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Option Trading
BACK TO BASICS
HISTORY OF OPTIONS
WHAT DOES AN OPTION LOOK LIKE? COMMON OPTION DEFINITIONS
7 FACTORS THAT AFFECT AN OPTION'S PRICE
OPTION STRATEGIES
LONG CALL LONG PUT SHORT CALL SHORT PUT COVERED CALL COLLARBULL CALL SPREAD BEAR PUT SPREAD BEAR CALL SPREAD BULL PUT SPREAD LONG STRADDLE SHORT STRADDLE LONG STRANGLE SHORT STRANGLE LONG COMBINATION SHORT COMBINATION
RATIO VERTICAL SPREAD WITH CALLS RATIO VERTICAL SPREAD WITH PUTS BACK SPREAD WITH CALLS
BACK SPREAD WITH PUTS
LONG CALENDAR SPREAD WITH CALLS LONG CALENDAR SPREAD WITH PUTS DIAGONAL SPREAD WITH CALLS DIAGONAL SPREAD WITH PUTS LONG BUTTERFLY SPREAD WITH CALLS LONG BUTTERFLY SPREAD WITH PUTS
3
3 4 5 812
12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 IRON BUTTERFLYSKIP STRIKE BUTTERFLY WITH CALLS SKIP STRIKE BUTTERFLY WITH PUTS
INVERSE SKIP STRIKE BUTTERFLY WITH CALLS INVERSE SKIP STRIKE BUTTERFLY WITH PUTS CHRISTMAS TREE BUTTERFLY WITH CALLS CHRISTMAS TREE BUTTERFLY WITH PUTS LONG CONDOR SPREAD WITH CALLS LONG CONDOR SPREAD WITH PUTS IRON CONDOR
ADVANCED TOPICS
THE GREEKS
THE GREEK CHEAT SHEET
USING OPTIONS TO PICK UP STOCK
TOP 8 MISTAKES PEOPLE MAKE TRADING OPTIONS (SET) AND INDEX OPTION EXPIRATION
64 66 68 70 72 74 76 78 80 82
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84 89 90 93 99BACK TO BASICS
HISTORY OF OPTIONS
WHAT DOES AN OPTION LOOK LIKE? COMMON OPTION DEFINITIONS
7 FACTORS THAT AFFECT AN OPTION'S PRICE
OPTION STRATEGIES
LONG CALL LONG PUT SHORT CALL SHORT PUT COVERED CALL COLLARBULL CALL SPREAD BEAR PUT SPREAD BEAR CALL SPREAD BULL PUT SPREAD LONG STRADDLE SHORT STRADDLE LONG STRANGLE SHORT STRANGLE LONG COMBINATION SHORT COMBINATION
RATIO VERTICAL SPREAD WITH CALLS RATIO VERTICAL SPREAD WITH PUTS BACK SPREAD WITH CALLS
BACK SPREAD WITH PUTS
LONG CALENDAR SPREAD WITH CALLS LONG CALENDAR SPREAD WITH PUTS DIAGONAL SPREAD WITH CALLS DIAGONAL SPREAD WITH PUTS LONG BUTTERFLY SPREAD WITH CALLS LONG BUTTERFLY SPREAD WITH PUTS
3
3 4 5 812
12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 IRON BUTTERFLYSKIP STRIKE BUTTERFLY WITH CALLS SKIP STRIKE BUTTERFLY WITH PUTS
INVERSE SKIP STRIKE BUTTERFLY WITH CALLS INVERSE SKIP STRIKE BUTTERFLY WITH PUTS CHRISTMAS TREE BUTTERFLY WITH CALLS CHRISTMAS TREE BUTTERFLY WITH PUTS LONG CONDOR SPREAD WITH CALLS LONG CONDOR SPREAD WITH PUTS IRON CONDOR
ADVANCED TOPICS
THE GREEKS
THE GREEK CHEAT SHEET
USING OPTIONS TO PICK UP STOCK
TOP 8 MISTAKES PEOPLE MAKE TRADING OPTIONS (SET) AND INDEX OPTION EXPIRATION
64 66 68 70 72 74 76 78 80 82
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84 89 90 93 99History of Op ons
The US op ons exchange started with the founding of the CBOE (Chicago Board Op ons Exchange) in 1973. At the beginning there were a total of 16 equi es that had only call op ons. In 1977 they began to trade put op ons. There are now over 5 different exchanges ac vely trading op ons.
In 1975 the SEC (Securi es and Exchange Commission) approved the OCC (Op ons Clearing Corpora on) with the sole purpose of clearing all US based op ons. A clearing firm’s job is to facilitate execu on by transferring funds, assigning deliveries, and guaranteeing the contracts. Op ons were a hit when they first appeared. In 1975 18 million contracts traded. By 1978 that number had more than tripled to 60 million contracts. The increase in contracts con nued to climb un l the 1987 stock market crash. A er the stock market crash investors were s ll uneasy. In 1991 only 2/3 of the peak level contracts were traded. In 1983 we saw the first op ons traded on an index, the S&P 500. This was a big development since it was from this that led to the forma on of the VIX. The VIX is the vola lity index, fear index, based on the prices of S&P 500 op ons.
Enthusiasm for the op ons market didn’t return un l the 1990s. During these mes we saw the introduc on of LEAPS (Long-term An cipa on Securi es) which allowed investors to buy op ons that expired over a year. We also saw the forma on of the OIC (Op ons Industry Council) which is a non-profit organiza on developed to educate people on the risk and benefits of op ons.
What Does An Op on Look Like?
An op on gives the buyer the right to buy or sell the underlying at a specified price and me. At the same me, the seller has the obliga on to take the opposite side and fulfill the op on upon exercise. That means that the buyer can choose if they want to exercise the op on, but the seller has to live up to the contract if the buyer does exercise.
A typical op on:
Let’s analyze:
XYZ is the underlying instrument. This can range from equi es (companies), indexes, futures, and currency. In this case we are using the company XYZ.
January is the expira on month and sets the life of the op on. Expira ons are always given in terms of a month. It is understood that op ons expire on the third Friday of every month. In this example, a er the third Friday in January this op on will no longer exist.
170 is our strike price. The strike price sets the price of the underlying if it were exercised. This is not the price you would pay to buy the op on.
Call specifies if this is a call or put. A call is the right to buy or call the stock away from someone else. Too long a call you are making a bet the underlying will appreciate in price.
