1Q 2003

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?????????????
???? ????????? 1Q 2003
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Outline

•  ???
• ?????10?
• ???????
•  ???
• ?????????????
• ??????????????
• ??????????????????
•  ???
• ??????????
• ??, ???, ????, ??????????????

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???????

• ???????
• ??????
• ?????????
• What do you like? ?? ??
• What do you like? ?? ?? ???
• ?????????, ????
• ???6000?, ????

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???????? - ???????????- ???????
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Call option put option

• ??????,???.
• ?????, ??????,???????.

• ??(Call option)
• The right to buy
• ???????,?????????
• ???????,?????????
• ??(Put option)
• The right to sell
• ???????,?????????
• ???????,?????????

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Long call ???????
Long Index Call Option
Payoff max(S-K,0)
Futures
Call
K
Index level(S)
premium
max. profit unlimited max. loss
premium initial investment debit breakeven
point Kpremium
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Short call ???????
Short Index Call Option
Payoff - max(S-K,0)
Index level
max. profit premium max. loss
unlimited initial investment credit breakeven
point Kpremium
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Long put ???????
Long Index Put Option
Payoff max(K-S,0)
Index level
max. profit K-premium max. loss
premium initial investment debit breakeven
point K-premium
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Short put ???????
Short Index Put Option
Payoff - max(K-S,0)
Index level
max. profit premium max. loss
K-premium initial investment credit breakeven
point K-premium
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Bull Spread ????
Long a call at K1 Short a call at K2, K1 lt K2
Payoff
c2
Index level
K1
K2
c1
max. profit K2-K1-(c1-c2) max. loss
c1-c2 initial investment net debit breakeven
point K1(c1-c2)
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Bear Spread ????
Short a call at K1 Long a call at K2, K1 lt K2
max. profit c1-c2 max. loss
K2-K1-(c1-c2) initial investment net
credit breakeven point K1(c1-c2)
Payoff
c1
K2
Index level
K1
c2
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Long Straddle ????
K
Index level
p
c
max. profit unlimited max. loss cp initial
investment debit breakeven point K?(cp)
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Short Straddle ????
Short a call Short a put at the same strike
max. profit cp max. loss unlimited initial
investment credit breakeven point K?(cp)
Payoff
p
c
Index level
K
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Bottom Strangle
Refresh
Long a call Long a put at different strikes
Payoff
K1
K2
Index level
p
c
max. profit unlimited max. loss cp initial
investment debit breakeven point K1-(cp)
K2(cp)
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Top Strangle
Short a call Short a put at different strikes
max. profit cp max. loss unlimited initial
investment credit breakeven point K1-(cp)
K2(cp)
Payoff
p
Index level
c
K1
K2
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Butterfly Spread ????
Bull spread Bear spread or Short straddle
Long strangle
Payoff
Index level
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???? Why use option 1
??? Directional play

• ?????
• Extremely bullish
• ???Long call option
• Bullish with some downside concern
• ???? Bull spread
• Bullish with downside concern, also limited
  upside expectation
• Long lower K call, short higher K call.
• Long lower K put, short higher K put.
• Go the other way for bearish view

????Bullish
??????? Less Bullish
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???? Why use option 2
???? Volatility play

• ???? ????
• Long straddle/ strangle
• Go the other way if price too high
• ???? ????
• Short straddle/ strangle

???High vol.
??? Low vol
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???? more

• ??
• ??
• ??
• ??
• ??
• ??
• ???
• ???

• Long call
• Long Put
• Short call
• Short Put
• Bull spread long call short call
• Bear spread long put short put
• Bear spread short call long call
• Bull spread short put long put

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???? more

• ?????
• ?????
• ?????
• ???????

• Long call Long Put
• Long straddle
• Short call short Put
• Short straddle
• Bull spread Bear spread
• Long Butterfly
• Bull spread Bear spread
• Short Butterfly

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??????

• ????call, ????put
• ????call, ????put
• ????Bull spread, ????Bear spread
• ????straddle, ????straddle
• ???????, ???????

