SET50 Index Options SET50 Index Options FIN 4931 SEMINAR IN INVESTMENT

SET50 Index Options Handbook: Unlocking the power of profitable investment

Dr. Teerasak Naranong (PhD in Finance, UK) Lecturer, Finance Department Assumption University (ABAC)

Topics
1. 2. 3. 4. 5. 6. What is Option ? SET50 Index Option Factor affecting the SET50 Index Options Investors in Options In action (Investors Review) Trading Strategies in SET50 Options - Basic Strategies - Intermediate Strategies - Advanced Strategies Margin Calculation

7.

Derivative trades in TFEX

SET50 Futures

SET50 Options SET50 Call Options

28 April 2006
SET50 Put Options

29 October 2007

1. What is Options? Option An option grants an investor (Option holder) the right to buy/not
buy or sell/not sell the underlying asset at fixed price (exercise price or strike price) on or before a specific point in time (expiration date or exercise date) Option holder pay the price of the option called option price or option premium

Premium
Option holder (Long position)
Option writer (Short position)

Option (right)

Components of Options
Call Options or Put Options Underlying Asset, S Exercise Price or Strike Price, X Expiration date or Maturity Date, T) Contract Size Option Premium

2 Types of Options (right)

1. Call option An option (right) to buy an asset ( underlying asset ) at a fixed price ( exercise price ) on or before the maturity date(expiration date) No obligation for buyer or holder

2. Put option An option (right) to sell an asset ( underlying asset ) at a fixed price ( exercise price ) on or before the maturity date(expiration date) No obligation for buyer or holder

Right and Obligation

Call Options
Holder (Long) Writer (Short)
(OBLIGATION TO SELL)

Put Options
Holder (Long) Writer (Short)
(RIGHT TO SELL) (OBLIGATION TO BUY)

Right And Obligation

(RIGHT TO BUY)

When will we exercise ?

AT THE EXPIRATION DATE

Call Options
Put Options

ST> X

ST< X

EXERCISE

NO

NO

EXERCISE

 the right to buy (Call) Profit when the price increases

St X

St
X

the right to sell (Put) Profit when the price decreases

Time

Time

Expiration date of Options

1. European option Option holder can exercise only on the expiration date (SET50 INDEX OPTION) 2. American option Option holder can exercise any time up to and including the expiration date 3. Pseudo American option Option holder can exercise at the fixed interval date (eg at the end of week, month or quarter.

Begin

Time to maturity

Expiration Date

European Options (SET 50 Index Options)

American Options S&P 500

Pseudo-American Options

Intrinsic value of Option (Moneyness) 1) In The Money: ITM (Intrinsic Value > 0)
Call Option: ( Spot Price, S ) > (exercise price, X) ; Put Option: ( Spot Price, S ) < (exercise price, X)

2) At The Money: ATM (Intrinsic Value = 0)

Call Put Options: (S) =(X )

3) Out of the Money: OTM (Intrinsic Value = 0)

Call Option: (S) < (X) ; Put Option: (S) > (X)

Intrinsic value of option (Moneyness)

ITM Call or OTM Put

ATM Call and Put

OTM Call or ITM Put

St > X

St = X

St <X

ITM = In-the-money : Intrinsic Value > 0 ATM = At-the-money : Intrinsic Value = 0 OTM = Out-of-the-money : Intrinsic Value = 0

Call Option X 490 500 510 INTRINSIC VALUE ITM ATM OTM
ATM ITM OTM

Put Option X 490 500 510

= = =

INTRINSIC VALUE OTM ATM ITM

At-the-money In-the-money Out-of-the-money

St = 500 B

2. SET50 Index Options

SET50 Index

1) 2) 3) 4) 5)

SET50 Index is an index of 50 securities. Stocks in SET50 Index have following qualification: Market cap of the company must be high. High liquidity stocks with regular high trading volume Listed in the market at least 6 months The Stock Exchange will adjust names of stocks selected for calculation every 6 months (In June for last 6 mths and Dec. for first 6 mths) In calculating SET50 Index, weight of each stock will depend on the market cap of that stock

SET50 Index Options

Is a derivatives that has the underlying assets as SET50 Index pay as cash settlement

Multiplier To calculate into cash settlement cash settlement = SET50 Index X Multiplier 100,000 Baht = 500 x 200

SET50 Index Futures VS SET50 Index Options SET50 Index Futures Specifications

SET50 Index Options Specifications

SET50 Index Futures

SET50 Index Futures

SET50 Index Futures
SET50 + = FUTURES

SET50 INDEX FUTURES

SET50 Index

SET50 Index Futures Contract Specifications

Underlying index Multiplier Tick Size Price Limit Trading Hours
SET50 Index

1000 Baht.
0.10 index points 30% of the previous settlement price Pre-open: Morning session: Pre-open: Afternoon session: 9:15 9:45 9:45 12.30 14:00 14.30 14:30 16.55

SET50 Index Futures Contract Specifications

Contract Month Speculative Position limit Final Trading Day
March, June, September, December up to 4 quarters.
10000 net long or short in any contract month or all contract months combined. The business day immediately preceding the last business day of the contract month SET50 Index, rounded down to the nearest two decimal points of the average of value of the SET50 index taken at one minute interval during 4:00 p.m. 4.30 p.m. plus the closing index value, after deleting three highest and lowest value.