A put is the right to sell or put the stock to someone else. Too long a put you are predic ng deprecia on in price.
A put and call can be traded long and short or also in combina on with other puts/calls to create spreads (more informa on on combina ons to follow).
History of Op ons
The US op ons exchange started with the founding of the CBOE (Chicago Board Op ons Exchange) in 1973. At the beginning there were a total of 16 equi es that had only call op ons. In 1977 they began to trade put op ons. There are now over 5 different exchanges ac vely trading op ons.
In 1975 the SEC (Securi es and Exchange Commission) approved the OCC (Op ons Clearing Corpora on) with the sole purpose of clearing all US based op ons. A clearing firm’s job is to facilitate execu on by transferring funds, assigning deliveries, and guaranteeing the contracts. Op ons were a hit when they first appeared. In 1975 18 million contracts traded. By 1978 that number had more than tripled to 60 million contracts. The increase in contracts con nued to climb un l the 1987 stock market crash. A er the stock market crash investors were s ll uneasy. In 1991 only 2/3 of the peak level contracts were traded. In 1983 we saw the first op ons traded on an index, the S&P 500. This was a big development since it was from this that led to the forma on of the VIX. The VIX is the vola lity index, fear index, based on the prices of S&P 500 op ons.
Enthusiasm for the op ons market didn’t return un l the 1990s. During these mes we saw the introduc on of LEAPS (Long-term An cipa on Securi es) which allowed investors to buy op ons that expired over a year. We also saw the forma on of the OIC (Op ons Industry Council) which is a non-profit organiza on developed to educate people on the risk and benefits of op ons.
What Does An Op on Look Like?
An op on gives the buyer the right to buy or sell the underlying at a specified price and me. At the same me, the seller has the obliga on to take the opposite side and fulfill the op on upon exercise. That means that the buyer can choose if they want to exercise the op on, but the seller has to live up to the contract if the buyer does exercise.
A typical op on:
Let’s analyze:
XYZ is the underlying instrument. This can range from equi es (companies), indexes, futures, and currency. In this case we are using the company XYZ.
January is the expira on month and sets the life of the op on. Expira ons are always given in terms of a month. It is understood that op ons expire on the third Friday of every month. In this example, a er the third Friday in January this op on will no longer exist.
170 is our strike price. The strike price sets the price of the underlying if it were exercised. This is not the price you would pay to buy the op on.
Call specifies if this is a call or put. A call is the right to buy or call the stock away from someone else. Too long a call you are making a bet the underlying will appreciate in price.
A put is the right to sell or put the stock to someone else. Too long a put you are predic ng deprecia on in price.
A put and call can be traded long and short or also in combina on with other puts/calls to create spreads (more informa on on combina ons to follow).
Common Op on Defini ons
In-the-Money (ITM): For a call op on this means that the underlying is trading above the strike price. For example ABC is trading at 30 and the call op on has a strike price of 25. This call op on is ITM. For a put op on this means the underlying is trading below the strike price. For example ABC is trading at 45 and the put op on has a strike of 50. This put op on is ITM.
At-the-Money (ATM): This indicates the underlying price is around the strike price. For example ABC is trading at 50 and the op on strike is 50. This goes for both puts and calls. If you cannot tell which strike is closer than look for the strike with a delta closer to .50.
Out-of-the-Money (OTM): For a call op on this means the underlying is trading below the strike price. For example ABC is trading at 15 with the call op on strike at 20. This call op on is OTM. For a put op on this means the underlying is trading above the strike price. For example ABC is trading at 75 and the put op on has a strike of 70. This put op on is OTM.
Intrinsic Value: The amount the op on is in-the-money. Only In-the-Money (ITM) op ons carry intrinsic value.
Time Value: Sets the value of me ll expira on. An op on that is Out-of-the-Money (OTM) only has me value. If an op on is In-the-Money (ITM) it is made up of both Intrinsic Value and Time Value.
Exercise: To exercise an op on contract means you are fulfilling the contract and closing it out. If you exercise a call op on you are buying the shares at the strike price. If you exercise a put you are selling the shares at the strike price.
Assignment: An op on assignment is the other side of the op on being exercised. In this case you are not the buyer of the op on instead you are the seller or writer of the op on. When a buyer exercises an op on the writer gets assigned. If you are a writer of a call op on that gets exercised then you have to give the buyer your shares. If you are a writer of a put op on then you will receive the shares when assigned.
Op on Chain: An op on chain displays all the necessary informa on for the underlying asset. The op ons are listed by the expira on month and then broken down by all the strikes available. Usually Calls are listed on the le side and Puts listed on the right side. Op on Chains can provide a wide variety of informa on from something basic such as the bid/ask to more specific informa on such as the op on Greeks.
Common Op on Defini ons
In-the-Money (ITM): For a call op on this means that the underlying is trading above the strike price. For example ABC is trading at 30 and the call op on has a strike price of 25. This call op on is ITM. For a put op on this means the underlying is trading below the strike price. For example ABC is trading at 45 and the put op on has a strike of 50. This put op on is ITM.
At-the-Money (ATM): This indicates the underlying price is around the strike price. For example ABC is trading at 50 and the op on strike is 50. This goes for both puts and calls. If you cannot tell which strike is closer than look for the strike with a delta closer to .50.
Out-of-the-Money (OTM): For a call op on this means the underlying is trading below the strike price. For example ABC is trading at 15 with the call op on strike at 20. This call op on is OTM. For a put op on this means the underlying is trading above the strike price. For example ABC is trading at 75 and the put op on has a strike of 70. This put op on is OTM.
Intrinsic Value: The amount the op on is in-the-money. Only In-the-Money (ITM) op ons carry intrinsic value.
Time Value: Sets the value of me ll expira on. An op on that is Out-of-the-Money (OTM) only has me value. If an op on is In-the-Money (ITM) it is made up of both Intrinsic Value and Time Value.
Exercise: To exercise an op on contract means you are fulfilling the contract and closing it out. If you exercise a call op on you are buying the shares at the strike price. If you exercise a put you are selling the shares at the strike price.
Assignment: An op on assignment is the other side of the op on being exercised. In this case you are not the buyer of the op on instead you are the seller or writer of the op on. When a buyer exercises an op on the writer gets assigned. If you are a writer of a call op on that gets exercised then you have to give the buyer your shares. If you are a writer of a put op on then you will receive the shares when assigned.
