 Study
 Slides
 Videos
9.1 BULL CALL SPREAD
A bull call spread is constructed by buying an inthemoney (ITM) call option, and selling another outofthemoney (OTM) call option. Often the call with the lower strike price will be inthemoney while the Call with the higher strike price is outofthemoney. Both calls must have the same underlying security and expiration month.
The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish, because the investor will make a profit only when the stock price / index rises. If the stock price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike, the investor makes the maximum profit. Let us try and understand this with an example.
When to Use: Investor is moderately bullish
Risk: Limited to any initial premium paid in establishing the position. Maximum loss occurs where the underlying falls to the level of the lower strike or below
Reward: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where the underlying rises to the level of the higher strike or above.
BreakEvenPoint (BEP): Strike Price of Purchased call + Net Debit Paid
Example:
Mr. XYZ buys a Nifty Call with a Strike price Rs. 16100 at a premium of Rs. 170.45 and he sells a Nifty Call option with a strike price Rs. 16400 at a premium of Rs. 35.40. The net debit here is Rs. 135.05 which is also his maximum loss.
Strategy: Buy Put+ Buy call 

Nifty index 
Current Value 
16191.10 
Buy In the Money Call option 
Strike Price (Rs.) 
16100 
Mr. XYZ pays 
Premium (Rs.) 
170.45 
Sell Out of the money call option 
Strike Price 
16400 
Mr. XYZ receives 
Premium 
35.40 

Net Premium paid (Rs) 
135.05 (170.4535.40) 

Breakeven Point 
16235.05 
Â
Payoff Schedule
On expiry Nifty closes at 
Net Payoff from Call Buy(Rs.) 
Net Payoff from Call Call Sold (Rs.) 
Net Payoff (Rs.) 
15500 
170.45 
35.40 
135.05 
15600 
170.45 
35.40 
135.05 
15700 
170.45 
35.40 
135.05 
15800 
170.45 
35.40 
135.05 
15900 
170.45 
35.40 
135.05 
16000 
170.45 
35.40 
135.05 
16100 
170.45 
35.40 
135.05 
16200 
70.45 
35.40 
35.05 
16235 
35.40 
35.40 
0 
16300 
29.55 
35.40 
64.95 
16400 
129.55 
35.40 
164.95 
16500 
229.55 
64.60 
164.95 
16600 
329.55 
164.60 
164.95 
16700 
429.55 
264.60 
164.95 
16800 
529.55 
364.60 
164.95 
16900 
629.55 
464.60 
164.95 
17000 
729.55 
564.60 
164.95 
17100 
829.55 
664.60 
164.95 
17200 
929.55 
764.60 
164.95 
The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs. 16100 strike price Call was purchased the breakeven point would have been Rs. 15929.55), reduced the cost of the trade (if only the Rs. 16100 strike price Call was purchased the cost of the trade would have been Rs. 170.45), reduced the loss on the trade (if only the Rs. 16100 strike price Call was purchased the loss would have been Rs. 170.45 i.e. the premium of the Call purchased). However, the strategy also has limited gains and is therefore ideal when markets are moderately bullish.
Key Points:
 The strategy makes a loss if Nifty expires below 16200. However the loss is restricted to Rs.135.05.
 The breakeven point (where the strategy neither make a profit or loss) is achieved when the market expires at 16235. Therefore we can generalize the breakeven point for a bull call spread asÂ Lower Strike + Net Debit
 The strategy makes money if the market moves above 7854, however the maximum profit achievable is Rs.46 i.e the difference between the strikes minus the net debit

 7900 â€“ 7800 = 100
 100 â€“ 54 = 46
9.2 Bull Put Spread
A bull put spread can be profitable when the stock / index is either range bound or rising. The concept is to protect the downside of a Put sold by buying a lower strike Put, which acts as an insurance for the Put sold. The lower strike Put purchased is further OTM than the higher strike Put sold ensuring that the investor receives a net credit, because the Put purchased (further OTM) is cheaper than the Put sold. This strategy is equivalent to the Bull Call Spread but is done to earn a net credit (premium) and collect an income.
If the stock / index rises, both Puts expire worthless and the investor can retain the Premium. If the stock / index falls, then the investorâ€™s breakeven is the higher strike less the net credit received. Provided the stock remains above that level, the investor makes a profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less the net credit received. This strategy should be adopted when the stock / index trend is upward or range bound. Let us understand this with an example.
When to Use: When the investor is moderately bullish
Risk: Limited. Maximum loss occurs where the underlying falls to the level of the lower strike or below
Reward: Limited to the net premium credit. Maximum profit occurs where underlying rises to the level of the higher strike or above.
Breakeven: Strike Price of Short Put  Net Premium Received
Example Mr. XYZ sells a Nifty Put option with a strike price of Rs. 16000 at a premium of Rs. 21.45 and buys a further OTM Nifty Put option with a strike price Rs. 16800 at a premium of Rs. 3.00 when the current Nifty is at 16191.10, with both options expiring on 31st March
Strategy: Sell a Put + Buy a Put 