Final Settlement Day The Settlement Price shall be the numerical value of the

SET50 Index Options Specifications

Contract Specification
Underlying Asset Multiplier Exercise Style Contract Month Trading Hour
SET50 Index 200 Thai Baht per Index Point European Style March, June, September, December Pre-Open: 9.15 a.m.-9.45 a.m. Morning Session: 9.45 a.m.-12.30 p.m. Pre-Open: 14.00 p.m.-14.30 p.m. Afternoon Session:14.30 p.m.-16.55 p.m. 10 Points. At the commencement of trading in a contract month, the Exchange shall List five series which are in-the-money and five series which are outof-the-money plus one at-the-money series. New series are added to maintain 5 strike prices above and strike price below the at-themoney strike

Strike Price Interval

St (SET50 INDEX)= 500

March (H), June (M), September (U), December (Z)

Call Option
S50Z09C450 ITM S50Z09C460 ITM S50Z09C470 ITM S50Z09C480 ITM S50Z09C490 ITM

Put Option
S50Z09P450 OTM S50Z09P460 OTM S50Z09P470 OTM S50Z09P480 OTM S50Z09P490 OTM

S50Z09C500 ATM
S50Z09C510 OTM S50Z09C520 OTM S50Z09C530 OTM S50Z09C540 OTM S50Z09C550 OTM

S50Z09P500 ATM
S50Z09P510 ITM S50Z09P520 ITM S50Z09P530 ITM S50Z09P540 ITM S50Z09P550 ITM

Contract Specification
Tick Size Final Settlement Price
0.1 index points The Final Settlement price shall be the average value of the SET50 Index on the last trading day, taken at one-minute intervals from 4:01 p.m. to 4:30 p.m. and the closing index value, excluding the three lowest value, and rounded to the nearest two decimal points.

Last Trading Day Settlement Method

The business day immediately preceding the last business day of the contract month. Cash Settlement. An in-the-money options which has not been liquidated or exercised on the expiration date shall be exercised automatically.

SET50 Index Options (Symbol)

use symbol for buying and sell S50 = SET50 Index / September / 2009 : S50U09P500 / Put / 500

S50M09C450
Month March June symbol H M

September
December

U
Z

Type Call Put

symbol

C P

Option Screen (1)

Option Screen (2)

Multiplier
Example: Mr A. long S50H09C500: 1 contract pay premium 20 points Payment = 20 * 200 = 4,000 baht Assume investor long 3 contract Payment = 20 * 200*3 = 12,000 baht

Futures and Options

Futures Options

The obligation between 2 parties to purchase and sale of the underlying assets No payment made to the one who short Futures (except commission fee) Trade in Organized Securities Exchange

Option holder has the right to buy or sell, option writer is obligated to sell and buy

Option holder must pay premium or option price to option writer Trade in Organized Securities Exchange

Standardized term

Standardized term

Futures and Options

Futures Option

Daily settlement (marking to the market) Can earn a profit or loss on the position

Daily settlement (marking to the market) Can limit losses by choosing not to exercise the option

Both parties have to pay margin

Option writer (short position) must pay margin

3. Index Options Price

3. Index Options Price

1) Index Options Premium (Determinations) 2) Factors affecting price of SET50 Index Options 3) Theoretical Valuation of Index Options

1) Index Options Premium (Determinations)

Components of SET50 Index Options Premium (intrinsic value) (time value)

Option Value

Intrinsic value Time value

= Max(0,Spot Strike) , for Call = Max(0,Strike Spot) , for put = Options value Intrinsic value

1. Intrinsic and Time Value for Calls (S X) Stock price Exercise price Call Premium Expiration date Intrinsic Value: B55 B50 B6 (option price) 3 mths 55 50 = 5 Option price = IV + TV 6 = 5 + TV Time Value = 1

2. Intrinsic and Time Value for Calls (S X) Stock price Exercise price Call Premium Expiration date Intrinsic Value: B45 B50 B6 (option price) 3 mths 45 50 = 0 Option price = IV + TV 6 = 0 + TV Time Value = 6

3. Intrinsic and Time Value for Put (X S) Stock price Exercise price Call Premium Expiration date Intrinsic Value: B90 B99 B15 (option price) 3 mths 99 90 = 9 Option price = IV + TV 15 = 9 + TV Time Value = 6

4. Intrinsic and Time Value for Put (X S) Stock price Exercise price Call Premium Expiration date Intrinsic Value: B110 B99 B15 (option price) 3 mths 99 110 = 0 Option price = IV + TV 15 = 0 + TV Time Value = 15

2) Factors affecting price of SET50 Index Options (Theoretical Factors)

SET50 (St)
exercise price (X) time to maturity Index volatility

interest rate dividend

SET50 (St)
Call value
20 15

Put value
20 15

10
5

10
5 0 80 90 100 110 120 80 90 100 110 120

(St)

(St)

Call = S X S Call Put = X S S Put

Exercise price (X)

Call value
20 15

Put value
20 15

10
5

10
5 0 80 90 100 110 120 80 90 100 110 120

(X)

(X)

Call = S X X Call Put = X S X Put

Time to maturity
The longer time to maturity the higher option value
Call and Put Value

Time to maturity

Index volatility
(Long Call Options)
35 30 35 30 25 20 15 10 5

(Long Put Options)

25 20 15 10 5 0 470 -5 -10 -15

------Payoff ___Profit and loss

480

490

500

510

520

0 530 470 -5 -10 -15

480

490

500

510

520

530

SET50 index at the expiration date

SET50 index at the expiration date

Interest Rate
Call Value

Put Value

Call Value

i
Put Value

Call = S X e r PV of X Call Put = X e-rt S r PV of X Put

-rt

Dividend
S S X Call Value S X S Put Value Call Value

Dividend

Dividend

Put Value

The most important factors affecting option value

SET50 (St) Index volatility

SET50 Index Options

SET50 Index Options = SET50 Call Options = SET50 (X) Put Options = SET50 (X) Premium = Option TFEX Call Premium (c) = Call Option TFEX Put Premium (p) = Put Option TFEX

