Examples for each option strategy
1. Bull Call Spread
View: Expect moderate upside, don’t want to pay for unlimited upside.
Example A – Airline hedging fuel price rise
Firm: Airline (jet fuel is a big cost).
Scenario: Fuel is cheap now, but the airline expects prices to rise somewhat over the next 6–12 months, not explode.
Strategy: Buy a call on jet fuel with a lower strike and sell a call with a higher strike (same maturity).
Why this helps:
The bought call protects against fuel becoming too expensive.
The sold call lowers the net premium, which matters for a cost-sensitive airline.
Because the airline only expects a moderate rise in fuel costs, capping the hedge (with the short call) is acceptable.
Example B – Retailer hedging FX for imports
Firm: Clothing retailer importing from Europe, paying in euros.
Scenario: Retailer fears the euro might strengthen a bit against the local currency but not by a huge amount.
Strategy: Buy a call option on EUR (right to buy euros) at a lower strike, sell another EUR call at a higher strike.
Why this helps:
Protects the retailer from a moderate EUR appreciation, which would raise import costs.
The spread is cheaper than a plain long call, which helps margin-sensitive retail.
If EUR appreciates a lot, they don’t gain extra—but that’s acceptable if very big moves are considered unlikely.
2. Bear Put Spread
View: Expect moderate downside, want protection but at lower cost.
Example A – Tech company with large share-based compensation
Firm: Large tech firm that holds its own stock to cover employee stock option programs.
Scenario: Management fears the stock may drop over the next year but doesn’t expect a crash.
Strategy: Buy a higher-strike put and sell a lower-strike put on its own shares.
Why this helps:
Limits the impact of a moderate decline in the firm’s stock value on the cost of equity compensation.
The sold lower-strike put reduces the hedge cost, which matters if they’re hedging a large position.
They accept some risk of very large losses beyond the lower strike, which they see as unlikely.
Example B – Commodity producer worried about price slip
Firm: Coffee exporter.
Scenario: Coffee prices are high but could fall moderately after harvest; the firm wants downside protection but doesn’t want to fully give up upside if prices stay high.
Strategy: Buy a put at a strike near current prices, sell a lower-strike put.
Why this helps:
Ensures a minimum revenue level while keeping partial exposure to favorable prices.
The cost is lower than buying a full put, which is important given thin producer margins.
Fits the view: risk of a normal price correction, not a full collapse.
3. Butterfly Spread (using calls)
View: Expect the price to stay in a narrow range around a target level (low volatility view).
Example A – Utility with stable stock and known regulation
Firm: Electric utility with very stable earnings; upcoming regulatory decision is expected to confirm current tariffs (no big surprise).
Scenario: Trader believes the utility’s stock will stay near current price over the next 6 months.
Strategy: Call butterfly centered around today’s price: long low-strike call, short two at-the-money calls, long high-strike call.
Why this helps:
Profits if the stock stays near the middle strike (the expected scenario).
Limited risk if the stock unexpectedly moves a lot.
Cheap way to “bet on stability” in a business known for low volatility.
Example B – Consumer staples company after results
Firm: Large food & beverage company.
Scenario: Earnings just came out, no major surprises, and there are no big events ahead (no lawsuits, no M&A rumors). An analyst expects the stock to trade in a tight band.
Strategy: Call butterfly around the post-earnings price.
Why this helps:
Takes advantage of expected “sideways” trading in a defensive sector.
Low cost, limited risk if something unexpected does happen.
Shows students how to profit from low volatility, not just direction.
4. Long Straddle
View: Expect a big move, but don’t know the direction (high volatility view).
Example A – Biotech company awaiting FDA decision
Firm: Biotech with a single key drug under review.
Scenario: FDA decision in 3 months: approval → stock may soar; rejection → stock may crash. Direction unknown, but magnitude likely huge.
Strategy: Buy a call and a put at the same strike and maturity.
Why this helps:
Profits if the stock moves sharply either up or down.
Perfect for “binary” events where the sign is uncertain but the move size is big.
Great classroom example of trading event risk.
Example B – Telecom operator with pending merger ruling
Firm: Telecom company awaiting an antitrust ruling on a proposed merger.
Scenario: If the merger is approved → big upside; if blocked → big downside.
Strategy: Long straddle on the telecom’s stock until the decision date.
Why this helps:
Captures large move regardless of whether the regulator says yes or no.
Simple story: students instantly see why both call and put are useful.
5. Strip (2 puts + 1 call)
View: Expect big move with downside more likely or more damaging.
Example A – Cyclical manufacturer worried about recession
Firm: Auto manufacturer.
Scenario: Macroeconomic data are weak; company is worried a recession will hit car demand, causing its stock to fall a lot, but there’s still some chance of a surprise upside.
Strategy: Buy 2 puts and 1 call at the same strike on its stock index or sector ETF.
Why this helps:
Extra weight on downside (2 puts) reflects that a big drop would be much more painful than a rally would be beneficial.
Retains some upside benefit if things surprisingly improve.
Example B – Luxury goods company exposed to China demand
Firm: Luxury fashion group.
Scenario: Uncertainty about Chinese demand: a slowdown could hurt profits badly; a rebound would be good but less impactful relative to the business risk of a downturn.
Strategy: Strip on its stock or on a luxury sector ETF.
Why this helps:
Emphasizes protection against a sharp fall in demand (downside risk).
Still makes money if demand explodes upward, but downside is the main concern.
6. Strap (2 calls + 1 put)
View: Expect big move with upside more likely or more valuable.
Example A – Tech company before major product launch
Firm: Smartphone or AI-chip manufacturer.
Scenario: New flagship product will be released. If it’s a hit, the stock could surge; if it disappoints, it may fall, but management believes the upside potential is larger.
Strategy: Strap (2 calls + 1 put at same strike).
Why this helps:
Benefits from volatility, but with extra weight on the upside.
Matches the firm’s belief that upside surprise (blockbuster product) is more valuable than downside risk.
Example B – Oil exploration company drilling a high-potential field
Firm: Oil & gas explorer.
Scenario: Upcoming drilling results: dry well = stock down, big discovery = stock way up. Upside move is likely larger than downside move.
Strategy: Strap on the company’s stock.
Why this helps:
Asymmetric payoff: more exposure to big positive outcome while still getting some protection if things disappoint.
Teaches students how to encode skewed expectations, not just symmetric volatility.
7. Long Strangle
View: Expect a big move, but want a cheaper volatility bet than a straddle (OK with needing a larger move to break even).
Example A – Airline facing election + regulatory changes
Firm: Airline whose profitability is strongly affected by new regulation and elections in 9–12 months.
Scenario: Combination of political/regulatory outcomes could drive the stock sharply up (deregulation, lower taxes) or sharply down (stricter rules, new taxes), but in the near term the price might drift.
Strategy: Long strangle: buy OTM put (lower strike) and OTM call (higher strike).
Why this helps:
Cheaper than a straddle, so easier to justify for a risk-averse treasury department.
Profits if there’s a large move in either direction once uncertainty resolves.
Example B – Retail chain around Black Friday + holiday season
Firm: Big-box retailer.
Scenario: Holiday season could be a blowout (stock soars) or terrible (stock tanks) depending on consumer spending and supply-chain issues; management expects “big or bust,” not a mild outcome.
Strategy: Long strangle on the retailer or on a retail sector ETF.
Why this helps:
Positions the firm (or an investor) to benefit from an extreme outcome while keeping option costs lower than at-the-money straddles.
Great pedagogical example of trading on tail outcomes.