Op on Chain: An op on chain displays all the necessary informa on for the underlying asset. The op ons are listed by the expira on month and then broken down by all the strikes available. Usually Calls are listed on the le side and Puts listed on the right side. Op on Chains can provide a wide variety of informa on from something basic such as the bid/ask to more specific informa on such as the op on Greeks.
7 Factors That Affect An Op on's Price
1. Stock Price
If a call op on allows you to buy a stock at a certain price in the future than the higher that price goes the more the op on will be worth.
Which op on would have a higher value:
A call op on allows you to buy The Op on Prophet (sym: TOP) for $100 while it is trading at $80 OR A call op on allows you to buy TOP for $100 while it is trading at $120
Obviously no one is going to pay $100 for something they can buy on the open market for $80, so our op on in Choice 1 will have a low value.
What is more appealing is Choice 2, an op on to buy TOP for $100 when its value is $120. In this situa on our op on value will be higher.
2. Strike Price
Strike price follows along the same lines as stock price. When we classify strikes we do it as in-the-money, at-the-money or out-of-the-money. When a call op on is in-the-money it means the stock price is greater than the strike price. When a call is out-of-the-money the stock price is less than the strike price.
A TOP call has a strike of 50 while TOP is currently trading at $60, this op on is in-the-money. On the flip side of that coin a put op on is in-the-money when the stock price is less than the strike price. A put op on is out-of-the-money when the stock price is greater than the strike price.
A TOP put has a strike of 20 while TOP is currently trading at $40, this op on is out-of-the-money. Op ons that are in-the-money have a higher value compared to op ons that are out-of-the-money. Example of an op on chain:
7 Factors That Affect An Op on's Price
1. Stock Price
If a call op on allows you to buy a stock at a certain price in the future than the higher that price goes the more the op on will be worth.
Which op on would have a higher value:
A call op on allows you to buy The Op on Prophet (sym: TOP) for $100 while it is trading at $80 OR A call op on allows you to buy TOP for $100 while it is trading at $120
Obviously no one is going to pay $100 for something they can buy on the open market for $80, so our op on in Choice 1 will have a low value.
What is more appealing is Choice 2, an op on to buy TOP for $100 when its value is $120. In this situa on our op on value will be higher.
2. Strike Price
Strike price follows along the same lines as stock price. When we classify strikes we do it as in-the-money, at-the-money or out-of-the-money. When a call op on is in-the-money it means the stock price is greater than the strike price. When a call is out-of-the-money the stock price is less than the strike price.
A TOP call has a strike of 50 while TOP is currently trading at $60, this op on is in-the-money. On the flip side of that coin a put op on is in-the-money when the stock price is less than the strike price. A put op on is out-of-the-money when the stock price is greater than the strike price.
A TOP put has a strike of 20 while TOP is currently trading at $40, this op on is out-of-the-money. Op ons that are in-the-money have a higher value compared to op ons that are out-of-the-money. Example of an op on chain:
The higher the interest rate the more a rac ve the second op on becomes. Thus, when interest rates go up calls are a be er investment so their price also increases.
On the flip side of that coin if we look at a long put versus a long call we can see a disadvantage. We have two op ons when we want to play an underlying to the downside.
You can short 100 shares of the stock which would generate cash into the brokerage and allow us to earn interest on that cash.
You long a put which will cost you less money overall but not put extra cash into your brokerage that generates interest income.
The higher the interest rate the more a rac ve the first op on becomes. Thus, when interest rates rise the value of put op ons drops.
6. Dividends
Op ons do not receive dividends so their value fluctuates when dividends are released. When a company releases dividends they have an ex-dividend date. If you own the stock on that date you will be awarded the dividend. Also on this date the value of the stock will decrease by the amount of dividend. As dividends increase a put op on's value also increases and a calls' value decreases.
7. Vola lity
Vola lity is the only es mated factor in this model. The vola lity that is used is forward vola lity. Forward vola lity is the measure of implied vola lity over a period in the future.
Implied vola lity shows the "implied" movement in a stock's future vola lity. Basically it tells you how traders think the stock will move. Implied vola lity is always expressed as a percentage, non-direc onal and on an annual basis.
3. Type Of Op on
This is probably the easiest factor to understand. An op on is either a put or a call and the value of the op on will change accordingly.
A call op on gives the holder the right to buy the underlying at a specified price within a specific me period.
A put op on gives the holder the right to sell the underlying at a specified price within a specific me period.
If you are long a call or short a put your op on value increases as the market moves higher. If you are long a put or short a call your op on value increases as the market moves lower.
4. Time To Expira on
Op ons have a limited life span thus their value is affected by the passing of me. As the me to expira on increases the value of the op on increases. As the me to expira on gets closer the value of the op on begins to decrease. The value begins to rapidly decrease within the last thirty days of an op on's life. The more me an op on has ll expira on, the more me the op on has to move around.
5. Interest Rates
Interest rates have a very small effect on an op on's value. When interest rates rise a call op on's value will also rise and a put op on's value will fall.
To drive this concept home let's look at the decision making process of trying to invest in TOP while it is trading at $50.
We can buy 100 shares of the stock outright which would cost us $5,000.
Instead of buying the stock outright we can long an at the money call for $5.00. Our total cost here would be $500. Our ini al outlay of cash would be smaller and this would leave us $4,500 le over. Plus, we will have the same reward poten al for half the risk. Now we can take that le over cash and invest it elsewhere such as Treasury Bills. This would generate a guaranteed return on top of our investment in TOP.
The higher the interest rate the more a rac ve the second op on becomes. Thus, when interest rates go up calls are a be er investment so their price also increases.
On the flip side of that coin if we look at a long put versus a long call we can see a disadvantage. We have two op ons when we want to play an underlying to the downside.
You can short 100 shares of the stock which would generate cash into the brokerage and allow us to earn interest on that cash.
You long a put which will cost you less money overall but not put extra cash into your brokerage that generates interest income.
The higher the interest rate the more a rac ve the first op on becomes. Thus, when interest rates rise the value of put op ons drops.
6. Dividends
Op ons do not receive dividends so their value fluctuates when dividends are released. When a company releases dividends they have an ex-dividend date. If you own the stock on that date you will be awarded the dividend. Also on this date the value of the stock will decrease by the amount of dividend. As dividends increase a put op on's value also increases and a calls' value decreases.
