Option Strategies - Easy Method - Long or Short the Bond?

CFA Level I
#1

Hi everyone,

This forum is great for picking up short and concise ways of remembering different parts of the syllabus. Does anyone have any easy methods or explanations that will help me remember whether I need to go Long or short the bond when dealing with the option strategy.

e.g. Protective Puts/ Fiduciary Calls / Covered Calls etc…

My concern is, I am fully comfortable with the strategies, but I always get mixed up on whether a) I need to involve the bond and b) should I be long or short? If that is the differentiator in the question it will be a 50/50 at present!

thanks

#2

Call + Bond = Stock + Put

think of this as a math equation.

If you want to short this stock, you rearrange it to:

  • Stock = - Call - Bonds + Put

this translates into: to short the stock, you need to sell the call, sell the bond and buy the put.

  • sign = buy
  • sign = sell (short)
#3

Perfect! Thank you!

#4

Backwardation nailed it.

I wrote an article on put-call parity that spells it out in more detail: http://financialexamhelp123.com/put-call-parity/