Chapter 4 Vanilla Options Strategies

In this part, we will explore diverse vanilla options strategies. We will also see basic greeks from these ones, but most importantly, how to derive them by reasoning or also by hand.

4.1 Spreads Strategies

Spreads involve selling an option to finance another one that we buy.

4.1.1 Call spread

This strategy is also known as bull-spread.

• Buy an option with strike \(K_1\)
• Sell an option with strike \(K_2>K_1\)

Payoff:

\[ \text{Payoff} = \begin{cases} 0 & \text{if } S_T \le K_1 \\ S_T - K_1 & \text{if } S_T \in [K_1, K_2] \\ K_2 - K_1 & \text{if } S_T > K_2 \end{cases} \]