7. Vola lity
Vola lity is the only es mated factor in this model. The vola lity that is used is forward vola lity. Forward vola lity is the measure of implied vola lity over a period in the future.
Implied vola lity shows the "implied" movement in a stock's future vola lity. Basically it tells you how traders think the stock will move. Implied vola lity is always expressed as a percentage, non-direc onal and on an annual basis.
3. Type Of Op on
This is probably the easiest factor to understand. An op on is either a put or a call and the value of the op on will change accordingly.
A call op on gives the holder the right to buy the underlying at a specified price within a specific me period.
A put op on gives the holder the right to sell the underlying at a specified price within a specific me period.
If you are long a call or short a put your op on value increases as the market moves higher. If you are long a put or short a call your op on value increases as the market moves lower.
4. Time To Expira on
Op ons have a limited life span thus their value is affected by the passing of me. As the me to expira on increases the value of the op on increases. As the me to expira on gets closer the value of the op on begins to decrease. The value begins to rapidly decrease within the last thirty days of an op on's life. The more me an op on has ll expira on, the more me the op on has to move around.
5. Interest Rates
Interest rates have a very small effect on an op on's value. When interest rates rise a call op on's value will also rise and a put op on's value will fall.
To drive this concept home let's look at the decision making process of trying to invest in TOP while it is trading at $50.
We can buy 100 shares of the stock outright which would cost us $5,000.
Instead of buying the stock outright we can long an at the money call for $5.00. Our total cost here would be $500. Our ini al outlay of cash would be smaller and this would leave us $4,500 le over. Plus, we will have the same reward poten al for half the risk. Now we can take that le over cash and invest it elsewhere such as Treasury Bills. This would generate a guaranteed return on top of our investment in TOP.
Name: Long Call
Descrip on: The long call gives the buyer the right to buy the underlying at the strike
price. The long call is used to simulate buying the underlying since you try to profit from the underlying going up in price. Unlike buying the underlying outright the long call gives you a cap for losses since you can only lose the price of the call. Be careful though, it is easy to
overleverage yourself using calls.
Setup: Buy (long) a call Bias: Bullish
Break-Even: Strike A + Price paid for call
Max Profit: Unlimited: Looking for the underlying to go as high as the sky
The higher the implied vola lity the more people think the stock's price will move. Stocks listed on the Dow Jones are value stocks so a lot of movement is not expected, thus, they have a lower implied vola lity.
Growth stocks or small caps found on the Russell 2000, conversely, are expected to move around a lot so they carry a higher implied vola lity.
Name: Long Call
Descrip on: The long call gives the buyer the right to buy the underlying at the strike
price. The long call is used to simulate buying the underlying since you try to profit from the underlying going up in price. Unlike buying the underlying outright the long call gives you a cap for losses since you can only lose the price of the call. Be careful though, it is easy to
overleverage yourself using calls.
Setup: Buy (long) a call Bias: Bullish
Break-Even: Strike A + Price paid for call
Max Profit: Unlimited: Looking for the underlying to go as high as the sky
The higher the implied vola lity the more people think the stock's price will move. Stocks listed on the Dow Jones are value stocks so a lot of movement is not expected, thus, they have a lower implied vola lity.
Growth stocks or small caps found on the Russell 2000, conversely, are expected to move around a lot so they carry a higher implied vola lity.
Name: Long Put
Descrip on: The long put gives the buyer the right to sell the underlying at the strike price. This is the
equivalent to selling a stock short. The buyer of the long put will profit if the underlying drops in price. Unlike selling stock short, which can have unlimited losses, a long put has a cap on the losses since you can only lose the price of the put.
Setup: Buy (long) a put
Bias: Bearish Break-Even: Strike A - Price paid for put
Max Profit: Limited: Underlying cannot fall below $0.00
Max Loss: Limited: Price paid for the put
Margin: No margin needed since put is bought outright Max Loss: Limited: Price paid for the call
Margin: No margin needed since call is bought outright
Time Decay: As me passes the call will drop in value. To offset rapid me decay typically call op ons are
purchased 60-150 days from expira on.
Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the
price of your op on. A decrease in implied vola lity will lower the price of your op on.
Name: Long Put
Descrip on: The long put gives the buyer the right to sell the underlying at the strike price. This is the
equivalent to selling a stock short. The buyer of the long put will profit if the underlying drops in price. Unlike selling stock short, which can have unlimited losses, a long put has a cap on the losses since you can only lose the price of the put.
Setup: Buy (long) a put
Bias: Bearish Break-Even: Strike A - Price paid for put
Max Profit: Limited: Underlying cannot fall below $0.00
Max Loss: Limited: Price paid for the put
Margin: No margin needed since put is bought outright Max Loss: Limited: Price paid for the call
Margin: No margin needed since call is bought outright
Time Decay: As me passes the call will drop in value. To offset rapid me decay typically call op ons are
purchased 60-150 days from expira on.
Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the
price of your op on. A decrease in implied vola lity will lower the price of your op on.
Name: Short Call
Descrip on: The short call obligates you to sell the stock at the strike price. If the underlying finishes
below the strike price your call will expire worthless allowing you to keep the credit. This play carries unlimited risk so cau on is advised when pu ng this play on.
Setup: Sell (short) a call
Bias: Neutral to Bearish
Break-Even: Strike A + Credit received for the sale of the call
Max Profit: Limited: To credit received
Max Loss: Unlimited: If the underlying rises above your strike price - loses will occur as long as the
underlying con nues to rise
Time Decay: As me passes the put will drop in value. To offset rapid me decay typically put op ons are
purchased 60-150 days from expira on.
Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the
price of your op on. A decrease in implied vola lity will lower the price of your op on.
Notes: Purchasing puts deep out-of-the-money because they are cheap will typically result in losses. The
purchase of puts is also used as protec on against long stock. If you are currently long stock and want to protect or lock in gains from future decline you can purchase a put that will cover any downward
Name: Short Call
Descrip on: The short call obligates you to sell the stock at the strike price. If the underlying finishes
below the strike price your call will expire worthless allowing you to keep the credit. This play carries unlimited risk so cau on is advised when pu ng this play on.
