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Wednesday, October 14, 2020
Derivatives Idea - SPX Dual Directional KI Structure
*This performance is only observed with historical backtests and not traded by the company.
Risks & Assumptions
- The structure is based on option strategies which involves buying & selling of options at specific strike prices.
- The structure has a total of 4 option legs which include buying of 2 options & selling of 2 options.
- Strike prices are marked by *.
- An estimate for the structure cost mentioned below is based on the option market prices available at the time of structure creation. Going ahead, the costs may vary based on the underlying option premiums and implied volatilities associated with them.
Structure Rationale & Advantages
With US elections round the corner, investors are primarily worried about market direction & the related volatility which could affect their existing long stock positions. Dual directional structures, which are very popular with index based products, allow investors to play on both sides of the market without committing to any single direction. The structure has upside Knock-In (KI) at 114% levels whereas on the downside KI barrier is set at 70%.
As seen from 2016 election outcome, markets are expected to yet again prove their uncertain and chaotic nature. Irrespective of the outcome, investors holding positions on either side are likely to experience huge volatility which may affect their position value.
With SPX index currently trading near its all time high levels, investors especially those holding existing stock positions are worried about the future direction. As we progress into the big Election Day event, chances of getting stopped out in either direction are extremely high. Investors can make use of 2 primary instruments to hedge their position – SPX Futures or enter into this structure for protection against downside risk.
With an upfront cost of 2.09%, the structure aims to potentially provide investor protection till further 30% drop from current prices and also provide a maximum profit over and above the upside KI barrier. This maximum profit is capped in the manner explained above.
The structure is suitable for investors who are of the view that SPX will trend sharply in either of the directions over the next 2 months.
Structure Statistics & Design
The structure is a combination of 2 options strategies that makes use of long & short Out of the Money calls & puts.
|SPX 2 Month Dual Directional Knock In Structure|
|Structure||SPX Dual Directional Knock In|
|Tenure||31st Dec,2020 Expiry(2 Month)|
|Total Option Legs||4|
|Position Size (Per Option Leg)||1 lot = 100 Units|
|Upside KI Barrier||114%|
|Downside KI Barrier||70%|
|Call Option Strikes||Long 1 OTM Call Strike of* & Short 1 OTM Call Strike of*|
|Put Option Strikes||Long 1 OTM Put Option Strike of* & Short 4* OTM Put Strike of*|
|Structure Profit Range(SPX Levels)||Between $2,274 - $3,176 & Above $3800|
|Structure Loss Range(SPX Levels)||Between $3177 - $3,799 & Below $2274|
|Max Profit||On the upside max profit of $20,100 observed when SPX is above upside KI barrier & on the downside max profit of $67,600 observed when SPX is at downside KI barrier|
|Max Loss||On the upside, max loss of ($7,400) observed when SPX is at 3,550 & on the downside max loss of ($232,400) observed when SPX is at 1,500|
*Past performance is not indicative of and does not guarantee future results. Trading in markets may involve loss of capital.
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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