3) Theoretical Valuation of Index Options

Binomial Options Pricing Model Black-Scholes Options Pricing Model

C = (European call option) P = (European put option) So = (Spot price) ST = (Spot price at t) X = (Strike price) T = (Time to maturity) r = (Risk-free interest rate) q = (Dividend yield) = (Volatility)

Binomial Model

(One-period binomial model)

(One-step binomial tree) S ou u

So

S od d

Black-Scholes Model

Black-Scholes Model
c = SoN(d1)-Xe-rTN(d2) p = Xe-rTN(-d2)-SoN(-d1)

So 2 T d1 = In + r+ 2 X So T 2 T = d1-T d2 = In + r2 X T N(z) = Cumulative standard normal distribution

4.Types of Investors

4.Types of Investors: Options

1) Hedger 2) Speculator 3) Arbitrager

5. In action (Investors Review)

5. In action (Investors Review)

ST > X ST < X no exercise

Call Option Put Option

exercise no

Payoff Call Option = Max (O,ST - X) Payoff Put Option = Max (O,X - ST)

1) Call option
Jan. 1 X (INDEX) = 500 b

1) Mar.31 (St) = 520 b call option exercise ( In The Money ) Pay off (profit) = 520-500 = +20 (wihtout deduct option Premium )
2)

Mar.31 (St) = 480 b

Do not exercise option (at 500 b) Pay off (Loss) = option premium ( Out of The Money )

Compare Long Call Option & Long Futures

Case 1 = +20 Case 2 = -20 Call Option + +

Long Futures

500 (x)

500

2) Put option Jan. 1 X (INDEX) = 500 b 1) Mar.31 (St) = 520 b

put option " do not exercise ( Out of the Money ) loss = option premium 2)

Mar.31 (St) = 480 b

Gain = 500-480 = +20 (X ST)

Compare Long Put Option & Short Futures

Put Option + 500
(X)

Short Futures

Case 1 Loss = -20 Case 2 Gain = +20

+
-

500

Option Call option Put option

Moneyness ITM ST > X ST < X

OTM ST < X ST > X

ATM ST = X ST = X

6. Trading Strategies: Options

6. Trading Strategies: Options

1. Trading Strategies: Options (Basic) - Long call option - Short call option - Long put option - Short put option 2. Stock Option combination 3. Spreads 4. Put & Call options (Put-Call combinations)

Memory Tips
+ + = + - + = + - = - - =

BUY = + , SELL = -

Profit and Loss: Options & Futures

+ -

+ 500
A Long Call option

+
500 B Short Call option

Long Futures / Stock

+

+ 500 C Long Put option

500 D Short Put option

Short Futures / Stock

Trading Strategies: Options

Ex

Expect the price of St : increase Long Call option/Short Put option Expect the price of St : decrease Short Call option/Long Put option

PART 1

Basic Strategies

1. Trading Strategies: Options (Basic)

1.1 Long Call option : P/L = Max( O,ST - X ) - Premium
Notes ST: Spot price X : Exercise price

Table 1: Pay off and Profit/Loss : Long Call Option and Long Stock and Futures
Fig.1
30 20 10 -10 -20 -30 470 480 490 500 510 520 530

St

Pay off

P/L (Long Call)

P/L (Long stock/ Futures)

470

0 0 0 0 10 20 30

-10 -10 -10 -10 0 10 20

-30 -20 -10 0 10 20 30

ST

480 490

500
510 520

P/L Long Stock/ Futures P/L Long Call Option

530

(Application): Long Call Option Bullish market & high volatility

1.2 Short Call option :

P/L = Min ( O,X ST ) + Premium

Table 2: Pay off and Profit/Loss :Short Call Option and Short Stock or Futures
Fig. 2
30 20 10 -10 -20 -30 470 480 490 500 510 520 530
St Pay off P/L (Short Call) P/L (Short stock/ Futures)

470

ST

0 0 0 0 -10

10 10 10 10 0

30 20 10 0 -10

480 490 500 510 520

-20
-30

-10
- 20

-20
-30

P/L Short Stock/ Futures P/L Short Call Option

530

Application: Short Call Option

sideway to moderate bearish market & low volatility

1.3 Long Put option : P/L = Max(O,X ST) Premium

Table 3: Pay off and Profit/Loss :Long Put Option and Short Stock or Futures
Fig. 3
30 20 10
St Pay off P/L (Long Put) P/L (Short stock/ Futures)

470

30 20 10 0 0

20 10 0 -10 -10

30 20 10 0 -10

-10 -20 -30

470 480 490 500 510 520 530

ST

480 490 500 510

P/L Short Stock/ Futures P/L Long Put Option

520 530

0
0

-10
- 10

-20
-30

Application: Long Put Option

Bearish market & high volatility

1.4 Short Put option :

P/L = Min(O,ST X) + Premium

Table 4: Pay off and Profit/Loss : Short Put Option and Long Stock or Futures
Fig. 4
30 20 10 -10 -20 -30 470 480 490 500 510 520 530
St Pay off P/L (Short Put) P/L (Long stock/ Futures)

ST

470 480 490 500 510 520

-30 -20 -10 0 0

-20 -10 0 10 10

-30 -20 -10 0 10

0
0

10
10

20
30

P/L Long Stock/ Futures P/L Short Put Option

530

Application: Short Put Option sideway-up market & low volatility

PART 2

Intermediate Strategies

2) stock option combination

2.1 Covered Call - Long stock or Long Futures with Short call option - sideway to moderate bullish market

stock option combination

Ex Jan.1 St = 500 b call option ( premium ) = 10 b X = 500 b
St

Fig. 1 P/L
30 20 10 -10 -20 -30 470 480 490 500 510 520 530
P/L Short Call Option
P/L Long Stock P/L Covered call