Setup: Sell (short) a call
Bias: Neutral to Bearish
Break-Even: Strike A + Credit received for the sale of the call
Max Profit: Limited: To credit received
Max Loss: Unlimited: If the underlying rises above your strike price - loses will occur as long as the
underlying con nues to rise
Time Decay: As me passes the put will drop in value. To offset rapid me decay typically put op ons are
purchased 60-150 days from expira on.
Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the
price of your op on. A decrease in implied vola lity will lower the price of your op on.
Notes: Purchasing puts deep out-of-the-money because they are cheap will typically result in losses. The
purchase of puts is also used as protec on against long stock. If you are currently long stock and want to protect or lock in gains from future decline you can purchase a put that will cover any downward
Name: Short Put
Descrip on: The short put obligates you to buy the underlying at the strike price. If the underlying
finishes above the strike price your put will expire worthless allowing you to keep the credit. This play carries high risk so cau on is advised when pu ng this play on.
Setup: Sell (short) a put
Bias: Neutral to Bullish
Break-Even: Strike A - Credit received for the sale of the put
Max Profit: Limited: To Credit received
Max Loss: Limited: If the underlying falls below your strike price losses will occur - but are limited due to
the fact the underlying cannot fall below $0.00
Margin: Short call requires no cash outlay so margin is used. Margin is calculated by taking the greater
of:
25% of the underlying security value minus the out-of-the-money amount plus the premium received or
10% of the underlying security value plus the premium received
Time Decay: As me passes the call will drop in value which is what you want. You want your short call to
lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the
price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Short calls can profit no ma er which direc on the underlying moves. Losses will only occur
Name: Short Put
Descrip on: The short put obligates you to buy the underlying at the strike price. If the underlying
finishes above the strike price your put will expire worthless allowing you to keep the credit. This play carries high risk so cau on is advised when pu ng this play on.
Setup: Sell (short) a put
Bias: Neutral to Bullish
Break-Even: Strike A - Credit received for the sale of the put
Max Profit: Limited: To Credit received
Max Loss: Limited: If the underlying falls below your strike price losses will occur - but are limited due to
the fact the underlying cannot fall below $0.00
Margin: Short call requires no cash outlay so margin is used. Margin is calculated by taking the greater
of:
25% of the underlying security value minus the out-of-the-money amount plus the premium received or
10% of the underlying security value plus the premium received
Time Decay: As me passes the call will drop in value which is what you want. You want your short call to
lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the
price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Short calls can profit no ma er which direc on the underlying moves. Losses will only occur
Name: Covered Call
Descrip on: A covered calls means you are buying or already own shares of the underlying and you are
going to sell a call on it. People will do this because this posi on is rela vely safe. If the underlying increases in price you will sell the shares and keep the premium. If the underlying drops then you will keep the premium.
Setup: Sell (short) a call and Own or Buy (long) equal amount of shares
Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the
strike price missing out on the extra gains)
Break-Even: Underlying Price - Credit received for the sale of the call
Max Profit: Limited: To credit received; if the underlying price goes above strike price then profit
increases to premium received + sale of the underlying
Margin: Short put requires no cash outlay so margin is used. Margin is calculated by taking the greater
of:
25% of the underlying security value minus the out-of-the-money amount plus the premium received or
10% of the underlying security value plus the premium received
Time Decay: As me passes the put will drop in value which is what you want. You want your short put
to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing
the price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Short puts can profit no ma er which direc on the underlying moves. Losses will only occur
below break-even. Selling deep out-of-the-money puts can return high probability plays. Short puts can also be turned into cash-secured puts. This is setup by holding enough cash to buy the shares if the underlying falls below the strike price. This is a good way to pick up shares at a reduced price. For example if the underlying is currently trading at $65 and you are willing to purchase the stock at $60 then you could sell the put on the 60 strike. If the underlying falls below 60 you will be assigned the shares and now have a long stock posi on. This is more typical for picking up long-term holdings.
Name: Covered Call
Descrip on: A covered calls means you are buying or already own shares of the underlying and you are
going to sell a call on it. People will do this because this posi on is rela vely safe. If the underlying increases in price you will sell the shares and keep the premium. If the underlying drops then you will keep the premium.
Setup: Sell (short) a call and Own or Buy (long) equal amount of shares
Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the
strike price missing out on the extra gains)
Break-Even: Underlying Price - Credit received for the sale of the call
Max Profit: Limited: To credit received; if the underlying price goes above strike price then profit
increases to premium received + sale of the underlying
Margin: Short put requires no cash outlay so margin is used. Margin is calculated by taking the greater
of:
25% of the underlying security value minus the out-of-the-money amount plus the premium received or
10% of the underlying security value plus the premium received
Time Decay: As me passes the put will drop in value which is what you want. You want your short put
to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing
the price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Short puts can profit no ma er which direc on the underlying moves. Losses will only occur
below break-even. Selling deep out-of-the-money puts can return high probability plays. Short puts can also be turned into cash-secured puts. This is setup by holding enough cash to buy the shares if the underlying falls below the strike price. This is a good way to pick up shares at a reduced price. For example if the underlying is currently trading at $65 and you are willing to purchase the stock at $60 then you could sell the put on the 60 strike. If the underlying falls below 60 you will be assigned the shares and now have a long stock posi on. This is more typical for picking up long-term holdings.
Name: Collar
Descrip on: This strategy creates security around your underlying posi on. When you long the put you
use the short call to pay for it. With this play you have protected your downside movement and capped your upside poten al.
Setup: Own the stock and Sell (short) a call and Buy (long) a put
Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the
strike price missing out on the extra gains)
Break-Even: Two breakeven points could exist:
If the play is established for a net credit (cash inflow) the break-even is the current underlying price - the credit received
If the play is established for a net debit (cash ou low) the break-even is the current underlying price + the debit paid
Max Loss: Downside risk happens only if the stock price falls to low
Margin: The short call is covered by the purchase or ownership of the stock - no margin needed
Time Decay: As me passes the call will drop in value which is what you want. You want your short call
to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the
price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Covered Calls are typically referred to as beginner plays because the op on cannot take a loss so
the posi on is rela vely safe. Selling calls on shares already owned is a good way to increase/boost profit on long-term posi ons. Only establish covered calls if you are comfortable with ge ng assigned, if you are okay with losing the shares because they are called away. Pu ng on a covered call when you are not willing to give up the shares will only bring headaches and future losses.
