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What are your options - CAC40 buy or sell premium? - defined risk strategies
Koen Hoorelbeke
Investment and Options Strategist
Summary: In this article we provide an analysis of defined risk strategies for the CAC 40 Index. It compares various approaches, highlighting their potential benefits and drawbacks. The information is aimed at traders seeking to understand different risk management techniques applicable to the CAC 40. The content is factual and may be useful for those involved in trading this particular index.
What are your options - CAC40 buy or sell premium? - defined risk strategies
Peter Garnry's article "Can European equities continue to ignore the bad news?" takes a look at Europe's biggest economy and discusses the weakest economic growth since the crisis years of 2011-2013. And we can't but wonder if this is also the case for France's economy, which is the third largest in the Euro-region.
Based on the technical update of Kim Cramer Larsson, in this article we'll have a deeper look into how we can react, using option strategies, on what to do if France's index, the CAC 40 goes up, sideways or down.
In our analysis, we will present two distinct possibilities for each market outlook, categorizing them based on strategies where we either receive/sell premium or pay premium to initiate positions. By comparing both strategies side by side for each outlook, we aim to equip you with the insights needed to make informed decisions. This comparison will help you select the strategy that aligns best with your trading style and preferences
In this article, we focus exclusively on a selection of defined risk strategies within the CAC 40 Index. It's important to note that the scope of this analysis does not extend to the many undefined risk strategies available in the options toolbox. Traders interested in a broader range of techniques may need to consult additional resources.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Before we go any further, let's list up the strategies we'll cover in this article:
Bullish setups
○ Bullish Credit Put Spread
○ Bullish Debit Call Spread
Neutral setups
○ (Credit) Iron Condor
○ (Debit) Call Butterfly
Bearish setups
○ Bearish Credit Call Spread
○ Bearish Debit Put Spread
Bullish Outlook Strategies
1) Bullish Vertical Credit Put Spread
Bullish Credit Put Spread on CAC 40 Index (Date: 8-Aug-23)
Strategy: Bullish Credit Put Spread
Underlying Asset: PXA:xpar (Last Traded: 7260.5)
Expiration Date: 15-Sep-23
Strike Prices: Sell 7300 Put, Buy 7250 Put
Quantity: 1 contract each
Premium Received: USD 184
Margin Impact: EUR 256.08 (can vary upon your margin configuration)
Max Risk: -USD 316
Max Profit: USD 184
Breakeven Point: 7281.06
Probability of Profit: 57.25% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
Days to Expiration (DTE): 38
Implied Volatility (IV) Rank: 15.7
Trade Details:
- Sell to Open: 7300 Put (Price: 146.15 Mid, Delta: -0.4784, Theta: -1.969, Volatility: 15.9%)
- Buy to Open: 7250 Put (Price: 126.8 Mid, Delta: -0.4275, Theta: -1.9983, Volatility: 16.39%)
Risk and Rewards:
- Risk: The maximum risk is the difference between the strike prices minus the premium received, which is USD 316. This occurs if the index closes below 7250 at expiration.
- Reward: The maximum profit is the premium received, USD 184, achieved if the index closes above 7300 at expiration.
- Breakeven Point: The breakeven point is 7281.06, where the trade neither makes nor loses money.
Position Metrics:
- Delta Position: 0.0509
- Theta Position: -0.0293
Summary:
This Bullish Credit Put Spread is a neutral to bullish strategy that benefits from time decay and a rise in the underlying index. The trader collects a premium upfront and aims to keep it by having the index close above the sold put strike at expiration. The defined risk and reward make it a popular choice for traders with a bullish outlook on the CAC 40 Index.
