REPLICATING TRADING STRATEGIES FINAL PROJECT
FIN 463/565
TRADING STRATEGIES USING OPTIONS
OVERVIEW & PURPOSE OF THIS PROJECT
Trading with options is so much more profitable than just trading stocks, and it's a lot easier
than most people think. This project lets you work on option trading using real financial data.
Idea underlying this project is for you to replicate the spreads and combinations learned in class
and speculate. At the end, we would want to create as much profit as possible (but it’s okay if
we were not able to).
LEARNING OBJECTIVE:
critical thinking (data analysis, synthesize data, suggest a solution)
HOW TO GET STARTED
‐ Find the right stock. You want to find a company that you are interested in and have a good
insight on.
Try to stick with industries you understand: if you enjoy shopping, look at retailers. If you
love gaming, look at game software company, etc. This will make your research a lot easier
and lead to a better stock pitch.
Qualitatively, try to choose the best/worst company in that industry
Quantitatively, use a
itrary parameters to filter out stocks. For example, you can select
certain criteria (i.e. market cap, P/E, ROE, industry, etc.) and it spits out list of companies
that meet the criteria. Free online stock screeners include Yahoo Finance, Google Finance,
and Capital IQ. (e.g. Yahoo Finance screener: https:
finance.yahoo.com/screene
new/ )
SOURCES OF INFORMATION
‐ General financial sites
Yahoo Finance, Google Finance, MSN Money, Bloomberg terminals, WSJ.com
WHAT TO DO :
Replicate at least THREE of the following spreads/combinations: bull spread, bear
spread, butterfly spread, straddle, strip and strap by using call and/or put options
WHAT SHOULD BE INCLUDED IN YOUR PAPER:
‐ Screen capture the information as in the example below
‐ In a table, write down information of the options you have used (similar to the one
given in the example below)
‐ Create a profit/payoff table and its graph for your spreads and combinations,
espectively
‐ When expiration date reaches, find out whether your spreads and combinations
created a profit or loss. How much was your total profit/loss?
‐ Suggest how you would have been made a (larger) profit with the respective
spread/combinations : e.g. used different strike prices? Different option types?
Different positions?
FIN 463/565
EXAMPLE
I am using Sta
ucks as my stock and am creating a butterfly spread
Following screenshot is from Yahoo Finance website
FIN 463/565
Here is the table of information option that I’m using to create my butterfly spread
I looked up the options data on 10/9/2019 to create a butterfly spread. You should create a payoff/profit table & graph with
possible stock prices at expiration before it reaches expiration, which in this example would be 10/11.
option type put
position Long
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $1.54
strike price $87
expiration date 2019/10/11
how many contracts used 1 *note 1 option contract deals with = 100 shares
option type put
position Long
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $0.12
strike price $83
expiration date 2019/10/11
how many contracts used 1 *note 1 option contract deals with = 100 shares
option type put
position short
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $0.43
strike price $85
expiration date 2019/10/11
how many contracts used 2 *note 1 option contract deals with = 100 shares
FIN 463/565
Then, I create my payoff/profit table (per share basis)
Same as above except that now it’s reflecting an actual payoff/profit since 1 option contract involves 100 shares
And created my payoff/profit graph according to the table above (note that this is based on per share basis)
ST<=83 83<=ST<=85 85<=ST<=87 ST>87
long 1 put @ K=83 83-ST 0 0 0
short 2 put @ K=85 -2*(85-ST) -2*(85-ST) 0 0
long 1 put @ K=87 87-ST 87-ST 87-ST 0
payoff per share 0 -83+ST 87-ST 0
profit per share XXXXXXXXXXST 86.2-ST -0.8 >i.e. adjusted payoff by option price per share
ST<=83 83<=ST<=85 85<=ST<=87 ST>87
long 1 put @ K=83 100*(83‐ST) 0 0 0
short 2 put @ K=85 ‐200*(85‐ST) ‐200*(85‐ST) 0 0
long 1 put @ K=87 100*(87‐ST) 100*(87‐ST) 100*(87‐ST) 0
total payoff 0 ‐83+ST 87‐ST 0
total profit ‐80 (‐82.2+ST)* XXXXXXXXXX‐ST)*100 ‐80
‐1
‐0.5
0
0.5
1
1.5
2
2.5
XXXXXXXXXX XXXXXXXXXX
Payoff/profit graph
payoff profit
FIN 463/565
On 10/11/2019, I found out that SBUX actual closing price was $86.36.
Hence, my payoff was $0.64 per share and profit was ‐0.16 per share
Therefore, I made a total loss of (reflecting total shares involved) was $16 with this butterfly
spread.
If I had used a smaller range of strike prices, I might have been able to produce profit instead of
loss. Or if I had written (i.e. short) butterfly spread with the same option type, same strike price,
and same expiration date, I would have created a $16 total profit instead of $16 loss.
*I have shown only butterfly spread here as an example, but for your project you would need to
eplicate at least THREE of spreads and/or combinations. That is, choose THREE from bull
spread, bear spread, butterfly spread, straddle, strip and strap and replicate them using real
data.