Name: Collar
Descrip on: This strategy creates security around your underlying posi on. When you long the put you
use the short call to pay for it. With this play you have protected your downside movement and capped your upside poten al.
Setup: Own the stock and Sell (short) a call and Buy (long) a put
Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the
strike price missing out on the extra gains)
Break-Even: Two breakeven points could exist:
If the play is established for a net credit (cash inflow) the break-even is the current underlying price - the credit received
If the play is established for a net debit (cash ou low) the break-even is the current underlying price + the debit paid
Max Loss: Downside risk happens only if the stock price falls to low
Margin: The short call is covered by the purchase or ownership of the stock - no margin needed
Time Decay: As me passes the call will drop in value which is what you want. You want your short call
to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the
price of your op on. An increase in implied vola lity will increase the price of your op on.
Notes: Covered Calls are typically referred to as beginner plays because the op on cannot take a loss so
the posi on is rela vely safe. Selling calls on shares already owned is a good way to increase/boost profit on long-term posi ons. Only establish covered calls if you are comfortable with ge ng assigned, if you are okay with losing the shares because they are called away. Pu ng on a covered call when you are not willing to give up the shares will only bring headaches and future losses.
Name: Bull Call Spread or Ver cal Spread
Descrip on: The bull call spread has the same intent as the long call. However, instead of just buying the
long call you also short a call. This short call reduces your cost, reduces your risk, but also reduces your profit poten al.
Setup: Buy (long) Strike A call and Sell (short) Strike B call - same expira on month for both
Bias: Bullish with a target at the short strike
Break-Even: Strike A + debit paid
Max Profit: Limited: Strike A - Strike B - Debit Paid
Max Loss: Limited: Equal to the debit paid Margin: No margin required Max Profit: Limited: The strike of the short call - the current underlying price + the credit or - the debit
paid
Max Loss: Losses will equal the current underlying price - the strike of the long put + the debit paid or -
the credit received
Margin: The short call is covered by the purchase or ownership of the stock - no margin needed
Time Decay: As me passes the call will drop in value and the put will also drop in value. This is a
neutral effect.
Name: Bull Call Spread or Ver cal Spread
Descrip on: The bull call spread has the same intent as the long call. However, instead of just buying the
long call you also short a call. This short call reduces your cost, reduces your risk, but also reduces your profit poten al.
Setup: Buy (long) Strike A call and Sell (short) Strike B call - same expira on month for both
Bias: Bullish with a target at the short strike
Break-Even: Strike A + debit paid
Max Profit: Limited: Strike A - Strike B - Debit Paid
Max Loss: Limited: Equal to the debit paid Margin: No margin required Max Profit: Limited: The strike of the short call - the current underlying price + the credit or - the debit
paid
Max Loss: Losses will equal the current underlying price - the strike of the long put + the debit paid or -
the credit received
Margin: The short call is covered by the purchase or ownership of the stock - no margin needed
Time Decay: As me passes the call will drop in value and the put will also drop in value. This is a
neutral effect.
Name: Bear Put Spread or Ver cal Spread
Descrip on: The bear put spread has the same intent as the long put. However, instead of just buying
the long put you also short a put. This short put reduces your cost, reduces your risk, but also reduces your profit poten al.
Setup: Buy (long) Strike A put and Sell (short) Strike B put - same expira on month for both
Bias: Bearish with a target at the short strike
Break-Even: Strike B - debit paid
Max Profit: Limited: Strike A - Strike B - Debit Paid
Max Loss: Limited: Debit paid Time Decay: A neutral effect - the passing of me hurts the long call and the passing of me helps the
short call
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short call then you want implied vola lity to decrease. If the underlying is near the long call then you want the implied vola lity to increase.
Name: Bear Put Spread or Ver cal Spread
Descrip on: The bear put spread has the same intent as the long put. However, instead of just buying
the long put you also short a put. This short put reduces your cost, reduces your risk, but also reduces your profit poten al.
Setup: Buy (long) Strike A put and Sell (short) Strike B put - same expira on month for both
Bias: Bearish with a target at the short strike
Break-Even: Strike B - debit paid
Max Profit: Limited: Strike A - Strike B - Debit Paid
Max Loss: Limited: Debit paid Time Decay: A neutral effect - the passing of me hurts the long call and the passing of me helps the
short call
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short call then you want implied vola lity to decrease. If the underlying is near the long call then you want the implied vola lity to increase.
Name: Bear Call Spread or Ver cal Spread
Descrip on: The bear call spread has the same intent as the short call. However, instead of just shor ng
the call you also long a call. The long call reduces your risk, but also reduces your credit received.
Setup: Sell (short) Strike A call and Buy (long) Strike B call - same expira on month for both
Bias: Neutral to bearish Break-Even: Strike A + credit received
Max Profit: Limited: Credit received
Max Loss: Limited: Strike A - Strike B - Credit received
Margin: Margin is equal to the Max Loss: Strike A - Strike B - Credit received Margin: No margin required
Time Decay: A neutral effect - the passing of me hurts the long put and the passing of me helps the
short put
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short put then you want implied vola lity to decrease. If the underlying is near the long put then you want the implied vola lity to increase.
Name: Bear Call Spread or Ver cal Spread
Descrip on: The bear call spread has the same intent as the short call. However, instead of just shor ng
the call you also long a call. The long call reduces your risk, but also reduces your credit received.
Setup: Sell (short) Strike A call and Buy (long) Strike B call - same expira on month for both
Bias: Neutral to bearish Break-Even: Strike A + credit received
Max Profit: Limited: Credit received
Max Loss: Limited: Strike A - Strike B - Credit received
Margin: Margin is equal to the Max Loss: Strike A - Strike B - Credit received Margin: No margin required
Time Decay: A neutral effect - the passing of me hurts the long put and the passing of me helps the
short put
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short put then you want implied vola lity to decrease. If the underlying is near the long put then you want the implied vola lity to increase.
Name: Bull Put Spread or Ver cal Spread
Descrip on: The bull put spread has the same intent as the short put. However, instead of just shor ng
the put you also long a put. The long put reduces your risk, but also reduces your credit received.