2) Bullish Vertical Debit Call Spread
Bullish Debit Call Spread on CAC 40 Index (Date: 8-Aug-23)
Strategy: Bullish Debit Call Spread
Underlying Asset: PXA:xpar (Last Traded: 7260.5)
Expiration Date: 15-Sep-23
Strike Prices: Buy 7300 Call, Sell 7350 Call
Quantity: 1 contract each
Premium Paid: USD 277
Margin Impact: EUR 25.67
Trade Fees: USD 0
Max Risk: USD 277
Max Profit: USD 223
Breakeven Point: 7327.7
Probability of Profit: 48.88% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
Days to Expiration (DTE): 38
Implied Volatility (IV) Rank: 23.5
Trade Details:
- Buy to Open: 7300 Call (Price: 150.8 Mid, Delta: 0.5112, Theta: -1.9791, Volatility: 16.07%)
- Sell to Open: 7350 Call (Price: 123.25 Mid, Delta: 0.4572, Theta: -1.9113, Volatility: 15.59%)
Risk and Rewards:
- Risk: The maximum risk is the premium paid, USD 277, which occurs if the index closes below 7300 at expiration.
- Reward: The maximum profit is the difference between the strike prices minus the premium paid, USD 223, achieved if the index closes above 7350 at expiration.
- Breakeven Point: The breakeven point is 7327.7, where the trade neither makes nor loses money.
Position Metrics:
- Delta Position: 0.054
- Theta Position: -0.0678
Summary:
This Bullish Debit Call Spread is a bullish strategy that requires an upfront payment of the premium. The trader profits if the underlying index rises above the breakeven point by expiration. The defined risk and potential for profit make it suitable for traders with a bullish outlook on the CAC 40 Index, expecting a moderate upward move.
Now let's compare these 2 strategies
Bullish Credit Put Spread | Bullish Debit Call Spread |
Max Risk: USD 316 Max Profit: USD 184 Breakeven Point: 7281.06 Probability of Profit: 57.25% Premium Received: USD 184 Cost Structure: Credit (receive premium) Delta Position: 0.0509 Theta Position: -0.0293 | Max Risk: USD 277 Max Profit: USD 223 Breakeven Point: 7327.7 Probability of Profit: 48.88% Premium Paid: USD 277 Cost Structure: Debit (pay premium) Delta Position: 0.054 Theta Position: -0.0678 |
Comparison:
Risk:
Credit Put Spread has a higher max risk (USD 316) compared to the Debit Call Spread (USD 277).
Reward:
Credit Put Spread has a lower max profit (USD 184) compared to the Debit Call Spread (USD 223).
Debit Call Spread offers a higher potential reward for a lower risk.
Probability of Profit:
Credit Put Spread has a higher probability of profit (57.25%) compared to the Debit Call Spread (48.88%).
Cost Structure:
Credit Put Spread receives a premium, while Debit Call Spread pays a premium.
Breakeven Point:
Credit Put Spread has a lower breakeven point, making it potentially easier to reach profitability.
Delta and Theta Position:
Slightly different exposure to price and time decay between the two strategies. However, one important fact to note is that with a credit strategy time works in the seller's favor. Time, or in options terms theta-decay, works in the same way for both credit and debit strategies and decreases the price of the option-strategy. This is however the opposite of what you want in a debit-strategy. So the longer it takes to reach your target, the harder it get's because time reduces the value of your strategy as it passes by.
Conclusion:
Bullish Credit Put Spread might be preferred if the trader wants a higher probability of profit, is willing to accept higher risk, and prefers to receive a premium upfront.
Bullish Debit Call Spread might be preferred if the trader seeks a higher reward relative to risk, is willing to pay a premium upfront, and expects a more significant upward move in the underlying index.
Neutral Outlook Strategies
1) Iron Condor
Iron Condor
- Strategy Type: Neutral (Profit from low volatility)
- Max Risk: USD 361
- Max Profit: USD 139
- Breakeven Points: 6936.1 and 7663.9
- Probability of Profit: 66.73% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
- Premium Received: USD 139
- Expiry: 15-Sep-23
- Delta Position: -0.0128
- Theta Position: 0.2486
Risk and Rewards:
- Risk: The maximum risk is the difference between the strike prices of the call or put spread minus the premium received, which is USD 361.