Nifty index 
Current Value 
16191.10 
Sell Put Option 
Strike Price (Rs.) 
16000 
Mr. XYZ Receives 
Premium (Rs.) 
21.45 
Buy Put Option 
Strike Price 
16400 
Mr. XYZ Pays 
Premium 
3 

Net Premium paid (Rs) 
18.45 

Breakeven Point 
15981.55 
Payoff Schedule
On expiry Nifty closes at 
Net Payoff from Call Buy(Rs.) 
Net Payoff from Call Call Sold (Rs.) 
Net Payoff (Rs.) 
15500 
297 
478.55 
181.55 
15600 
197 
378.55 
181.55 
15700 
97 
278.55 
181.55 
15800 
3 
178.55 
181.55 
15900 
3 
78.55 
0 
15981.55 
3 
3 
18.45 
16000 
3 
21.45 
18.45 
16100 
3 
21.45 
18.45 
16200 
3 
21.45 
18.45 
16300 
3 
21.45 
18.45 
16400 
3 
21.45 
18.45 
16500 
3 
21.45 
18.45 
16600 
3 
21.45 
18.45 
16700 
3 
21.45 
18.45 
16800 
3 
21.45 
18.45 
The strategy earns a net income for the investor as well as limits the downside risk of a Put sold.
Important Points:
â€¢ The strategy makes a loss if Nifty expires below 15800. However, the loss is restricted to Rs.181.55
â€¢ The breakeven point (where the strategy neither makes a profit or loss) is achieved when the market expires at 15900. Therefore we can generalize the breakeven point for a Bull Put spread as Higher Strike â€“ Net Credit
â€¢ The strategy makes money if the market moves above 15981.55, however the maximum profit achievable is Rs 18.45 i.e the difference between the Premium Received for ITM PE and the Premium Paid for the OTM PE
9.3 BEAR CALL SPREAD STRATEGY
The Bear Call Spread strategy can be adopted when the investor feels that the stock / index is either range bound or falling. The concept is to protect the downside of a Call Sold by buying a Call of a higher strike price to insure the Call sold. In this strategy the investor receives a net credit because the Call he buys is of a higher strike price than the Call sold. The strategy requires the investor to buy outofthemoney (OTM) call options while simultaneously selling inthemoney (ITM) call options on the same underlying stock index. This strategy can also be done with both OTM calls with the Call purchased being higher OTM strike than the Call sold.
If the stock / index falls both Calls will expire worthless and the investor can retain the net credit. If the stock / index rises then the breakeven is the lower strike plus the net credit. Provided the stock remains below that level, the investor makes a profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less the net credit received. Let us understand this with an example.
When to use: When the investor is mildly bearish on market.
Risk: Limited to the difference between the two strikes minus the net premium.
Reward: Limited to the net premium received for the position i.e., premium received for the short call minus the premium paid for the long call.
Break Even Point: Lower Strike + Net credit
Example:
Mr. XYZ is bearish on Nifty. He sells an ITM call option with strike price of Rs. 16600 at a premium of Rs. 154 and buys an OTM call option with strike price Rs. 16800 at a premium of Rs. 49.
Strategy: Sell a Call with a lower strike (ITM) + Buy a Call with a higher strike (OTM) 

Nifty index 
Current Value 
16694 
Sell ITM Call Option 
Strike Price (Rs.) 
16600 
Mr. XYZ Receives 
Premium (Rs.) 
154 
Buy OTM Call Option 
Strike Price 
16800 
Mr. XYZ Pays 
Premium 
49 

