![payoff vs profit diagram short position payoff vs profit diagram short position](https://fantasylasopa155.weebly.com/uploads/1/2/5/4/125486272/738479864.jpg)
One reason that you may want to do this is if you want to neutralise your volatility exposure on a prior option trade. Note that because you have bought an option and sold an option on the same strike and same expiry the payoff diagram is completely linear and has no convexity, so you have no volatility exposure.
![payoff vs profit diagram short position payoff vs profit diagram short position](https://riskprep.com/images/stories/put_call_parity_2.gif)
You can create an synthetic long future (a “synthetic”) by buying a call and selling a put on the same strike, as follows: You can hedge this exposure on entering the trade by buying back the amount of BTCUSD, so in reality you can consider your USD PnL loss as unchanging up to expiry (so the slope of the curve can also be considered to be flat rather than negative). Of course, at the time of entering this trade you have paid BTC equivalent to a USD value at the current price (sold BTCUSD through the premium paid). This is because the premium you paid for the call is paid in BTC and it is converting this BTC premium into USD to calculate the overall PnL. If BTC remains below the 40k strike you can see that the USD loss on the position decreases as BTC falls.If BTC rises over the 40k strike the payout in USD is linear (the payout will be settled in BTC on Deribit at the expiry BTCUSD price).We will also look only at the payoff diagram at option expiration by dragging the time to expiry bar all the way to “Expiry” as shown in the call diagram below:Ī couple of notes about the payoff diagram above (for buying a Jan 40k call with BTC spot at 35194.65) : You can play around yourself with it here.įor the purposes of this article we will look at PnL in USD terms (you can set this on the chart by clicking on the 3 dots and toggling “PNL in USD”). However, a few exchanges also require option buyers to post a margin rather than paying a premium, and their positions are marked to market.Here we will introduce the payoff diagram at option expiration in more detail, using the Position Builder tool on Deribit. Unlimited for buyers limited to premium received for sellers
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Limited to premium paid for buyers unlimited for sellers Rights for buyers obligations for sellers The following table highlights the main differences between trading futures, options and warrants: Your maximum loss will therefore be limited to the amount you pay for the warrant. This means you can buy but not sell a call or a put warrant unless you sell the warrant to close out a long position previously established. Warrants are a special form of option in which an investor can only take a long position - just like an option buyer. How do warrants differ from options and futures? In this case, as with futures contracts, both the option buyer and seller have to post a margin and settle any losses arising from the daily mark-to-market process. However, a few exchanges have adopted a "futures-style" margining system where the option buyer does not pay a premium at the start of the contract. These short positions are also marked to market and the investors must abide by the margin requirements. Only the option seller has to pay a margin. For options, the buyer pays the premium (Note) when the contract starts, and does not have to post a margin. Margin requirements - When trading futures, you have to pay a margin deposit to open a position regardless of whether you buy or sell a contract. Given the option seller must meet the buyer's decision on exercise, the option seller's loss can be far greater than the premium received. An option seller's profit is limited to the premium received. Since the buyer has to pay a premium, his potential gain is smaller than that for a futures contract, and the difference is the amount of premium paid. The potential gain when buying an option is unlimited, but the option buyer's risk is only limited to the premium paid. However, the payoff for option trading is "asymmetrical". Both the potential gain and loss can far exceed the initial margin paid. This is shown in the "symmetric" payoff diagrams. Potential risk and return - Whether you buy or sell a futures contract, your potential gain or loss is unlimited. The option seller is passive and must comply with whatever the buyer decides to do. With options the buyer has the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset. obligations - When trading futures, both the buyer and the seller must settle the futures contract regardless of how the underlying asset price moves. Competency frameworks for financial literacy.