Estratégias de Trading e
Opções Exóticas
Chapter 12. TRADING STRATEGIES INVOLVING OPTIONS
Section - 12.2 - Trading an Option and the Underlying Asset
There are four possible positions in options markets: a long position in a call, a short position in a call, a long position in a put, and a short position in a put. Taking a short position in an option is known as writing it. Options are currently traded on stocks, stock indices, foreign currencies, futures contracts, and other assets.
John C. Hull, “Options, Futures, and Other Derivatives”, 10th Edition, Publisher: Pearson, 2018.
Chapter 12. TRADING STRATEGIES INVOLVING OPTIONS
Section - 12.4 - Combinations
John C. Hull, “Options, Futures, and Other Derivatives”, 10th Edition, Publisher: Pearson, 2018.
EXOTIC OPTIONS
Asian Option Example
For an Asian call option using arithmetic averaging and a 30-day period for sampling the data.
On November 1st, a trader purchased a 90-day arithmetic call option on stock XYZ with an exercise price of $22, where the averaging is based on the value of the stock after each 30-day period. The stock price after 30, 60, and 90 days was $21.00, $22.00, and $24.00.
The arithmetic average (mean) is (21.00 + 22.00 + 24.00) / 3 = 22.33.
The profit is the average minus the strike price 22.33 - 22 = 0.33 or $33.00 per 100 share contract.
As with standard options, if the average price is below the strike price, the loss is limited to the premium paid for the call options.
What is a Barrier Option
A barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price. A barrier option can be a knock-out, meaning it expires worthless if the underlying exceeds a certain price, limiting profits for the holder and limiting losses for the writer. It can also be a knock-in, meaning it has no value until the underlying reaches a certain price.
Basics of a Barrier Option
Barrier options are considered exotic options because they are more complex than basic American or European options. Barrier options are also considered a type of path-dependent option because their value fluctuates as the underlying's value changes during the option's contract term. In other words, a barrier option's payoff is based on the underlying asset's price path. The option becomes worthless or may be activated upon crossing of a price point barrier. Barrier options are typically classified as either knock-in or knock-out.
Knock-In Barrier Options
A knock-In option is a type of barrier option where the rights associated with that option only come into existence when the price of the underlying security reaches a specified barrier during the option's life. Once a barrier is knocked in, or comes into existence, the option remains in existence until it expires.
Knock-in options may be classified as up-and-in or down-and-in. In an up-and-in barrier option, the option only comes into existence if the price of the underlying asset rises above the pre-specified barrier, which is set above the underlying's initial price. Conversely, a down-and-in barrier option only comes into existence when the underlying asset price moves below a pre-determined barrier that is set below the underlying's initial price.
Knock-Out Barrier Options
Contrary to knock-in barrier options, knock-out barrier options cease to exist if the underlying asset reaches a barrier during the life of the option. Knock-out barrier options may be classified as up-and-out or down-and-out.
Reasons To Trade Barrier Options
Because barrier options have additional conditions built in, they tend to have cheaper premiums than comparable options with no barriers. Therefore, if a trader believes the barrier is unlikely to be reached, then they may opt to buy a knock-out option, for example, since it has a lower premium and the barrier condition is unlikely to affect them.
THE OPTION MENAGERIE