- Reward: The maximum profit is the premium received, which is USD 139.
- Breakeven Points: The trade will break even if the index closes at 6936.1 or 7663.9 at expiration.
Characteristics:
- Neutral Strategy: The Iron Condor benefits from the underlying asset staying within a specific range.
- Volatility Play: It's a strategy that can profit from decreasing volatility in the underlying asset.
- Defined Risk and Reward: Both the potential profit and loss are capped.
- Theta Positive: Benefits from time decay as the options approach expiration.
Conclusion:
The Iron Condor is a suitable strategy for traders who expect the underlying index to trade within a specific range and want to benefit from time decay. It offers a relatively high probability of profit with defined risk and reward. The choice of strike prices and the distance between them can be adjusted based on the trader's outlook and risk tolerance.
2) Call Butterfly
Call Butterfly
- Strategy Type: Neutral
- Max Risk: USD 650
- Max Profit: USD 1850
- Breakeven Points: 7065 and 7435
- Probability of Profit: 51.74% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
- Premium Paid: USD 650
- Expiry: 15-Sep-23
- Delta Position: -0.0578
- Theta Position: 0.7153
Risk and Rewards:
- Risk: The maximum risk is the premium paid, which is USD 650.
- Reward: The maximum profit is USD 1850, achieved if the index closes at the middle strike price (7250) at expiration.
- Breakeven Points: The trade will break even if the index closes at 7065 or 7435 at expiration.
Characteristics:
- Neutral to Bullish Strategy: The Broken Wing Call Butterfly benefits if the underlying asset stays within a specific range, with a slight bullish bias.
- Volatility Play: It can be used in various volatility environments, but typically benefits from a decrease in implied volatility.
- Defined Risk and Reward: Both the potential profit and loss are capped.
- Theta Positive: Benefits from time decay as the options approach expiration.
Conclusion:
The Broken Wing Call Butterfly is a suitable strategy for traders who expect the underlying index to trade within a specific range, with a slight bullish bias. It offers a balanced probability of profit with defined risk and reward. The choice of strike prices and the distance between them can be adjusted based on the trader's outlook and risk tolerance. The strategy is more complex than some other options strategies, so it may be more suitable for intermediate to advanced traders.
Now let's compare these 2 strategies
Iron Condor | Call Butterfly |
Max Risk: USD 361 Max Profit: USD 139 Probability of Profit: 66.73% Breakeven Points: 6936.1 and 7663.9 Strategy: Neutral, benefits from low volatility Theta Position: 0.2486 (positive time decay) | Max Risk: USD 650 Max Profit: USD 1850 Probability of Profit: 51.74% Breakeven Points: 7065 and 7435 Strategy: Neutral, Theta Position: 0.7153 (positive time decay) |
Comparison:
Risk:
- The Iron Condor has a lower maximum risk (USD 361) compared to the Broken Wing Call Butterfly (USD 650).
Reward:
- The Call Butterfly has a significantly higher maximum profit (USD 1850) compared to the Iron Condor (USD 139).
Probability of Profit:
- The Iron Condor has a higher probability of profit (66.73%) compared to the Broken Wing Call Butterfly (51.74%).
Strategy Bias:
- The Iron Condor is purely neutral and benefits from decreasing volatility.
- The Call Butterfly is neutral to bullish and can be adjusted for different volatility environments.
Theta (Time Decay):
- Both strategies are theta positive, but the Call Butterfly has a higher theta value, meaning it benefits more from time decay.
Conclusion:
- If you prioritize a higher probability of profit and lower risk, the Iron Condor may be the better choice.
- If you are looking for a higher potential reward and are willing to accept more risk, the Call Butterfly may be more suitable.
- The choice between these two strategies depends on your market outlook, risk tolerance, and trading objectives.