P/L Short Call

P/L Long Stock

P/L Covered Call

470

10
10

-30
-20

-20
-10

St

480 490 500

10
10 0 -10 -20

-10
0 10 20 30

0
10 10 10 10

510
520 530

stock option combination 2.2 Protective Put - Long Stock and Long put option - Bullish market: to hedge risk when the price decreases

Table 2: Protective Put

Fig 2 P/L
30 20 10 70 80 -30 90 100 110 120 130

St

P/L Long put option

P/L Long Stock

P/L Protective put

St

470

20 10 0

-30 -20 -10

-10 -10 -10

480
490 500

-10
-10 -10 -10

0
10 20 30

-10
0 10 20

P/L Long Put Option P/L Long Stock P/L Protective Put

510

520
530

Note : Same as Long call option (put call parity )

PART 3

Advanced Strategies

3. Spreads
- buy and sell options, same underlying assets Price spread or Vertical spread: buy and sell options, same underlying assets, same expiration date, diff exercise price Calendar spread or horizontal spread: buy and sell options, same underlying assets, same exercise price, diff expiration date

Price Spread
1) Bullish Spreads - Debit Bullish Spreads (Call Option) - Credit Bullish Spreads (Put Option) 2) Bearish Spreads - Debit Bearish Spreads (Put Option) - Credit Bearish Spreads (Call Option) 3) Butterfly Spreads (Long and Short) - Call Option - Put Option

Calendar Spreads (Long and Short)

3.1 Bullish spreads : Debit &Credit Bullish spreads (1) Bullish Spreads ( Call option ) or Debit Bullish Spreads - Long call option at lower exercise price (X1) & short call option at higher exercise price (X2) ( Buy low sell high ) - same underlying assets and expiration date - moderate bullish market

Optimistic and Be conservative - limited upside gain ( = X2-X1 ) for limited downside loss

** Call = S X X
Jan.1

Call

**

Ex.1

500 call option = 10 b. 510 call option = 6 b.

Table 1 Bullish Spreads (Debit)

Fig. 1

P/L
30 20 10 0 -10 470 480 490 500 510 520 530

St

P/L Long 500 call (10 b.)

P/L Short 510 call (6 b.)

P/L Bullish Spreads

St

470 480 490 500 510

-10 -10 -10 -10 0

6 6 6 6 6

-4 -4 -4 -4 6

-20
-30

P/L Long 500call P/L Short 510 call P/L Bullish Spreads

520 530

10
20

-4
-14

6
6

Note : - Long call option at lower exercise price (higher option premium) & Short call option at higher exercise price (lower option premium) - Debit Bullish Spreads

Buy 10 b. Sell 6 b.

(2) Bullish Spreads (Put option)& Credit Bullish Spreads - Long put option at lower exercise price (X1),lower option premium & Short put option at higher exercise (X2),higher option premium

** Put = X S X
Ex.2 Jan.1 500 put option = 6 b. 510 put option = 12 b.

Put

**

Table 2 : Bullish Spreads (Credit)

Fig. 2

St

30 20 10 0 -10 470 480 490 500 510 520 530

P/L Long 500 put (6b.)

P/L Short 510 put (12b.)

P/L Bullish Spreads

St

470
480 490 500

24 14 4 -6 -6 -6 -6

-28 -18 -8 2 12 12 12

-4 -4 -4 -4 6 6 6

-20
-30

510

P/L Long 500 put P/L Short 510 put P/L Bullish Spreads

520 530

Note : - short 510 put = 12 b. & Long 500 put =6 b. - Credit Bullish Spreads

buy 6 b. sell 12 b.

3.2) Bearish Spreads - moderate bearish market - limited loss and limited gain (1) Bearish Spreads (Put options) or Debit Bearish Spreads - Long put options at higher exercise price (X2), higher option premium & Short put options at lower exercise price (X1),lower option premium Ex.3 Jan.1 500 put option = 6 b. 490 put option = 3 b.

Table 3:Bearish Spreads (Debit)

Fig. 3
30 20 10

St

P/L Long 500 put (6b.)

P/L Short 490 put (3b.)

P/L Bearish Spreads

x1

St

470 480 490 500 510 520

24 14 4 -6 -6 -6 -6

-17 -7 3 3 3 3 3

7 7 7 -3 -3 -3 -3

0 -10 470 480 490 500 510 520 530 x2 -20 -30

P/L Long 500 put P/L Short 490 put P/L Bearish Spreads

530

Note :

Debit Bearish Spreads

Buy 6b. Sell 3 b.

 (2) Bearish Spreads (Call option) or Credit Bearish Spreads - Long call option at higher exercise price (X2),lower option premium & Short call option at lower exercise price (X1),higher option premium
Ex.4 Jan 1 500 call option = 10 b. 490 call option = 16 b.

Table 4 Bearish Spreads (Credit)

Fig. 4
30 20 10 0

St St
x2
470 480 490 500

P/L Long 500 call (10b.)

P/L Short 490 call (16b.)

P/L Bearish Spreads

x1
470 480 490 500 510 520 530

-10 -10 -10 -10 0 10 20

16 16 16 6 -4 -14 -24

6 6 6 -4 -4 -4 -4

P/L Long 500 call P/L Short 490 call P/L Bearish Spreads

510 520

530

Note : - Short 490 call option = 16 b. & Long 500 call option = 10 b. - Credit Bearish Spreads

Buy 10b.Sell 16b.

3.3) Butterfly Spreads - buy and sell options, 3 diff exercise price, same underlying asset, and same expiration date (1) Call option : Long 1 unit of call option at low exercise price (X1) Short 2 units of call option at medium exercise price (X2) Long 1 unit of call option at high exercise price (X3) - ( sideway market ) - limit loss at all option price -Max. profit at medium exercise price (X2) Ex. 5 Jan 1 490 call option = 16 b. 500 call option = 10 b. 510 call option = 6 b.