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??????(????)

• ??????, ??????
• ??????, ??????
• ????????, ????????
• ??????, ??????
• ???????, ???????

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??????(???1)

• ?????call, ?????put
• ?????call, ?????put
• ???, ??????,
• ???,??????,

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??????(???2)

• ???????, ??call???put,
• ???????, ??call???put,
• ???????,???????,
• ???????,???????.

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??????? A point to ponder

• ???????
• ???????
• ??????????????????
• ???????????????????????????
• ??????,?????????
• ??????????????

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??????? A point to ponder

• ?????????50? 48? 40?
• ????, ??????, ???????,
• ??????, ??????,
• ??????, ???????????.
• ?????.
• ?????.
• ????????(Sophisticate, not complicate).

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??????????
????

• Building blocks in option strategies

2000/11/25
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The building blocks of FE
Modern finance is particle finance. We decompose,
then recompose.
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Long position short position
PL
?????
Stock price
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Long call, put short call, put
PL
?????
LONG PUT
LONG CALL
SHORT PUT
SHORT CALL
Stock price
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Different strikes different amount
Different strike
Different ratio
?????
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Different strikes different amount
?????????
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???????

• ??????(????)
• ????(market View)
• ?? direction, ?? price, ?? time, ?? probability.
• ???? Primary view, ???? Secondary view.
• ??????
• Build your initiate positions.
• Set the positions to meet your major market view.
• ??????
• Revise your positions.
• Add or drop positions to fit your concerns.

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??????(????) (X,Y)
Type\price Number Up 1 Down 1 K
Long 1 1 -1 100
Short 1 -1 1 100
Long call 1 1 0 100
Short call 1 -1 0 100
Long put 1 0 1 100
Short put 1 0 -1 100
Sum 0 0
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???????

• Short future long call
• (-1, 1) (1, 0) (0,1)
• Long future long put
• (1, -1) (0,1) (1, 0)
• Short call long put
• ( -1, 0) (0, 1) (-1, 1)
• Long call long put
• (1,0) (0,1) (1,1)

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???????

• Short 3 stock at 100 (-1,1)3 (-3,3)
• Long 2 call at 100 (1, 0)2 (2, 0)
• Short 3 put at 100 ( 0, -1)3 ( 0, -3)
• The over all position (-1,
  0)
• What will it look like?

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????????

• ??????
• ???stirke,??????
• ????
• ??? Spread
• Call for bull spread
• Put for bear spread
• ??? Strangle
• ??Strike????????

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1 future _at_ 5080 4 4800 Put _at_ 45 -10 5400 Call
_at_30
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-5 5000 call _at_181 -1 future _at_ 5080 -10 4800 put _at_
45
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Figure 9 Aggressive Delta trade
10 call_at_6000 20 call_at_6100 40 call_at_6200 3 day
to expiration Implied spot 6099
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Analysis on payoff chart

• Define market view
• Build your position
• Draw the payoff chart
• Look at the chart
• What is the best, it is possible.
• What is the worst, it is possible.
• ??????????
• ???????????

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?? To sum up option strategies

• ????????.
• ??????,????????.
• To make money on one side, and to protect risk on
  the other side.
• ????,????,???????????????.
• Create the whole new trading dimension.
• The more you practice, the more you can master
  these instruments.

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Spread Bull or Bear
Tips for exam

• Use buy and sell two calls or two puts.
• Bull spread or bear spread
• The direction of the higher premium leg
• Call or Put spread
• Bull - Buy low K sell high K,
• Bear - Buy high K sell low K.

