2023-10-24 17:15:47 -07:00

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\section{Compound Strategies}
\definition{}
A \textit{covered call} is a trading strategy where one simultaneously
buys a share of stock and sells a call option. When the contract
expires, the stock is sold to the call buyer (if they choose
to exercise their contract) or to the market (if they don't).
\problem{}
Say we set up a covered call by buying a share of $\mathbb{X}$ for $x_0$
and selling a call option for $\mathbb{X}$ at $k$ for $p$. \par
When our contract expires, $\mathbb{X}$
is worth $x_1$.
\vspace{2mm}
What is the gross profit of a covered call?\par
What is its net profit?\par
\hint{Gross profit does not take setup cost into account. Net profit does.}
\vfill
\definition{}
We say that trading strategy $A$ \textit{simulates} trading strategy
$B$ if their net profits are equal.
\problem{}
Find a trading strategy that buys stock and call options
to simulate a single put option with strike price $k$.
\vfill
\problem{}
A \textit{straddle} is a trading strategy where one buys a call and a put
with the same strike price and expiration. Plot the profit curve. \par
What do you bet on when you buy a straddle?
\begin{center}
\begin{tikzpicture}
\draw (0,0) -- (10, 0);
\draw (0,-3) -- (0, 3);
\node[
anchor = south,
rotate = 90
] at (0,0) {\color{gray}Profit};
\node[
anchor = south west,
] at (0, 0) {\color{gray}Price of $\mathbb{X}$ at $t$};
\node[anchor = north] at (5, 0) {$k$};
\filldraw (5, 0) circle (0.5mm);
\end{tikzpicture}
\end{center}
\vfill
\pagebreak
\definition{}
A \textit{butterfly spread} is a trading strategy where one buys two
calls with strike prices $k_1$ and $k_2$ and sells two calls with strike
prices $\frac{k_1+k_2}{2}$.
\problem{}
When should you set up a butterfly spread? \par
Find the payoff function.
\vfill
\vfill
\pagebreak