Table 5 Butterfly Spreads

Fig 5
P/L
30 20 10 0 470 -10 -20 -30

St
x2 x1 x3
St
470 480 490 500

P/L Long 490 call (1 unit)

P/L Short 500 call (2units)

P/L Long 510 call (1 unit)

P/L Long Butterfly Spreads

-16 -16 -16

20 20 20

-6 -6 -6

-2 -2 -2

480 490 500 510 520 530

-6
4 14 24

20
0 -20 -40

-6
-6 4 14

8
-2 -2 -2

P/L Long 490 call

P/L Short 500 call (2 units) P/L Long 510 call P/L Long Butterfly Spreads

510
520

530

(2) Put options : Long 1 unit of put option at low exercise price (X1) Short 2 units of put option at medium exercise price (X2) Long 1 unit of put option at high exercise price (X3)
Ex. 6 Jan 1 490 put option = 3 b. 500 put option = 6 b. 510 put option = 12 b.

Table 6 Butterfly Spreads

Fig. 6
P/L
30 20 10

St

P/L Long 490 put (1 unit)

P/L Short 500 put (2units)

P/L Long 510 put (1 unit)

P/L Long Butterfly Spreads

x3 0 -10 470 480 490 500 510 520 530 x1 -20

-30

x2

St

470 480 490 500 510

17 7 -3 -3 -3 -3

-48 -28 -8 12 12 12

28 18 8 -2 -12 -12

-3 -3 -3 7 -3 -3

P/L Long 490 put (1 unit) P/L Short 500 put (2 units) P/L Long 510 put (1 unit) P/L Long Butterfly Spreads

520 530

-3

12

-12

-3

Note : - (1) and (2) Long Butterfly Spread use call options & put options (Sideway market)

- For Short Butterfly Spreads Up and down with low volatility

Ex. Short 1 unit of call option (or put option) at low exercise price (X1) Long 2 units of call option (or put option) at medium exercise price (X2) Short 1 unit of call option (or put option) at high exercise price (X3)

Ex. 7

Jan 1 490 call option = 16 b. 500 call option = 10 b. 510 call option = 6 b.

Table 7 Butterfly Spreads

Fig. 7
P/L
30 20 10 470 480 490 500 510

St

P/L P/L P/L P/L Short Long Short Short 490 500 510 Butterfly call call call Spreads (1 unit) (2 units) (1 unit) 16 16 16 6 -4 -14 -24 -20 -20 -20 -20 0 20 40 6 6 6 6 6 -4 -14 2 2 2 -8 2 2 2

0 -10 470 480 490 500 510 520 530 x2 -20 -30

x1

x3

St

P/L Short 490 call (1unit) P/L Long 500 call (2 units) P/L Short 510 call (1unit) P/L Short Butterfly Spreads

520

530

3.4 Calender Spreads - Horizontal Spreads : options with same exercise price, diff.expiration date - Sideway market & volatility expect to increase Long Calendar Spreads - Long call (or put) options at the longer maturity - Short call ( or put) options at the shorter maturity **Options with same underlying asset & Same exercise price** Ex.8 MAR 500 Call option = 10 b. JUN 500 Call option = 14.50 b.

Table 8: Long Calendar Spreads

Fig. 8
P/L
30 20 10 0 -10 470 480 490 500 510 520 530 470 480 490 500

St

P/L P/L Short Long MAR JUN 500 call 500 call

P/L Long Calendar Spreads

St

10 10 10 10 0 -10 -20

-14.12 -12.48 -9.33 -4.50 1.89 9.53 18.07

-4.12 -2.48 0.67 5.50 1.89 -0.47 -1.93

-20
-30

510

P/L Long JUN 500 call P/L Short MAR 500 call P/L Long Calendar Spreads

520 530

Notes :

- The investor can Short Calendar Spreads Short call (or put) options at the longer maturity & long call (or put) option at the shorter maturity - Sideway market & volatility expect to decrease

4. Put & Call options (Put-Call combinations) Buy (or sell) call option and put option at the same time
4 Types: Straddle , Strip , Strap , and Strangle 4.1) Straddle - buy (or sell) 1 unit of call and put options, same exercise price, same underlying asset, and same expiration date

1) Long straddle (Long call & put options) or Bottom Straddle - Market with high volatility in any direction (Up and down) - (limited loss/ unlimited return) Ex.1 Jan 1 500 call option = 10 b. 500 put option = 6 b.

Table 1: Long Straddle

Fig. 1
P/L
30 20 10 0 -10 470 480 490 500 510 520 530 470
St P/L Long Call P/L Long Put P/L Long Straddle

St

-10 -10 -10

24 14 4

14 4 -6

480
490 500 510

-20
-30

-10
0 10 20

-6
-6 -6 -6

-16
-6 4 14

P/L Long 500 call P/L Long 500 put P/L Long Straddle

520 530

2) Short Straddle (Short call & put option) or Top Straddle - Sideway market Ex.2 Jan 1 500 call option = 10 b. 500 put option = 6 b.

Fig. 2
P/L
30 20 10

Table 2: Short Straddle

St P/L Short Call P/L Short Put P/L Short Straddle

St

470 480 490 500 510

10 10 10 10 0 -10 -20

-24 -14 -4 6 6 6 6

-14 -4 6 16 6 -4 -14

0 -10 470 480 490 500 510 520 530

-20
-30

P/L Short 500 call P/L Short 500 put P/L Short Straddle

520 530

4.2) Strip and Strap Strip : buy (or sell) 1 call option & 2 put options at the same exercise Strap : buy (or sell) 2 call options & 1 put option at the same exercise 1) Long Strip (Long 1 call option and 2 put options) - The price moves any direction: up or down (higher chance to decrease) Ex.3 Jan 1 500 call option = 10 b . 500 put option = 6 b.

