OverUnderExample

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OverUnder Example

Assume that share A is traded at 66 SEK and the following OverUnder with an expiration day in three weeks is available for trade:

OverUnder variant      Market price per unit

Share A over 70         0.25 SEK
Share A over 65         0.55 SEK
Share A over 60         0.85 SEK

Share A under 70       0.75 SEK
Share A under 65       0.45 SEK
Share A under 60       0.15 SEK

Example 1:

An investor believes that Share A will have risen above 70 SEK on the expiration day in three weeks, from today’s price of 66 SEK.

Example 2:

An investor is slightly positive to share A. The share is today trading at 66 SEK and the investor believes that the share will be at least above 60 on the expiration day three weeks from now.

Remember that the share is currently traded at 60 SEK. Accordingly, the investor in example 2 can accept a decline of nearly 6 SEK (equivalent to a decline of almost -9 %) over the next three weeks and remain on the “right” side of the strike price on the expiration day. If the share nonetheless declines by more than 9%, the entire invested amount is lost.

Example 3:

An investor believes that share A on the expiration day in three weeks will have declined substantially to below 60 SEK, equivalent to a decline in the share price of around 9 %.

Example 4:

An investor is moderately positive to share A. The investor believes that the share will be at least above 65 SEK on the expiration day three weeks from now (share now trading 66 SEK).

The day after the investor in example 4 purchased his or her Over, the Ericsson share increases sharply to 71 SEK. As a result, the market value of the investor’s Over rises to 0.80 SEK, and the investor chooses to realize his or her profit immediately on the same day. The result is as follows:

If, instead, the investor had waited until the expiration day in slightly less than three weeks’ time, the result would have been:

(The amounts in the examples above do not include any brokerage fees)

OverUnder Information