Podcast
Questions and Answers
What has research in neuroscience shown about the anticipation of winning the lottery compared to the actual experience of winning?
What has research in neuroscience shown about the anticipation of winning the lottery compared to the actual experience of winning?
- Anticipation is equally exciting as actual winning
- There is no difference in excitement
- Anticipation is more exciting than actual winning (correct)
- Anticipation is less exciting than actual winning
The reflexive brain is responsible for analytical thinking and performing calculations.
The reflexive brain is responsible for analytical thinking and performing calculations.
False (B)
What compels a person to buy a lottery ticket even when they know the odds of winning are low?
What compels a person to buy a lottery ticket even when they know the odds of winning are low?
The reflexive brain
Anticipating a win from investments requires a degree of ______.
Anticipating a win from investments requires a degree of ______.
Match the following terms with their correct descriptions:
Match the following terms with their correct descriptions:
Why is the experience of winning in trading options considered more exciting than winning the lottery?
Why is the experience of winning in trading options considered more exciting than winning the lottery?
Buying calls and puts in options trading does not carry any risk.
Buying calls and puts in options trading does not carry any risk.
What is the primary reason people regularly buy options even after experiencing losses?
What is the primary reason people regularly buy options even after experiencing losses?
What is the main disadvantage of trading with a traditional broker?
What is the main disadvantage of trading with a traditional broker?
An arbitrage opportunity is created when Synthetic long + short futures yields a negative P&L upon expiry.
An arbitrage opportunity is created when Synthetic long + short futures yields a negative P&L upon expiry.
What is the benefit of using a discount broker like Zerodha for arbitrage trades?
What is the benefit of using a discount broker like Zerodha for arbitrage trades?
The breakeven point for a synthetic long is the ________________________ + net premium paid.
The breakeven point for a synthetic long is the ________________________ + net premium paid.
Match the following terms with their descriptions:
Match the following terms with their descriptions:
Why may an arbitrage trade for 10 points not be profitable?
Why may an arbitrage trade for 10 points not be profitable?
A synthetic long can be created by simultaneously buying ATM call and selling ATM put.
A synthetic long can be created by simultaneously buying ATM call and selling ATM put.
What is the key takeaway from executing an arbitrage trade?
What is the key takeaway from executing an arbitrage trade?
What is a characteristic of all strikes in a bull call spread?
What is a characteristic of all strikes in a bull call spread?
In a bull call spread, the net cash flow is always a credit transaction.
In a bull call spread, the net cash flow is always a credit transaction.
What is the intrinsic value of a call option upon expiry?
What is the intrinsic value of a call option upon expiry?
In a bull call spread, the trade setup involves buying a _______ call option and selling a _______ call option.
In a bull call spread, the trade setup involves buying a _______ call option and selling a _______ call option.
Match the following options with their respective premiums:
Match the following options with their respective premiums:
The bull call spread is also referred to as a credit bull spread.
The bull call spread is also referred to as a credit bull spread.
What happens to the 7800 CE option if the market expires at 7700?
What happens to the 7800 CE option if the market expires at 7700?
What is the net cash flow in the given bull call spread trade setup?
What is the net cash flow in the given bull call spread trade setup?
What is the difference between the spread and the strategy's net debit?
What is the difference between the spread and the strategy's net debit?
The maximum profit of a Bull Call Spread is determined by subtracting the net debit from the spread.
The maximum profit of a Bull Call Spread is determined by subtracting the net debit from the spread.
What is the breakeven point for a Bull Call Spread?
What is the breakeven point for a Bull Call Spread?
The maximum loss for a Bull Call Spread is equal to the ______ of the strategy.
The maximum loss for a Bull Call Spread is equal to the ______ of the strategy.
Match the following terms with their correct definitions:
Match the following terms with their correct definitions:
What happens to a Bull Call Spread if the underlying asset price expires below the lower strike price?
What happens to a Bull Call Spread if the underlying asset price expires below the lower strike price?
The Bull Call Spread strategy is always profitable.
The Bull Call Spread strategy is always profitable.
What is the purpose of a Bull Call Spread strategy compared to buying a plain vanilla call option?
What is the purpose of a Bull Call Spread strategy compared to buying a plain vanilla call option?
The synthetic long strategy loses money when the market moves higher.
The synthetic long strategy loses money when the market moves higher.
What is the breakeven point calculated in the strategy?
What is the breakeven point calculated in the strategy?
At a price of 7627, the overall payoff from the strategy is _______.
At a price of 7627, the overall payoff from the strategy is _______.
What is the intrinsic value of the 7400 CE at a price of 7627?
What is the intrinsic value of the 7400 CE at a price of 7627?
The synthetic long strategy has payoff symmetry around the breakeven point.
The synthetic long strategy has payoff symmetry around the breakeven point.
What is the net loss when the price is at 7227?
What is the net loss when the price is at 7227?
Match the following terms with their definitions:
Match the following terms with their definitions:
Study Notes
Trading with Traditional Brokers vs. Discount Brokers
- Trading with traditional brokers can eat away profits due to high brokerage charges (8-10 points)
- Discount brokers like Zerodha can reduce brokerage charges, making breakeven points more achievable (4-5 points)
Important Considerations for Arbitrage Trades
- STT (Securities Transaction Tax) can further eat away profits, especially for ITM options
- Other applicable taxes, such as service tax and stamp duty, must also be considered
- Arbitrage trades may not be worth the effort for small payoffs (10 points), but can be profitable with higher payoffs (15-20 points)
Key Takeaways from Synthetic Long and Arbitrage
- Options can be used to replicate futures payoffs
- Synthetic longs replicate long futures payoffs
- A synthetic long is created by simultaneously buying ATM calls and selling ATM puts
- The breakeven point for a synthetic long is the ATM strike + net premium paid
- Arbitrage opportunities arise when synthetic long + short futures yield a positive non-zero P&L upon expiry
- Execute arbitrage trades only if the P&L upon expiry makes sense after accounting for expenses
Behavioral Finance and Trading
- Our brains are wired to seek excitement and indulge in activities that provide a rush, even if they are not rational choices
- Reflexive brain vs. reflective brain: reflexive brain drives impulsive decisions, while reflective brain analyzes and thinks
- Trading options can be an exciting experience, but it's essential to think critically and consider the risks
Bull Call Spread
- A bull call spread is a strategy that involves buying a lower strike call and selling a higher strike call
- Net debit is the difference between the premium paid for the lower strike call and the premium received for the higher strike call
- Max loss is equal to the net debit, and max profit is the spread minus the net debit
- Breakeven point is the lower strike + net debit
- The payoff diagram of a bull call spread shows a restricted loss and capped profit
Synthetic Long Payoff
- The synthetic long payoff behaves similarly to futures, with a linear payoff around the breakeven point
- The payoff is symmetric around the breakeven point, making it similar to long call futures
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Learn about the impact of brokerage and STT on trading profits and how discount brokers like Zerodha can help reduce costs.