Setup: Buy (long) Strike A put and Sell (short) Strike B put
Bias: Neutral to Bullish
Break-Even: Strike B - credit received
Max Profit: Limited: Credit received
Max Loss: Limited: Strike A - Strike B - Credit received
Margin: Margin equal the Max Loss: Strike A - Strike B - Credit received Time Decay: Time decay is a posi ve effect as you want both sides of the spread to expire worthless
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short call then you want implied vola lity to decrease. If the underlying is near the long call then you want the implied vola lity to increase.
Name: Bull Put Spread or Ver cal Spread
Descrip on: The bull put spread has the same intent as the short put. However, instead of just shor ng
the put you also long a put. The long put reduces your risk, but also reduces your credit received.
Setup: Buy (long) Strike A put and Sell (short) Strike B put
Bias: Neutral to Bullish
Break-Even: Strike B - credit received
Max Profit: Limited: Credit received
Max Loss: Limited: Strike A - Strike B - Credit received
Margin: Margin equal the Max Loss: Strike A - Strike B - Credit received Time Decay: Time decay is a posi ve effect as you want both sides of the spread to expire worthless
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short call then you want implied vola lity to decrease. If the underlying is near the long call then you want the implied vola lity to increase.
Name: Long Straddle
Descrip on: The long straddle gives you the opportunity to profit if the stock goes up or goes down.
While this may seem like an ideal play the underlying has to move enough to cover the cost of both op ons.
Setup: Buy (long) Strike A put and Buy (long) Strike A call
Bias: Bullish and Bearish - expec ng a big move but unsure of direc on
Break-Even: Two break-even points:
Strike A + Debit paid Strike A - Debit paid
Max Profit: Unlimited Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire
worthless.
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short put then you want implied vola lity to decrease. If the underlying is near the long put then you want the implied vola lity to increase.
Name: Long Straddle
Descrip on: The long straddle gives you the opportunity to profit if the stock goes up or goes down.
While this may seem like an ideal play the underlying has to move enough to cover the cost of both op ons.
Setup: Buy (long) Strike A put and Buy (long) Strike A call
Bias: Bullish and Bearish - expec ng a big move but unsure of direc on
Break-Even: Two break-even points:
Strike A + Debit paid Strike A - Debit paid
Max Profit: Unlimited Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire
worthless.
Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the
strikes. If the underlying is trading near the short put then you want implied vola lity to decrease. If the underlying is near the long put then you want the implied vola lity to increase.
Name: Short Straddle
Descrip on: The short straddle is a good play if you think the underlying will remain neutral or a
decrease in vola lity. This play has the advantage of bringing you double the credit. However, you will be exposed to a lot of risk. Risk will be unlimited on the upside and substan al on the downside.
Setup: Sell (short) Strike A put and Sell (short) Strike A call
Bias: Neutral
Break-Even: Two break-evens exist:
Strike A - Credit received Strike A + Credit received
Max Profit: Limited: Credit received Max Loss: Limited: Debit paid
Margin: No margin required
Time Decay: Time decay is an extreme nega ve effect since it will drop the value of both of your op ons
Implied Vola lity: A er you establish the posi on you want implied vola lity to increase so the value of
your op ons increase and to make the necessary move you originally planned for
Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make
before your posi on gets beaten down by me decay. Even if you are expec ng move such as an
earnings announcement or report coming out the op ons could already be priced so high that it cannot capture the move. Always make sure you find the price of an at-the-money (ATM) straddle to see how big of a move the market is expec ng. You can use gamma scalping to protect and increase your gains with long straddles
Name: Short Straddle
Descrip on: The short straddle is a good play if you think the underlying will remain neutral or a
decrease in vola lity. This play has the advantage of bringing you double the credit. However, you will be exposed to a lot of risk. Risk will be unlimited on the upside and substan al on the downside.
Setup: Sell (short) Strike A put and Sell (short) Strike A call
Bias: Neutral
Break-Even: Two break-evens exist:
Strike A - Credit received Strike A + Credit received
Max Profit: Limited: Credit received Max Loss: Limited: Debit paid
Margin: No margin required
Time Decay: Time decay is an extreme nega ve effect since it will drop the value of both of your op ons
Implied Vola lity: A er you establish the posi on you want implied vola lity to increase so the value of
your op ons increase and to make the necessary move you originally planned for
Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make
before your posi on gets beaten down by me decay. Even if you are expec ng move such as an
earnings announcement or report coming out the op ons could already be priced so high that it cannot capture the move. Always make sure you find the price of an at-the-money (ATM) straddle to see how big of a move the market is expec ng. You can use gamma scalping to protect and increase your gains with long straddles
Name: Long Strangle
Descrip on: The long strangle gives you the opportunity to profit if the stock goes up or goes down. The
op ons you buy will be out of the money which reduces the cost over the long straddle. However it will split the strikes apart which increase your breakeven levels. The underlying has to move enough to cover the cost of both op ons.
Setup: Buy (long) Strike A put and Buy (long) Strike B call
Bias: Extreme Bullish and Extreme Bearish
Break-Even: Two break-even points:
Strike A - Debit paid Strike B + Debit paid
Max Loss: Unlimited
Margin: Margin is the greater out of the Short Put or the Short Call + the premium received from the
other side
Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire
worthless.
Implied Vola lity: A er the posi on has been put on you want implied vola lity to decrease thus
lowering your op on prices.
Notes: This posi on carries a lot of risk since you are naked two op ons in either direc on. Playing
direc on is not as important as playing the implied vola lity here. Look for the underlying to have a lot of vola lity and put the posi on on when you believe it will decrease.
Name: Long Strangle
Descrip on: The long strangle gives you the opportunity to profit if the stock goes up or goes down. The
op ons you buy will be out of the money which reduces the cost over the long straddle. However it will split the strikes apart which increase your breakeven levels. The underlying has to move enough to cover the cost of both op ons.
Setup: Buy (long) Strike A put and Buy (long) Strike B call
Bias: Extreme Bullish and Extreme Bearish
Break-Even: Two break-even points:
Strike A - Debit paid Strike B + Debit paid
Max Loss: Unlimited
Margin: Margin is the greater out of the Short Put or the Short Call + the premium received from the
other side
Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire
worthless.
Implied Vola lity: A er the posi on has been put on you want implied vola lity to decrease thus
lowering your op on prices.
Notes: This posi on carries a lot of risk since you are naked two op ons in either direc on. Playing
direc on is not as important as playing the implied vola lity here. Look for the underlying to have a lot of vola lity and put the posi on on when you believe it will decrease.