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Exercise bull or bear
Tips for exam

• Buy lower strike call, sell higher strike call
• ??????????5,100??,?400?,
• ??????????5,300??,?290?
• Bull or Bear
• Buy higher strike put, sell lower strike put
• ??????????5,300??,?260?
• ??????????5,100??,?170?
• Bull or Bear
• Buy higher strike call, sell lower strike call
• ??????????5,300??,?290?
• ??????????5,100??,?400?
• Bull or Bear

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Spread Max P/L
Tips for exam

• Max P/L
• Case 1
• (P. Received- P. paid) gt0, Max profit.
• Max loss diff in K max profit
• Case 2
• (P. Received- P. paid) lt0, Max loss.
• Max profit diff in K max loss

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Exercise max P/L
Tips for exam

• Case 1 Bear spread
• ??????????5,100??,?400?,
• ??????????5,300??,?290?
• (P. Received- P. paid) 400-290110gt0, Max
  profit.
• Max loss diff in K max profit200-11090
• Case 2 Bull spread
• ??????????5,100??,?400?,
• ??????????5,300??,?290?
• (P. Received- P. paid) 290-400-110lt0,Max loss.
• Max profit diff in K max profit200-11090,

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Spread - Breakeven
Tips for exam

• Break-even point
• Case 1 call
• Klow Diff in P
• Case 2 put
• Khigh - Diff in P

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Exercise breakeven
Tips for exam

• Case 1 Call
• ??????????5,100??,?400?,
• ??????????5,300??,?290?
• Klow Diff in P51001105210
• Case 2 Put
• ??????????5,100??,?170?
• ??????????5,300??,?260?
• Khigh - Diff in P5300-905210

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Straddle and strangle
Tips for exam

• Max profit
• Long unlimited
• Short Premium received
• Max loss
• Long Premium paid
• Shortunlimited
• Breakeven
• Straddle K total premium, K - total
  premium
• Strangle K(call) total premium, Low
  K(put) - total premium

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Exercise Long straddle
Tips for exam

• ????????5,200??,?340?
• ????????5,200??,?210?
• Max profit Long unlimited
• Max loss340210550
• Breakeven
• K total premium 5200550 5,750
• K - total premium5200-550 4,650

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Exercise short strangle
Tips for exam

• ????????5,100??,?400?
• ????????5,300??,?260?
• Max profit 400260660
• Max loss unlimited
• Breakeven
• K(c) total premium 5100660 5,760
• K(p) - total premium5300-660 4,640

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??????????????????
Applying option in asset management
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??????? The spectrum of trading
strategies
??
??
PISSA
Timing
Ratio
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???? Synthetic position

• Long futureslong call short put
• (1,-1) (1,0) (0,-1)
• Short futuresshort call long put
• (-1,1) (-1,0) (0,1)
• Long call futures long put
• (1,0)(1,-1)(0,1)

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???? Synthetic position

• Long put short futures long call
• (0,1)(-1,1)(1,0)
• Short call short futures short put
• (-1,0)(-1,1)(0,-1)
• Short put long futures short call
• (0,-1)(1,-1)(0,1)

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Synthetic futures -long

• Long call short put at the same strike.
• Long 5800 call, pay 325.
• Short 5800 put, receive 85.
• Net cash outflow, -240.
• The price of synthetic futures 6040.
• March 21 cash close 6046, future 6047.

???????
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Synthetic futures -short

• Long put short call at the same strike.
• Long 6000 put, pay 143.
• Short 6000 call, receive 206.
• Net cash outflow, 63.
• The price of synthetic futures 6063.
• March 21 cash close 6046, future 6047.

???????
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??????? Hedge Exposure tuning

• What I want is what I get.
• Risk(exposure)
  Systematic exposure Specific
  exposure
• Fully or partially hedge market risk
• Short index futures

???? ???? ????
??????
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????? To hedge, or not to hedge

• When? How much?

1. Full hedge ???????? 2. Technical hedge
??????? 3. Protective put hedge ????????
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?????? ?? protective put

• Long equity portfolio
• Long protective put
• Long synthetic call

????????? ?? index put option ??????, ??????
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?????? payoff using protective
put

• profit
• Loss

Synthetic position
Assuming no tracking errors
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????????