Table 3: Long Strip

Fig. 3
St

P/L
30 20 10 0 -10 470 480 490 500 510 520 530

P/L Long Call Option (1 unit)

P/L Long Put Option (2 units)

P/L Long Strip

St

470 480 490 500 510

-10 -10 -10 -10 0 10 20

48 28 8 -12 -12 -12 -12

38 16 -2 -22 -12 -2 8

-20
-30

P/L Long 500 call P/L Long 500 put P/L Long Strip

520 530

2) Long strap (Long 2 call options & Long 1 put option)

-The price moves any direction: up or down (higher chance to increase)

Ex.4

Jan 1
500 call options = 10 b. 500 put options = 6 b.

Table 4: Long Strap

Fig 4
P/L
30 20 10 0 -10 470 480 490 500 510 520 530 470 480 490 500 510
St P/L Long Call Option (2 unit) P/L Long Put Option (1 units) P/L Long Strap

St

-20 -20 -20 -20 0 20 40

24 14 4 -6 -6 -6 -6

4 -6 -16 -26 -6 14 34

-20
-30

P/L Long 500 call P/L Long 500 put P/L Long Strap

520 530

3) Short Strip (Short 1 call option & Short 2 put options) 4) Short Strap (Short 2 call options 4 Short 1 put option)
For sideway market

4.3) Strangle
- buy (or sell)) put option at the lower exercise price& buy (or sell) call option at the higher exercise price (same underlying asset and expiration date) 1) Long Strangle (Long put option at lower exercise price & Long call option at higher exercise price) - (limited risk/unlimited return) - Very high volatility (in any direction: up or down) Ex.5 490 put option = 3 b. 510 call option = 6 b.

Fig 5
P/L
30 20 10 0 -10 470 480 490 500 510 520 530

Table 5: Long Strangle

St
P/L Long 490 put option P/L Long 510 Call option P/L Long Strangle

St

470 480 490 500

17 7 -3 -3 -3 -3 -3

-6 -6 -6 -6 -6 4 14

11 1 -9 -9 -9 1 11

-20
-30

P.L Long 490 put P/L Long 510 call P/L Long Strangle

510 520 530

Note : - quite similar to Long Straddle - limited risk/unlimited return (the wider gap comparing to Straddle) (profit increase when the price changes more) - Low cost strategy

2) Short Strangle (Short put option at lower exercise price & Short call option at higher exercise price) Ex.6 490 put option = 3 b. 510 call option = 10 b.

Fig. 6
P/L
30 20 10 0 -10 470 480 490 500 510 520 530

Table 6: Short Strangle

St
P/L Short 490 put option P/L Short 510 Call option P/L Short Strangle

St

470 480 490 500 510

-17 -7 3 3 3 3 3

10 10 10 10 0 -10 -30

-7 3 13 13 3 -7 -17

-20
-30

P/L Short 510 call P/L Short 490 put P/L Short Strangle

520 530

Note :
- Sideway market - unlimited risk/limited return

7. Index Options (Margin Calculation)

Trading Process: (Long) Index Options Long SET50 Index Options Call & Put
Open account with Broker Pay Premium Make an purchase order

Close the position or Let It Expire

(Long Open)

The Buyer pay premium

Trading Process: Short Index Options

Short SET50 Index Options Call & Put

Open account with Broker Pay margin Make sell order Maintain Margin

(Initial Margin)

Mark to Market At Settlement price

Close the position before Or at the expiration date

The Seller maintain margin

Withdraw margin

MARGIN
Initial margin Broker mark to market margin Maintenance margin spread strategy

(Initial margin)

(Maintenance margin )

(Maintenance margin) (Initial margin)

TRADING CASES

CASE 1 Investor never Short SET50 Index Options

Marketing (broker) has to send an Short Open order to open the position Investor pay margin to broker Mark-to-the-Market at the end of day to realize profit/loss

TRADING CASES

CASE 2 Investor had opened Long SET50 Index Options and Willing to close the position by short option
Do investor need to pay margin and Mark-to-the-Market?

NO

(Margin) Outright Trading

(Margin) Outright Trading

Position Description
Long Call Options Long Put Options Short Call Options Short Put Options

Margin Requirement
Dont deposit MARGIN Pay Premium
1. Initial Margin : Premium + MAX (A,B)

A B A B

= (Set by TFEX) OTM Amount 10,000/7,020 = (Minimum Options Charge) 2,000/ 1,500

2. Maintenance Margin : Premium + MAX (A,B)

= (Set by TFEX) OTM Amount 7,000/ 5,200 = (Minimum Options Charge) 2,000/1,500

EX Long Call Options

Day 1: Investor: Action:

(S X P)

1. Day Trade
Transaction Day 1 Anoon long Call at 22 points short Call at 17 points 540

SET50 Index at 540 point Expect the price to increase Long SET50 Index Call Options, S50Z07C540 1 contract at premium of 22 points
premium 22 17 (17 22) x 200 = - 1,000 P/L (Baht)

SET50 (St) 530 (OTM)

2. Position Trade
Transaction Day 1 Day 2 long Call at 22 points short Call at 24 points SET50 540 545 (ITM) premium 22 24 (24 22) x 200 = + 400 P/L (Baht)

3. Held to Maturity
Transaction Day 1 Dec.31 Day 1 Dec.31 long Call at 22 points Option expire - exercise Transaction long Call at 22 points Option expire -no exercise SET50 540 575 (ITM) SET50 540 500 (OTM) 500 [ - 22] x 200 = -4,400 Limit loss 575 Final Sett.Price [(575 540)-22]x200 = + 2,600 P/L (Baht) Final Sett.Price P/L (Baht)

