Chapter 8: Trading, Hedging and Investment Strategies Flashcards
(42 cards)
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What is an Intra Market Spread?
The spread between two contracts, with the same underlying asset, but different maturities.
How Would the Spread Between Two Contracts Narrow if Prices are Rising?
i.e for a 3 month and a 6 month future.
The price of the 3 month future is going to increase faster than the price of the 6 month future.
How Would the Spread Between Two Contracts Narrow if Prices are Falling?
i.e for a 3 month and a 6 month future.
The price of the 6 month contract falls faster than the price of the 3 month contract.
What Would an Investor do When Spreads are Narrowing?
i.e for a 3 month and a 6 month future.
Buy the 3 month and sell the 6 month, then once the prices have risen, sell your 3 month and buy the 6 month.
What Would an Investor do if the Intra Market Spread is Widening in a Contango Market?
What action and what trade?
Trade: Sell the spread
Action: Sell the near dated and buy the far dated.
What is an Inter-Market Spread?
Definition and example pair
Buying and selling futures on different but connected assets.
E.g. Long Gilt Future vs Short Sterling Future.
What is the Crack Spread?
Which commodities are involved?
The relationship between; Crude Oil, Heating Oil and Gasoline.
What is a Covered Short Call?
Why is it used?
If an investor is long on a unvolatile asset, they can sell a call, so they have profited off the premium and have boosted the asset.
This can also help soften losses if price falls.
What does a Covered Short Call Essentially Create?
A short put position.
What is a Sythetic Long Future = To ?
NOTE: This can be rearranged.
Which Forumla of Options
Long Future = Long Call and Short Put
What is a Bull Call Spread?
Which trades does this involve?
By Buying a Call and Selling a Call
For a Bull Call Spread, What is the Maximum Loss an Investor Can Incur?
The difference between the two premiums.
What is the Maximum Profit for a Bull Call Spread?
In absolute terms.
The difference between the two strike prices - the initial debt (premium paid)
If Strikes are 100 and 110, Which One Would you Buy for a Bull Call Spread?
100, because with BuLl you buy LOW.
For a Bear Call Spread, How is the Maximum Profit Calculated?
The difference between the two premiums.
What is the Maximum Loss a Bear Call Spread Can Incur?
The difference in premiums minus the difference in strikes.
What is the Rule for a Bull Put Spread?
Buy the ……., Short the ……..?
Buy the near and short the far.
What is the Maxium Profit for a Bull Put Spread?
It is the Net Initial Credit.
How does one Calculate the Break Even Point of a Bull Put Spread?
Higher strike price - net initial credit.
What is a Horizontal / Calendar Spread?
An option with the same strike but different maturities.
What is a Vertical Spread (Bull/Bear)?
Options with the same but different what?
The spread between options with the same maturities and the same strike price.
What is a Diagonal Spread?
Different options, with both different maturities and different strikes.
What is a Long Straddle?
What does one buy, with the same……..
Where one goes both long a call and long a put with the same strike.
What is the Cost of a Long Straddle?
The total of both premiums.
