Analysis of Plain Vanilla and Combined Option Strategies Essay

Analysis of Plain Vanilla and Combined Option Strategies - Essay Example Such buying or selling may take place on either a set date or a time before the date. The contract that enables such kind of financial trading to take place is referred to as option. There are several option strategies that may be used by the seller. Studies have actually showed that how careful a seller is in selecting an option goes a long way to determine the success of the transaction. This study gives emphasis to two of these option strategies namely plain vanilla and combined options. 1 Problem Definition and Objective The recent development of financial markets is connected with growing uncertainty of market participants. The current conflict in Syria, contrary expectations on the start of the Fed’s reduction of the quantitative easing program as well as mixed signs on economic growth in the US and Europe, are fueling investors fears. In this regard, investors are searching for strategies to manage market movements and minimize exposure to risk. Fortunately, there exist various market instruments that enable risk transfer to other more risk-tolerant market participants. Those instruments are called options and belong to the category of derivatives. Investors are able to trade in derivative instruments offering both – great potential returns and loss. Due to the large investment universe of derivatives, the author is going to reduce the complexity by analyzing the most common option strategies: plain vanilla and combined options. The goal of this project paper is to analyze and demonstrate motives using options in different market conditions to support investors in their investment decisions. Quelle zum ersten Satz 2 Course of the Investigation To introduce the topic of the analysis of option strategies, the theoretical fundamentals of options will be presented in the second chapter. First of all, the definition and delimitation of the term â€Å"option† are covered to give the reader a general introduction into the topic. A deeper in sight is going to be provided by characteristics and main factors influencing the option price. In this regard, the reader will get the main overview of the theoretical framework. To reduce complexity and give investors a comprehensive overview on common strategies, the author will start with the analysis of plain vanilla options. In the following chapter, the focus will switch to combined option strategies to increase the quantity of investors’ scenarios. In conclusion, all significant observations will be concisely summarized. In this regard, the author is going to break down an illustration with option characteristics 2 Theoretical Framework of Options 1 Definition and Delimitation of the term â€Å"Option† (des Optionsbegriffs) An option is generally a contract that gives right to a buyer to complete a buying or selling transaction on a specified date or before the date at a strike price (Frenkel, 2009). The rate at which financial markets are growing have given ri se to the use and availability of as many forms and types of options as