EX Short Call Options (X S + P)

Day 1: Investor Action: SET50 Index at 540 points : Price will decrease Short SET50 Index Call Options, S50Z07C540 1 contract at premium of 22 points
premium 22 17 (22 17) x 200 = + 1,000 P/L (Baht)

1. Day Trade
Transaction Day 1 Anoon Short call at 22 points long call at 17 points 540 530

SET50

2. Position Trade
Transaction Day 1 Day 2 Short call at 22 points long call at 24 points SET50 540 545 premium 22 24 (22 24) x 200 = - 400 P/L (Baht)

3. Held to Maturity
Transaction SET50 Final Sett.Price P/L (Baht) [(540 575)+22] x 200 = - 2,600 P/L (Baht)

Day 1
Dec.31

Short call at 22 points

Option expire - exercise Transaction

540
575 SET50 540 500

St Unlimit Loss
575 Final Sett.Price St Limit Gain 500 [ + 22] x 200 = + 4,400

Day 1 Dec.31

Short call at 22 points Option expire no exercise

How to calculate margin for Short Call

Suppose SET50 Call Options (Z series) A = 10,000 - OTM Value for IM = 7,000 - OTM Value for MM B = 2,000 for IM & MM
Date Day 1 End of Day 1 End of Day 2 SET50 540 530 545 Strike (x) 540 540 540 Premium 22 17 24 Moneyness S-X=0 S-X<0 S-X>0 Status ATM OTM ITM OTM Value 0 (540-530)*200=2,000 0

End of Day 3
End of Day 4

560
575

540
540

39
55

S-X>0
S-X>0

ITM
ITM

0
0

 Mr. A short S50Z07C540 at 22 points Mr. A get premium = 22*200 = 4,400 baht

Short call(1)

Margin requirement (Short Outright) = Max (A,B) + Premium

Date Day 1 Settlement Price 22 Premium Margin 4,400 A IM = 10,000 - OTM 10,000 - 0 = 10,000 B IM 2,000 IM = Max(A,B) + Premium Margin IM=10,000+4,400 = 14,400

End of Day 1
End of Day 2 End of Day 3 End of Day 4 Date Day 1 End of Day 1 End of Day 2

17
24 39 55 Settlement Price 22 17 24

3,400
4,800 7,800 11,000 Premium Margin 4,400 3,400 4,800

10,000 - 2,000 = 8,000

10,000 - 0 = 10,000 10,000 - 0 = 10,000 10,000 - 0 = 10,000 A MM = 7,000 - OTM 7,000 - 0 = 7,000 7,000 - 2,000 = 5,000 7,000 - 0 = 7,000

2,000
2,000 2,000 2,000 B MM 2,000 2,000 2,000

IM= 8,000+3,400 = 11,400

IM=10,000+4,800 = 14,800 IM=10,000+7,800 = 17,800 IM=10,000+8,800 = 21,000 MM = Max(A,B) + Premium Margin MM = 7,000+4,400 = 11,400 MM = 5,000+3,400 = 8,400 MM = 7,000+4,800 = 11,800

End of Day 3
End of Day 4

39
55

7,800
11,000

7,000 - 0 = 7,000
7,000 - 0 = 7,000

2,000
2,000

MM = 7,000+7,800 = 14,800
MM=7,000+11,000 = 18,000

Short call(2)
Day Transaction Prem. IM MM MARGIN

Short Call at 22 points: Deposit margin before trading

22

14,400

11,400

14,400

short order matched: get premium of 22 points (4,400 b) Excess margin = 4,400 b
Suppose: u withdraw Excess margin = 4,400 b

22

14,400

11,400

18,800

22

14,400

11,400

14,400

Initial margin (IM) = 14,400 Maintenance margin (MM) = 11,400

Short call(3)
Day Transaction Prem. IM MM MARGIN Compare with MM > MM OK > MM OK

End of Day 1
End of Day 2 End of Day 3

Mark-to-market

17

11,400

8,400

14,400

Mark-to-market

24

14,800

11,800

14,400

Mark-to-market margin < MM so, Broker will call margin

39

17,800

14,800

14,400

< MM ?

17,800-14,400 = 3,400 call margin

Short call(4)
Day
Day 4 End of Day 4 Day 5

Transaction
Pay margin before 3.55pm Mark-to-market Margin < MM

Prem.

IM

MM

MARGIN
17,800

Compare with MM

55

21,000

18,000

17,800

so, Broker will call margin

Investor long call to close position 56

< MM ?

Refund margin = 17,800 - 56*200 = 6,600 b : = + = 14,400+3,400-11,200 = 6,600 Loss = (22 - 56)*200 = 6,800 b. : = - =6,600 - (14,400 - 4,400 + 3,400) = 6,800

EX Long Put Options (X - S - P)

Day 1: Investor: Action: SET50 Index at 540 points Price will decrease Long SET50 Index Put Options, S50Z07P540 at premium of 17 points
premium 17 15 (15 17) x 200 = - 400 P/L (Baht)

1. Day Trade
Transaction Day 1 Long Put Options at 17 p. Short Put Options at 15 p. SET50 540 555 (OTM)

2. Position Trade
Transaction Day 1 Day 2 Long Put Options at 17 p. Short Put Options at 32 p SET50 540 520 (ITM) premium 17 32 (32 17) x 200 = + 3,000 P/L (Baht)

3. Held to Maturity
Transaction Day 1 Long Put Options at 17 p. SET50 540 Final Sett.Price (OTM) P/L (Baht)

Dec.31

Option expire no exercise

Transaction

600
SET50

600
Final Sett.Price

[ - 17] x 200 = - 3,400 Loss at Prem

P/L (Baht)

Day 1
Dec.31

Long Put Options at 17 p.