Bearish Outlook Strategies
1) Bearish Credit Call Spread
Bearish Credit Call Spread
- Max Risk: USD 199
- Max Profit: USD 301
- Probability of Profit: 55.68% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
- Breakeven Point: 7280.1
- Strategy: Bearish, benefits from a decrease in the underlying asset's price
- Theta Position: 0.0384 (positive time decay)
- Days to Expiry (DTE): 38
- Implied Volatility (IV) Rank: Not provided
Summary:
- This strategy involves selling a call option with a lower strike price and buying a call option with a higher strike price, both with the same expiry date.
- It's a bearish strategy, meaning it profits when the underlying asset's price decreases.
- The maximum risk is limited to USD 199, and the maximum profit is USD 301.
- The breakeven point is at 7280.1, meaning the underlying asset must stay below this price for the trade to be profitable.
- The positive theta value indicates that the position benefits from time decay.
The Bearish Credit Call Spread is suitable for traders who have a bearish outlook on the underlying asset and want to generate premium income with defined risk and reward.
2) Bearish Debit Put Spread
Bearish Debit Put Spread
- Max Risk: USD 185
- Max Profit: USD 315
- Probability of Profit: 44.00% (this is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta)
- Breakeven Point: 7281.5
- Strategy: Bearish, benefits from a decrease in the underlying asset's price
- Theta Position: 0.0366 (positive time decay)
- Days to Expiry (DTE): 38
- Implied Volatility (IV) Rank: Not provided
Summary:
- This strategy involves buying a put option with a higher strike price and selling a put option with a lower strike price, both with the same expiry date.
- It's a bearish strategy, meaning it profits when the underlying asset's price decreases.
- The maximum risk is limited to USD 185, and the maximum profit is USD 315.
- The breakeven point is at 7281.5, meaning the underlying asset must stay below this price for the trade to be profitable.
- The positive theta value indicates that the position benefits from time decay.
The Bearish Debit Put Spread is suitable for traders who have a bearish outlook on the underlying asset and want to profit from a decrease in price with defined risk and reward.
Now let's compare these 2 strategies
Bearish Credit Call Spread | Bearish Debit Put Spread |
Max Risk: USD 199 Max Profit: USD 301 Probability of Profit: 55.68% Breakeven Point: 7280.1 Theta Position: 0.0384 (positive time decay) Strategy: Bearish | Max Risk: USD 185 Max Profit: USD 315 Probability of Profit: 44.00% Breakeven Point: 7281.5 Theta Position: 0.0366 (positive time decay) Strategy: Bearish |
Comparison:
- Risk: The Bearish Debit Put Spread has a slightly lower maximum risk (USD 185) compared to the Bearish Credit Call Spread (USD 199).
- Reward: The Bearish Debit Put Spread offers a higher maximum profit (USD 315) compared to the Bearish Credit Call Spread (USD 301).
- Probability of Profit: The Bearish Credit Call Spread has a higher probability of profit (55.68%) compared to the Bearish Debit Put Spread (44.00%).
- Breakeven Point: The breakeven points are close, with the Bearish Credit Call Spread at 7280.1 and the Bearish Debit Put Spread at 7281.5.
- Theta Position: Both strategies have positive theta positions, meaning they benefit from time decay, with slightly higher theta for the Bearish Credit Call Spread.
Conclusion:
- If you prioritize a higher probability of profit and slightly higher theta, the Bearish Credit Call Spread may be the better choice.
- If you prioritize a lower risk and higher reward, the Bearish Debit Put Spread may be more suitable.
Both strategies are bearish and have their unique risk-reward profiles. The choice between them depends on your specific risk tolerance, market outlook, and trading objectives.
Conclusion
As a trader investing in the CAC 40 Index, you have various strategies at your disposal to manage risk. This article has laid out different methods, comparing them to help you choose the right one. Whether you're considering ways to protect against loss, spreading your investments, or employing other tactics to reduce risk, this information is vital for your success. It's a reminder to stay vigilant, keep an eye on your investments, and make necessary adjustments to thrive in a changing market. Your understanding of these strategies can be a key factor in your success with the CAC 40 Index.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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