Net Premium paid (Rs) 
105 

Breakeven Point 
16705 
Payoff Schedule
On expiry Nifty closes at 
Net Payoff from Call Sold(Rs.) 
Net Payoff from Call Call Bought (Rs.) 
Net Payoff (Rs.) 
16100 
154 
49 
105 
16200 
154 
49 
105 
16300 
154 
49 
105 
16400 
154 
49 
105 
16500 
154 
49 
105 
16600 
154 
49 
105 
16700 
54 
49 
5 
16705 
49 
49 
0 
16800 
46 
49 
95 
16900 
146 
51 
95 
17000 
246 
151 
95 
17100 
346 
251 
95 
17200 
446 
351 
95 
17300 
546 
451 
95 
The strategy earns a net income for the investor as well as limits the downside risk of a Call sold.
For example if Nifty expires at 17000, both the Call options would have an intrinsic value and hence they both would expire in the money.
â€¢ 16600 CE would have an intrinsic value of 400, since we have sold this option at Ra.154, we would incur a loss of 400 â€“ 154 = 246
â€¢ 16800 CE would have an intrinsic value of 200, since we have paid a premium of Rs.49, we would be in a profit of 200 â€“ 49= +151
â€¢ Net loss would be 264 + 151 = â€“ 95
So, going by the above table we can generalize the key trigger points for the strategy
o Spread = Difference between the strikes
o 16800 â€“ 16600 = 200
o Net Credit = Premium Received â€“ Premium Paid
o 154 â€“ 49 = 105
o Breakeven = Lower strike + Net Credit
o 16600 + 105 = 16705
o Max Profit = Net Credit
o Max Loss = Spread â€“ Net Credit
o 200 â€“ 105 = 95
9.4 LONGCALLBUTTERFLY
A Long Call Butterfly is to be adopted when the investor is expecting very little movement in the stock price. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost.
A long butterfly is similar to a Short Straddle except your losses are limited. The strategy can be done by:
a) Selling 2 ATM Calls,
b) buying 1 ITM Call, and
c) Buying 1 OTM Call options (there should be equidistance between the strike prices).
The result is positive incase the stock / index remains range bound. The maximum reward in this strategy is however restricted and takes place when the stock is at the middle strike at expiration. The maximum losses are also limited.
Let us see an example to understand the strategy:
When to use: When the investor is neutral on market direction and bearish on volatility
Risk: Net debit paid
Reward: Difference between adjacent strikes minus net debit
Break Even Point:
â€¢ Upper Breakeven Point = Strike Price of Higher Strike Long Call  Net Premium Paid
â€¢ Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid
Example:
Nifty is at 16200. Mr. XYZ expects very little movement in Nifty. He sells 2 ATM Nifty Call Options with a strike price of Rs. 16200 at a premium of Rs. 97.90 each, buys 1 ITM Nifty Call Option with a strike price of Rs. 16100 at a premium of Rs. 141.55 and buys 1 OTM Nifty Call Option with a strike price of Rs. 16300 at a premium of Rs. 64. The Net debit is Rs. 9.75
Strategy: : SELL 2 ATM CALL, BUY 1 ITM CALL OPTION AND BUY 1 OTM CALL OPTION 

Nifty index 
Current Value 
16200 
Sell 2 ATM Call Option 
Strike Price (Rs.) 
16200 
Mr. XYZ Receives 
Premium (Rs.) 
195.80 
Buy 1 ITM Call Option 
Strike Price 
16100 
Mr. XYZ Pays 
Premium 
141.55 
Buy 1 OTM Call Option 
Strike Price 
16300 
Mr. XYZ Pays 
Premium 
64 

Net Debit 
195.80141.5564=9.75 

Breakeven Point (upper) 
16290.25 

Breakeven Point (lower) 
16109.75 
The Payoff Schedule
On expiry Nifty closes at 
Net Payoff from 2 ATM Calls Sold (Rs.) 
Net Payoff from 1 ITM Call purchased (Rs.) 
Net Payoff from 1 OTM Call purchased (Rs.) 
Net Payoff (Rs.) 
15700 
195.80 
141.55 
64 
9.75 
15800 
195.80 
141.55 
64 
9.75 
15900 
195.80 
141.55 
64 
9.75 
16000 
195.80 
141.55 
64 
9.75 
16100 
195.80 
141.55 
64 
9.75 
16109.75 
195.80 
131.80 
64 
0 
16200 
195.80 
41.55 
64 
90.25 
16290.25 
15.30 
48.70 
64 
0 
16300 
4.20 
58.45 
64 
9.75 
16400 
204.20 
158.45 
36 
9.75 
16500 
404.20 
258.45 
136 
9.75 
16600 
604.20 
358.45 
236 
9.75 
16700 
804.20 
458.45 
336 
9.75 
16800 
1004.20 
558.45 
436 
9.75 
16900 
1204.20 
658.45 
536 
9.75 
In the above chart, the breakeven happens the moment Nifty crosses 16109.75 or 16290.25. The reward is limited to Rs.90.25 and the risk is limited to Rs. 9.75.
9.5 SHORT CALL BUTTERFLY
A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call Butterfly, which is a range bound strategy.
The Short Call Butterfly can be constructed by:
a Selling one lower striking inthemoney Call,
b buying two atthemoney Calls and
c selling another higher strike outofthemoney Call, giving the investor a net credit (therefore it is an income strategy).
There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index. The maximum risk occurs if the stock / index is at the middle strike at expiration. The maximum profit occurs if the stock finishes on either side of the upper and lower strike prices at expiration. However, this strategy offers very small returns when compared to straddles, strangles with only slightly less risk.
When to use: You are neutral on market direction and bullish on volatility. Neutral means that you expect the market to move in either direction  i.e. bullish and bearish.
Risk Limited to the net difference between the adjacent strikes (Rs. 100 in this example) less the premium received for the position.
Reward Limited to the net premium received for the option spread.
Break Even Point:
 Upper Breakeven Point = Strike Price of Highest Strike Short Call  Net Premium Received
 Lower Breakeven Point = Strike Price of Lowest Strike Short Call + Net Premium Received
Example:
Nifty is at 16200. Mr. XYZ expects large volatility in the Nifty irrespective of which direction the movement is, upwards or downwards. Mr. XYZ buys 2 ATM Nifty Call Options with a strike price of Rs. 16200 at a premium of Rs. 97.90 each, sells 1 ITM Nifty Call Option with a strike price of Rs. 16100 at a premium of Rs. 141.55 and sells 1 OTM Nifty Call Option with a strike price of Rs. 16300 at a premium of Rs. 64. The Net Credit is Rs. 9.75.
Strategy: BUY 2 ATM CALL OPTIONS, SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION 