• ????????
• ??????????
• Long 2002, long 2002 put.
• Long 2002 call, long 2002 put.
• Long 2002 call, long 2303 put.
• Long 2002 call, short 2303 put.
• Long 2002 call, short?? 2302 call.
• ?????,??????

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?????? Issues of using protective put

• ???(Put option)????
• Higher strike, better protection, but higher
  premium.
• ???(Put option)?????
• 3m 5.59, 6m 7.66, 9m 9.15, 12m 10.33
• ?????????
• Outperform or under-perform index
• Put option?????
• Early termination can not ensure the protection
  effect.
• Pay insurance premium to get down side protection.

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Ex. ????? PGF

• ???? NIKKIE 225 index
• ????
• ??2 years
• ???100
• ???125
• ????
• 100 Principal 125 return of N225 index.

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The basic structure
100
7
FV
95 FV
6.55
Buy 0.5 option to ensure fixed participation rate
11.22
93.45
Buy 0.85 options and get higher participation rate
PV
88.78 PV
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Investors payoff with call
Option value
Option value
Principal
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Investors payoff with Put
Option value
Principal
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Guaranteed rate vs. Participation rate

• ???? vs. ????
• Higher Principal Guaranteed rate, lower
  Participation rate.
• ??? G
• ????????????
• ??? P
• ?????(?)???????

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Conservative vs. Aggressive
Aggressive
Conservative
Principal
Guarantee rate
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?????? Types of PGI

• ?????Structured Deposit(SD)
• Interest payment is linked exotic structure
• ?????(?)? Equity linked note(ELN)
• Long option / short option
• ????? Principal Guaranteed Note (PGN)
• Linked to an underlined asset
• ????? Principal Guaranteed Fund (PGF)
• Linked to an underlined asset

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QFII ???

• ???????
• ?? call ??? Long call, sell stock.
• ?? put ??? Long put, hold stock.
• ??call ?(?)??Short call, buy/long stock.
• ??put ?(?)?? Short put, sell/short stock.
• ????? TX, TXO.
• ?????? MSCI, TX.
• ???? Impact trade.
• ????? Structure new products

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?? ???

• ???????
• ?? call ??? Long call, sell stock.
• ?? put ??? Long put, hold stock.
• ??call ?(?)??Short call, buy/long stock.
• ??put ?(?)?? Short put, sell/short stock.
• ????? TX, TXO.
• ???? Impact trade.
• ????? Structure new products

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??????

• ????,
• ??????? strategy based
• ????? implied volatility vs. forecast volatility
• ????? implied volatility vs. forecast volatility
• ???????? Dynamic hedge Delta
• ???????? Greeks portfolio
• ???????? Greeks based trading strategies

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Market makers P/L
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Market makers Delta position
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Market makers Gamma position
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??????

• ????, ????.
• ????????.
• ???????.
• ?????????.
• ????????, ???
• ??short call, long put,
• ??long call, short put.
• Call lower than put.

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?????

• ????????, ??????.
• ???????????
• ?????????

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??????

• ?? ???, ? call. Higher leverage
• ?? ???, ? put. Offset down side risk
• ??? ? call. Premium income
• ??? ? put, Premium income

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??????????
????
CBO
????
?????
Equity swap
?????
Equity linked note
????
Principal Guaranteed note/ fund
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??????????
?? vs ???

• ?????????.
• ???????????????.
• ???????????, ????????.
• ?????, ?????.
• ?? market maker short sell limit

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??????????
???? vs ???

• ?????????????
• ????????
• ????????
• ????????20??
• Bottle neck the system of TAIFEX
• ????????

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?????????? ????,
???? vs ???

• ???? Structure product
• ????
• ?? ????? ?????
• ?????????? ( FRA, IRS, IRO)
• ?????????? (inter-bank market)
• Structure deposit
• Equity linked note
• Equity swap
• Principal guaranteed note/ fund

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??????
Welcome to the world of derivatives
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??????
??? Sean Tseng 02 2516-3055 ,
0968-022-180 Sean_at_jsun.com