Derivatives Strategy Matrix
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Loulou DePanamDerivatives Strategy Matrix
Uploaded by
Loulou DePanam8 Strategies with Options 459
By using data such as the indexes above, traders can study the market view
of volatility, the most important parameter to value derivative contracts on the
stock market. The VIX calculation, step by step can be found in the White
Paper: The CBOE Volatility Index – VIX at: https://www.cboe.com/micro/
vix/part2.aspx.
8.8 Price Direction Matrix
Call +/ Put +/
The value of the underlying decreases +
The value of the underlying increases +
Higher strike prices compared with a lower +
Low strike prices compared with a higher +
Long time to maturity + +
Short time to maturity
High volatility + +
Low volatility
High risk-free interest rate +
Low risk-free interest rate +
Dividends +
As we can see above, the value of a long call option decrease if the interest
rate increases. The reason is the following; Say that if we buy the option
because we will buy the underlying in the future. Then we only have to pay an
initial cost for the option and we can put the rest of our money at the bank. If
the interest increases, then we get a better yield on the money on the bank.
Therefore, the total position increase in value and so do the option.
8.9 Strategy Matrix
Positive market Neutral market Negative market
Increasing Buy call option Long straddle Long put option
volatility Positive price-spread Long strangle Negative price-
Back spread Short neutral spread
Three leg position time-spread Back spread
Protective put Three leg position
Neutral Buy underl./forward DON’T TRADE Short forward
volatility Buy synthetic Short synthetic
forward forward
Buy sloped synthetic Short sloped syn-
Forward thetic forward
(continued )
460 Analytical Finance: Volume I
Positive market Neutral market Negative market
Decreasing Issue put options Short straddle Issue call option
volatility Positive price-spread Short strangle Negative price-
Covered call Long neutral spread
Three leg position time-spread Three leg position
Ratio spread Ratio spread