Nifty index 
Current Value 
16200 
Buy 2 ATM Call Option 
Strike Price (Rs.) 
16200 
Mr. XYZ Pays 
Premium (Rs.) 
195.80 
Sell 1 ITM Call Option 
Strike Price 
16100 
Mr. XYZ Receives 
Premium 
141.55 
Sell 1 OTM Call Option 
Strike Price 
16300 
Mr. XYZ Pays 
Premium 
64 

Breakeven Point (upper) 
16290.25 

Breakeven Point (lower) 
16109.75 
Â
Â
The Payoff Schedule
On expiry Nifty closes at 
Net Payoff from 2 ATM Calls Purchased (Rs.) 
Net Payoff from 1 ITM Call sold (Rs.) 
Net Payoff from 1 OTM Call sold (Rs.) 
Net Payoff (Rs.) 
15700 
195.80 
141.55 
64 
9.75 
15800 
195.80 
141.55 
64 
9.75 
15900 
195.80 
141.55 
64 
9.75 
16000 
195.80 
141.55 
64 
9.75 
16100 
195.80 
141.55 
64 
9.75 
16109.75 
195.80 
131.80 
64 
0 
16200 
195.80 
41.55 
64 
90.25 
16290.25 
15.30 
48.70 
64 
0 
16300 
4.20 
58.45 
64 
9.75 
16400 
204.20 
158.45 
36 
9.75 
16500 
404.20 
258.45 
136 
9.75 
16600 
604.20 
358.45 
236 
9.75 
16700 
804.20 
458.45 
336 
9.75 
16800 
1004.20 
558.45 
436 
9.75 
16900 
1204.20 
658.45 
536 
9.75 
In the above calculation the breakeven happens the moment Nifty crosses 16109.75 or 16290.25. The reward is limited to 90.25 and the risk is limited to 9.75.
Â
Â
7.6 SUMMARY OF GREEKS
The table below summarizes the â€˜signsâ€™ of the Greeks for four basic option strategies: long or short a call; long or short a put. To take one example from Table below, a long call has positive delta (it profits from a rise in the share price). It has positive gamma or convexity, which means that the profits accelerate in a more than linear fashion as the price of the underlying rises.
As the underlying price falls the losses decelerate because the most money that can ever be lost is the initial premium paid. The position is negative theta because of the time value decay effect. It is positive vega and rho because the call will become more valuable if volatility increases or interest rates rise.
Signs of the â€˜Greeksâ€™ for basic option strategies
The change in the value of an option for a small change in the price of the underlying is measured by delta. Delta is the slope or tangent on the option price curve. It is also the hedge ratio, the number the trader uses to decide how much of the underlying to trade to manage the risk on an option position. Delta is not a constant and is most unstable when an option is atthemoney and approaching expiry. Theta measures the change in the value of an option as time elapses.
It is negative for bought option contracts. Vega or kappa measures the change in the value of an option for a given change in volatility. It is positive for bought calls and puts. Rho measures the sensitivity of the option value to a change in interest rates. It is positive for long calls and negative for long puts.
The firstorder â€˜Greeksâ€™ delta, Vega, theta and rho are partial derivatives of the option pricing model. This means that they assume that only one factor used to determine the value of an option is changed, and the other inputs to the model are kept constant.
Gamma is a â€˜second orderâ€™ Greek: it measures the change in one of the firstorder Greeks (the delta) for a small change in the spot price of the underlying