Eachway Put Options

Eachway Put OptionsEachway put options have two strikes so that if the underlying asset price is above the upper strike the instrument settles at 0. Between the strikes the instrument settles at 40, while below the lower strike the eachway put option settles at 100. If the underlying price settled on either of the strikes then the mean of the adjacent settlement prices would be used for settling the strategy, i.e. 20 and 70 for the upper and lower strikes respectively. This instrument provides a further example of how binary options, in combintions, can settle at and between the limits of 0 and 1(00).

Eachway Put GreeksBelow Lower StrikeBetween StrikesAbove Upper Strike
Delta-ve-ve-ve
Gamma-ve+ve -ve+ve
Theta+ve-ve +ve-ve
Vega-ve+ve -ve+ve

Eachway Put Options Expiry Price Profile

Below is the expiry profile of the Corn 580/620 eachway put. Below the lower strike of 580 the strategy settles at 100 while between the strikes the strategy gets a ‘place’ and settles at 40%. Above the upper strike of 620 the bet loses outright and settles at 0. If Corn settles at exactly on 580 the bet is treated as a ‘dead heat’ and settles at 70, similarly at 20 if corn settles exactly on 620.

As with an each-way bet at the races, this strategy provides the less gung-ho ‘all-or-nothing’ trader with a get-out in that a return is offered even if the market hasn’t been called 100% correctly.

eachway put

Fig.1 – Corn 580/620 Eachway Put Option Price Profile at Expiry

Eachway Put Options Over Time

Figure 2 illustrates how the eachway put changes value over time. When there are 10-days to expiry this Corn eachway put has a smooth profile with almost a straight line profile between the strikes. On the other hand, the 0.2-day profile shows the profile being very much influenced by the proximity of the strikes with a horizontal straight line between the strikes, in itself indicating a zero delta.

If the two strikes were at 600 then the strategy is clearly nothing more than a single 600 strike binary put, so as the strikes move away from each other the deltas become more shallow indicating lower deltas, in turn indicating a less risky strategy. The put accumulator takes this feature a stage further.

Eachway Put FV w.r.t. Time

Fig.2 – Corn 580/620 Eachway Put Option Price Profile w.r.t. Time to Expiry

Eachway Put Options and Implied Volatility

Figure 3 plots the Corn eachway put over a range of implied volatilities. When there are 5-days to expiry the wide range of implied volatility, i.e. 10% to 30%, does not have a major impact on the price profiles suggesting that vega will be low.

Eachway Put FV w.r.t. Vol

Fig.3 – Corn 580/620 Eachway Put Option Price Profile w.r.t. Time to Expiry

The Eachway Put is calculated as:

Eachway Put    =    0.4 x Binary Put(K1) + 0.6 x Binary Put(K2)

where K1 is the upper strike and K2 the lower strike.

The ratio of 0.4 and 0.6 must sum to 1.0 although the ratios could be different, e.g. 0.25 and 0.75 which would also influence the attractiveness of the strategy. Applying the 0.25/0.75 ratio means a settlement price of just 25 between the strikes so that Figure 2 would thus become:

Eachway Put FV w.r.t. Time 75.25 Ratio

Fig.4 – Corn 580/620 Eachway Put Option Price Profile w.r.t. Implied Volatility (75:25 Payout)

In conclusion, the eachway put is likely to create a large following owing to the feature that the speculator can get close to being right, in reality losing the major prize, and still be rewarded with a runner-up spot.

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