webcab.lib.finance.options
Class OptionStrategies

java.lang.Object
  |
  +--webcab.lib.finance.options.OptionStrategies

All Implemented Interfaces:

Serializable

public class OptionStrategies

extends Object

implements Serializable

This class evaluates the payoff functions of a number of different option trading strategies. We will consider spreads which involve taking a position in two or more options of the same type and combinations which involve taking positions in both calls and puts on the same underlying asset.

See Also:

Serialized Form

Constructor Summary

OptionStrategies()
Creates a new instance.

Method Summary

double	payOffBearSpread(double expiryPrice, double buyCallStrike, double soldCallStrike) Returns the payoff at expiry for the Bear Spread.
double	payOffBullSpread(double expiryPrice, double buyCallStrike, double soldCallStrike) Returns the payoff at expiry for the Bull Spread.
double	payOffButterflySpread(double expiryPrice, double broughtCallHigh, double broughtCallLow, double soldCalls) Returns the payoff at expiry for the Butterfly Spread.
double	payOffSpread(double expiryPrice, double buyCallStrike, double soldCallStrike) Returns the payoff function of a spread of bull or bear type.
double	payOffStraddleCombination(double strike, double expiryPrice) We implement the payoff function for the Straddle Combination which involves taking a long position in a call option and a long position in a put option with the same strike price and expiration date.
double	payOffStrangleCombination(double expiryPrice, double callStrike, double putStrike) We implement the payoff function for the Strangle Combination consists of a long position in a call option and a put option with different strike prices and the same expiry date.

Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

Constructor Detail

OptionStrategies

public OptionStrategies()

Creates a new instance.

Method Detail

payOffBullSpread

public double payOffBullSpread(double expiryPrice,
                               double buyCallStrike,
                               double soldCallStrike)
                        throws OptionsException,
                               OptionStrategiesDemoException

Returns the payoff at expiry for the Bull Spread. A Bull spread is constructed by buying a call option with strike b, and selling a call option on the same asset with the same expiry date but with a strike s, where b is less than s. The individual entering into this contract will gain if the expiry price rises.

Parameters:

buyCallStrike - strike of the brought call option

soldCallStrike - strike of the sold call option

expiryPrice - expiry price of the underlying asset

Throws:

OptionsException - thrown when the parameter given do not represent a Bull Spread

OptionStrategiesDemoException

payOffBearSpread

public double payOffBearSpread(double expiryPrice,
                               double buyCallStrike,
                               double soldCallStrike)
                        throws OptionsException,
                               OptionStrategiesDemoException

Returns the payoff at expiry for the Bear Spread. A Bear spread is constructed by buying a call option with strike b, and selling a call option on the same asset with the same expiry date but with a strike s, where soldCallStrike is less than buyCallStrike. The individual entering into this contract will gain if the price falls.

Parameters:

buyCallStrike - strike of the brought call option

soldCallStrike - strike of sold call option

expiryPrice - expiry price of the underlying asset

Throws:

OptionsException - thrown when the parameter provided do not represent a Bear Spread

OptionStrategiesDemoException

payOffSpread

public double payOffSpread(double expiryPrice,
                           double buyCallStrike,
                           double soldCallStrike)
                    throws OptionsException,
                           OptionStrategiesDemoException

Returns the payoff function of a spread of bull or bear type. That is a spread constructed by buying a call option and selling a call option on the same underlying asset will the same expiry date.

Parameters:

buyCallStrike - strike of the brought call option

soldCallStrike - strike of sold option

expiryPrice - expiry price

Throws:

OptionException - thrown when the parameter given do not represent the a (Bull or Bear) Spread strategy

OptionsException

OptionStrategiesDemoException

payOffButterflySpread

public double payOffButterflySpread(double expiryPrice,
                                    double broughtCallHigh,
                                    double broughtCallLow,
                                    double soldCalls)
                             throws OptionsException,
                                    OptionStrategiesDemoException

Returns the payoff at expiry for the Butterfly Spread.

Description of a Butterfly Spread

This trading strategy involves the use of three options with different strikes. To construct the spread the investor must buy a call option with a relatively high strike and a relatively low strike price, and sell two options with a strike midway. Generally, the butterfly spread is constructed with the midpoint close to the present market value. In this case the investor will gain if the price at expiry is close to its present price and will take a small loss if the price moves significantly in either direction.

Parameters:

broughtCallHigh - strike of first brought call option

broughtCallLow - strike of second brought call option

soldCalls - the strike of the two sold call options

expiryPrice - expiry price

Throws:

OptionException - thrown when the parameters provided do not represent a Butterfly Spread

OptionsException

OptionStrategiesDemoException

payOffStraddleCombination

public double payOffStraddleCombination(double strike,
                                        double expiryPrice)
                                 throws OptionStrategiesDemoException

We implement the payoff function for the Straddle Combination which involves taking a long position in a call option and a long position in a put option with the same strike price and expiration date.

Parameters:

strike - the strike of the put and call

expiryPrice - expiry price of the underlying asset

Throws:

OptionException - thrown when the parameter provided do not represent a Straddle Combination

OptionStrategiesDemoException

payOffStrangleCombination

public double payOffStrangleCombination(double expiryPrice,
                                        double callStrike,
                                        double putStrike)
                                 throws OptionsException,
                                        OptionStrategiesDemoException

We implement the payoff function for the Strangle Combination consists of a long position in a call option and a put option with different strike prices and the same expiry date. To construct this combination the calls strike must be higher than the puts. The method returns an exception if this is not the case.

Parameters:

callStrike - strike of the call option

putStrike - strike of the put option

expiryPrice - price of the underlying asset at expiry

Throws:

OptionsException - thrown when the parameters provided do not represent a Strangle Combination

OptionStrategiesDemoException