The options are ideal tools for position trading as well risk management. These options give their holders some right to buy and sell their underlying assets at a quoted price on or before the expiration date. A call gives a holder the right to buy an option while a put enables a holder to sell an option. The three major option strategies are as listed below in the various case studies.
Bullish option strategy
The McDonald Company has, in past five years, expected the underlying stock price of their diversified commodities to go upward. For this very reason, the company financial management decided to adopt the Bullish strategy. With this strategy, the McDonald has been able to assess how high the stock price can go. Selection of the optimum trading strategy has been facilitated by the various time frames in which the rally occurs. The most strategy used by the company is the call buying strategy.
Figure 1: Bull Call Spread
Profit/loss
2.05
Stoke price at expiration
The McDonald has set a bull run at 2.05 from which it has been utilizing the bull spread so as to reduce the cost. However, this has not reduced the risks since the option could still expire. The advantage of the call buying strategy is that the company may make a maximum profit as the strategy bears very low cost in its employment. The company has put a lot of effort in ensuring that the price of the underlying stock does not drop at all before the expiration of this option. It is through the maintenance of this price that the company has continued to make money with the Bullish strategy. Generally, the Bullish strategy has been applied in most of the McDonald branches which exist in the major nations. This strategy has helped the company balance a consistence profit with fluctuating expenses.
Bearish Option Strategy
Pepsi is a soft drink company. It has branches in many parts of the world. The main stores are found in Asia and Europe. During the winter, the sales go down as few people take the cold drinks in such a cold weather. In this event, small profit is usually realized by the company. Pepsi employs the Bearish option strategy at such a time since the price of the underlying stock is expected to drastically drop. This optimum strategy was arrived at after the assessment of how low the stock price could go with a specific time frame of the winter season. The common strategy used by this company is the put buying strategy.
Since the stoke prices are usually expected to be on a constant downward move, the Pepsi company has set a target price for this provisional decrease. After that step, the bear spread has been put into use so as to reduce the running cost. The cost of employing this strategy is relatively low and it caps a maximum profit. That is the only advantage of the bear put spread enjoyed by this company. This kind of strategy option shall generate profit on condition that the underlying stock price does not rise by the expiration date of the very option in adoption. However, this strategy differs with the other strategies employed in the hotter parts of the world that do not experience the four seasons. A good example is Africa where the climate is usually hot.
Neutral Option Strategy
When the Post Bank was opening new branches in Quebec, there was uncertainty of weather the sale would be down or up in this area. The bank then decided to formulate and adopt the neutral strategy. This strategy is some times known as the non-directional strategy. With this strategy option, the expected profit of the company is not dependant of the price. That is to say, that the potential profit is independent of the underlying stock prices. Instead, this neutral strategy depends on the volatility of the underlying stock prices as shown in the figure below. The neutral trading strategies which are bullish on the volatility profit if the underlying price of the stock undergo the mega trends upwards or even downward. At the Post bank, this trend mainly consisted of the long straddle. On the other hand, if the neutral trading strategies are more bearish than bullish on volatility profit, the underlying prices of the stock at the Post bank usually experience the upward trend in the short straddle and the ratio spreads.
Figure 2: Neutral option strategy
Profit/ Loss
Underlying price
Figure 3: neutral option
Profit/loss
Underlying price
