs 100. Option Trades loss will be (Call Option Premium Received i.e 120 - Put Option Premium Paid i.e Rs 100 - Intrinsic Value Rs 100 ) = Rs 80 X 50 Lot Size resulting in overall loss of Rs 4000

Synthetic Long Put

Synthetic Long Put

Synthetic Long Put is a strategy to be used when the option trades is concerned Bearish to very bearish sentiment in market

This strategy involves buying a at-the-money Call Option, while Selling shares in the same underlying or Index, it is a strategy with a limited loss and unlimited profit.

An investor often employs a synthetic long put strategy to profit from the severe fall in the underlying’s price, however, as with any short sale, there is always a risk of being forced to return the stock.

Nifty Synthetic Long Put

Sell 1 lot Nifty Futures or Stock

Buy 1 ATM Index Call

Investor View: Bearish to very bearish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Breakeven:  Underlying Short Sale Price – Premium Paid

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Sold Price	5580
Nifty Call Strike Price	5600
Call Premium	Rs 70    (Call Premium Paid)
Breakeven point	Selling Price of Nifty - Premium Paid

Reward Potential

Ø  Profit = Unlimited

Ø  Profit Achieved When Settlement Price of Nifty < Selling Price of Nifty i.e. 5580 - Call Option Premium i.e.70

Ø  Maximum Profit = Selling price of Nifty - Settlement Price of Nifty – Premium Paid

Risk Potential

                                               

Ø  Max Loss = Call Option Premium Paid + Brokerage(s) + Statutory Charges

Ø  Loss occurs= When Settlement Price of Nifty = Strike Price of Call Option i.e 5600

Nifty Closing Price @	Profit/Loss
5400	5500 (Profit)
5500	500 (Profit)
5600	4500 (loss)
5700	4500 (Loss)
5800	4500 (Loss)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5600 Call Option for Rs 70/- and a Nifty Apr Futures Sold for Rs 5580. The net premium paid to enter the trade is Rs 3500 ((Call Option Premium) X 50 Lot size) and difference or Rs 20/- for nifty futures sold @ 5580 which is Rs 4500 maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 Call will expires out of the money and, Subtracting the premium paid of Rs 70, Nifty Short Futures will yield a profit of Rs 80 but at the same time Call Option premium would be in a loss of Rs 70 resulting in overall profit of Rs 10

On expiration in April, if Nifty is trading at 5700, Call option will remain in the money and earn Rs 100 and futures position would have a loss of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot).

 Investor will make a loss of

Nifty Short Futures : Rs 6000 Loss (Nifty Sold Price – Nifty Settlement Value ) X 50 Lot Size

Nifty 5500 Call       : Rs 1500 Profit (Exercised Value Rs 100 – Premium Paid Rs 70) X 50 Lot Size