REPLICATING TRADING STRATEGIES FINAL PROJECT
FIN 463/565
TRADING STRATEGIES USING OPTIONS
OVERVIEW & PURPOSE OF THIS PROJECT
Trading with options is so much more profitable than just trading stocks, and it's a lot easier
than most people think. This project lets you work on option trading using real financial data.
Idea underlying this project is for you to replicate the spreads and combinations learned in class
and speculate. At the end, we would want to create as much profit as possible (but it’s okay if
we were not able to).
LEARNING OBJECTIVE:
critical thinking (data analysis, synthesize data, suggest a solution)
HOW TO GET STARTED
‐ Find the right stock. You want to find a company that you are interested in and have a good
insight on.
Try to stick with industries you understand: if you enjoy shopping, look at retailers. If you
love gaming, look at game software company, etc. This will make your research a lot easier
and lead to a better stock pitch.
Qualitatively, try to choose the best/worst company in that industry
Quantitatively, use a
itrary parameters to filter out stocks. For example, you can select
certain criteria (i.e. market cap, P/E, ROE, industry, etc.) and it spits out list of companies
that meet the criteria. Free online stock screeners include Yahoo Finance, Google Finance,
and Capital IQ. (e.g. Yahoo Finance screener: https:
finance.yahoo.com/screene
new/ )
SOURCES OF INFORMATION
‐ General financial sites
Yahoo Finance, Google Finance, MSN Money, Bloomberg terminals, WSJ.com
WHAT TO DO :
Replicate at least THREE of the following spreads/combinations: bull spread, bear
spread, butterfly spread, straddle, strip and strap by using call and/or put options
WHAT SHOULD BE INCLUDED IN YOUR PAPER:
‐ Screen capture the information as in the example below
‐ In a table, write down information of the options you have used (similar to the one
given in the example below)
‐ Create a profit/payoff table and its graph for your spreads and combinations,
espectively
‐ When expiration date reaches, find out whether your spreads and combinations
created a profit or loss. How much was your total profit/loss?
‐ Suggest how you would have been made a (larger) profit with the respective
spread/combinations : e.g. used different strike prices? Different option types?
Different positions?
FIN 463/565
EXAMPLE
I am using Sta
ucks as my stock and am creating a butterfly spread
Following screenshot is from Yahoo Finance website
FIN 463/565
Here is the table of information option that I’m using to create my butterfly spread
I looked up the options data on 10/9/2019 to create a butterfly spread. You should create a payoff/profit table & graph with
possible stock prices at expiration before it reaches expiration, which in this example would be 10/11.
option type put
position Long
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $1.54
strike price $87
expiration date 2019/10/11
how many contracts used 1 *note 1 option contract deals with = 100 shares
option type put
position Long
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $0.12
strike price $83
expiration date 2019/10/11
how many contracts used 1 *note 1 option contract deals with = 100 shares
option type put
position short
traded date 2019/10/9
date when you are creating this table to artificially trade
option price $0.43
strike price $85
expiration date 2019/10/11
how many contracts used 2 *note 1 option contract deals with = 100 shares
FIN 463/565
Then, I create my payoff/profit table (per share basis)
Same as above except that now it’s reflecting an actual payoff/profit since 1 option contract involves 100 shares
And created my payoff/profit graph according to the table above (note that this is based on per share basis)
ST<=83 83<=ST<=85 85<=ST<=87 ST>87
long 1 put @ K=83 83-ST 0 0 0
short 2 put @ K=85 -2*(85-ST) -2*(85-ST) 0 0
long 1 put @ K=87 87-ST 87-ST 87-ST 0
payoff per share 0 -83+ST 87-ST 0
profit per share XXXXXXXXXXST 86.2-ST -0.8 >i.e. adjusted payoff by option price per share
ST<=83 83<=ST<=85 85<=ST<=87 ST>87
long 1 put @ K=83 100*(83‐ST) 0 0 0
short 2 put @ K=85 ‐200*(85‐ST) ‐200*(85‐ST) 0 0
long 1 put @ K=87 100*(87‐ST) 100*(87‐ST) 100*(87‐ST) 0
total payoff 0 ‐83+ST 87‐ST 0
total profit ‐80 (‐82.2+ST)* XXXXXXXXXX‐ST)*100 ‐80
‐1
‐0.5
0
0.5
1
1.5
2
2.5
XXXXXXXXXX XXXXXXXXXX
Payoff/profit graph
payoff profit
FIN 463/565
On 10/11/2019, I found out that SBUX actual closing price was $86.36.
Hence, my payoff was $0.64 per share and profit was ‐0.16 per share
Therefore, I made a total loss of (reflecting total shares involved) was $16 with this butterfly
spread.
If I had used a smaller range of strike prices, I might have been able to produce profit instead of
loss. Or if I had written (i.e. short) butterfly spread with the same option type, same strike price,
and same expiration date, I would have created a $16 total profit instead of $16 loss.
*I have shown only butterfly spread here as an example, but for your project you would need to
eplicate at least THREE of spreads and/or combinations. That is, choose THREE from bull
spread, bear spread, butterfly spread, straddle, strip and strap and replicate them using real
data.