Option expire - exercise

540
500

(ITM)
500 [(540 500)-17] x 200 = + 4,600

EX Short Put Options

Day 1: Investor: Action:

(S - X + P)

1. Day Trade
Transaction Day 1 Short Put Options at 17 p. Long Put Options at 15 p. SET50 540 555

SET50 Index at 540 points Price will increase Short SET50 Index Put Options, S50Z07P540 at 17 points
premium 17 15 (17 15) x 200 = +400 P/L (Baht)

2. Position Trade
Transaction Day 1 Day 2 Short Put Options at 17 p. Long Put Options at 32 p. SET50 540 520 premium 17 32 (17 32) x 200 = - 3,000 P/L (Baht)

3. Held to Maturity
Transaction Day 1 Dec.31 Short Put Options at 17 p. Option expire -no exercise Transaction SET50 540 600 SET50 600 Final Sett.Price [+17] x 200=+ 3,400 Gain at Prem P/L (Baht) Final Sett.Price P/L (Baht)

Day 1
Dec.31

Short Put Options at 17 p.

Option expire - exercise

540
500 500 [(500 540) +17] x 200 = - 4,600

How to calculate margin for Short Put

Suppose
SET50 put options (Z series) A = 10,000 - OTM Value for IM = 7,000 - OTM Value for MM B = 2,000 for IM & MM
Date Day 1 End of Day 1 SET50 550 555 Strike (x) 540 540 Premium 17 15 Moneyness X-S<0 X-S<0 Status OTM OTM OTM Value (550-540)*200=2,000 (555-540)*200=3,000

End of Day 2
End of Day 3 End of Day 4

540
520 505

540
540 540

24
32 42

X-S=0
X-S>0 X-S>0

ATM
ITM ITM

0
0 0

Short put(1)
Mr.B short S50Z07P540 at 17 points Mr.B recieve premium = 17*200 = 3,400 b.

Margin requirement (Short Outright) = Max (A,B) + Premium

Date Day 1 End of Day 1 End of Day 2 End of Day 3 End of Day 4 Date Day 1 End of Day 1 End of Day 2 End of Day 3 End of Day 4 Settlement Price 17 15 24 32 42 Settlement Price 17 15 24 32 42 Premium Margin 3,400 3,000 4,800 6,400 8,400 Premium Margin 3,400 3,000 4,800 6,400 8,400 A IM = 10,000 - OTM 10,000-2,000 = 8,000 10,000-3,000 = 7,000 10,000-0 = 10,000 10,000-0 = 10,000 10,000-0 = 10,000 A MM = 10,000 - OTM 7,000-2,000 = 5,000 7,000-3,000 = 4,000 7,000 - 0 = 7,000 7,000 - 0 = 7,000 7,000 - 0 = 7,000 B IM 2,000 2,000 2,000 2,000 2,000 B MM 2,000 2,000 2,000 2,000 2,000 IM = Max(A,B) + Premium Margin IM= 8,000 +3,400 = 11,400 IM =7,000+3,000 =10,000 IM=10,000+4,800=14,800 IM=10,000 +6,400=16,400 IM=10,000+8,400 = 18,400 MM = Max(A,B) + Premium Margin MM = 5,000+3,400 = 8,400 MM = 4,000+3,000 = 7,000 MM = 7,000+4,800 =11,800 MM = 7,000+6,400 = 13,400 MM = 7,000+8,400 = 15,400

Short put(2)
Day Transaction Prem. IM MM MARGIN

1 1

Short Call at 17 points Investor pay margin before trade short order Get premium 17 points (3,400 b.) Excess margin = 3,400 b.
Suppose: u withdraw Excess margin = 3,400 b

17 17

11,400 11,400

8,400 8,400

11,400 14,800

17

11,400

8,400

11,400

Initial margin (IM) = 11,400 Maintenance margin (MM) = 8,400

Short put(3)
Day Transaction Prem. IM MM MARGIN Compare with MM > MM OK

End of 1
End of 2

Mark-to-market
Mark-to-market margin < MM so, Broker will call margin
Pay margin of 3,800 b. before 3.55pm

15
24

10,000
14,800

7,000
11,800

11,400
11,400

< MM ? 11,400+ 3,800= 15,200

Day 3

margin < MM put money at IM = 14,800 11,400 = 3,400 b. Suppose investor put 3,800 B. that is more than IM OK

Short put(4)
Day
End 3

Transaction
Mark-to-market

Prem.
32

IM
16,400

MM
13,400

MARGIN
15,200

Compare with MM
> MM OK

End 4

Mark-to-market margin < MM so, Broker will call margin

Investor long put to close position

42

18,400

15,400

15,200 < MM ?

46

Refund Margin = 15,200 - 46*200 = 6,000b. : = + = 11,400 +3,800 - 9,200 = 6,000 Loss = (17 - 46)*200 = 5,800b. : = - = 6,000 (11,400 3,400 + 3,800) = 5,800

References
- Cohen,G.,2005, Options made Easy, 2ndedition, Prentice Hall, New Jersey - Hull.,J.C., 2006, Options, Futures and other derivatives, 6thedition, Pearson, New Jersey - Hull.,J.C., 2005, Futures and Options market, 4thedition, Prentice Hall, New Jersey - Hull.,J.C., 2007, Fundamentals of Futures and Options markets, 5th edition, Pearson -TSI 2547, (DR1) - TSI 2548, (DR2) - TSI, . (19 ..2550) - TSI 2548, (CISA)

References
- TSI 2550, SET50 Index Options, ( ) - TSI 2550, SET50 Index Options, ,