Name: Short Strangle
Descrip on: The short strangle allows you to make a neutral bet on the underlying. By selling both a put
and strike you receive a larger credit. However, there is s ll substan al risk involved because you can incur unlimited losses to the upside and substan al losses to the downside
Setup: Sell (short) Strike A put and Sell (short) Strike B call
Bias: Neutral
Break-Even: Two break-even points:
Strike A - Credit received Strike B + Credit received
Max Profit: Limited: Credit received
Max Loss: Unlimited Max Profit: Unlimited
Max Loss: Debit paid
Margin: No margin requirement
Time Decay: Time decay has an extreme nega ve effect since it will lower the value of both of your
op ons.
Implied Vola lity: A er the posi on has been established you want implied vola lity to increase. This
will increase the value of your op ons plus help make the an cipated move.
Notes: A Long Strangle posi on is a hard posi on to profit from. You will need a big move that the
Name: Short Strangle
Descrip on: The short strangle allows you to make a neutral bet on the underlying. By selling both a put
and strike you receive a larger credit. However, there is s ll substan al risk involved because you can incur unlimited losses to the upside and substan al losses to the downside
Setup: Sell (short) Strike A put and Sell (short) Strike B call
Bias: Neutral
Break-Even: Two break-even points:
Strike A - Credit received Strike B + Credit received
Max Profit: Limited: Credit received
Max Loss: Unlimited Max Profit: Unlimited
Max Loss: Debit paid
Margin: No margin requirement
Time Decay: Time decay has an extreme nega ve effect since it will lower the value of both of your
op ons.
Implied Vola lity: A er the posi on has been established you want implied vola lity to increase. This
will increase the value of your op ons plus help make the an cipated move.
Notes: A Long Strangle posi on is a hard posi on to profit from. You will need a big move that the
Name: Synthe c Long
Descrip on: This is called a synthe c long because the profit graph is iden cal to going long on the
underlying. The advantage of choosing this posi on over the underlying is the increase in leverage. You can pick up more op ons than stock. The disadvantage is that the op ons have expira on while the underlying does not.
Setup: Buy (long) Strike A call and Sell (short) Strike A put - same expira on month for both
Bias: Bullish
Break-Even: Strike + Debit paid
Max Profit: Unlimited
Max Loss: Limited - Even though it is limited it can s ll be substan al in that the underlying can fall to
$0.00
Margin: The margin requirement is the greater margin between the short put or the short call plus the
credit received Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire worthless.
Implied Vola lity: A er the play has been established you want implied vola lity to decrease thus
lowering the value of your op ons. This will also lower the chance of seeing a large move in either direc on.
Notes: Short Strangle is a good play to put on when you expect a decrease in implied vola lity. Be careful
Name: Synthe c Long
Descrip on: This is called a synthe c long because the profit graph is iden cal to going long on the
underlying. The advantage of choosing this posi on over the underlying is the increase in leverage. You can pick up more op ons than stock. The disadvantage is that the op ons have expira on while the underlying does not.
Setup: Buy (long) Strike A call and Sell (short) Strike A put - same expira on month for both
Bias: Bullish
Break-Even: Strike + Debit paid
Max Profit: Unlimited
Max Loss: Limited - Even though it is limited it can s ll be substan al in that the underlying can fall to
$0.00
Margin: The margin requirement is the greater margin between the short put or the short call plus the
credit received Time Decay: Time decay is a posi ve effect. You are looking for both sides of your spread to expire worthless.
Implied Vola lity: A er the play has been established you want implied vola lity to decrease thus
lowering the value of your op ons. This will also lower the chance of seeing a large move in either direc on.
Notes: Short Strangle is a good play to put on when you expect a decrease in implied vola lity. Be careful
Name: Short Combina on or Synthe c Short Stock
Descrip on: This play replicates going short on an underlying. This play has several advantages over
shor ng the underlying. With op ons you will have be er leverage and the margin will not be less than shor ng the underlying. The disadvantage here is that the op ons have expira on when the underlying does not.
Setup: Sell (short) Strike A call and Buy (long) Strike A put
Bias: Bearish
Break-Even: Strike A + Credit received or - Debit paid
Max Profit: Limited: Underlying can only go to $0.00 Margin: Margin requirement equals the short put requirement
Time Decay: Time decay is a neutral effect. It will lower the value of your long call and lower the value of
your short put which is a good thing
Implied Vola lity: Implied vola lity is also a neutral effect. An increase in vola lity will increase the value
of your long call and it will increase the value of your short put which is not a good thing
Name: Short Combina on or Synthe c Short Stock
Descrip on: This play replicates going short on an underlying. This play has several advantages over
shor ng the underlying. With op ons you will have be er leverage and the margin will not be less than shor ng the underlying. The disadvantage here is that the op ons have expira on when the underlying does not.
Setup: Sell (short) Strike A call and Buy (long) Strike A put
Bias: Bearish
Break-Even: Strike A + Credit received or - Debit paid
Max Profit: Limited: Underlying can only go to $0.00 Margin: Margin requirement equals the short put requirement
Time Decay: Time decay is a neutral effect. It will lower the value of your long call and lower the value of
your short put which is a good thing
Implied Vola lity: Implied vola lity is also a neutral effect. An increase in vola lity will increase the value
of your long call and it will increase the value of your short put which is not a good thing
Name: Front Spread With Calls or Ra o Ver cal Spread With Calls
Descrip on: The front spread with calls, also known as ra o ver cal spread, is a neutral strategy. This
play is a good play if you are looking to take advantage of a decreasing vola lity. The cau on with this trade is the unlimited risk to the upside.
Setup: Buy (long) Strike A call and Sell (short) 2 Strike B calls
Bias: Neutral to Slightly Bullish
Break-Even: Strike B + Max Profit
Max Profit: Limited: Strike B - Strike A + Credit Received
Max Loss: Unlimited if the underlying climbs
Margin: Margin equals the requirement for the short call Max Loss: Unlimited if the underlying climbs
Margin: Margin equals the requirement for the short call
Time Decay: Time decay is a neutral effect. It will have a posi ve effect on the short call but a nega ve
effect on the long put
Implied Vola lity: The effect of implied vola lity is neutral. It will have a posi ve effect on the long put
Name: Front Spread With Calls or Ra o Ver cal Spread With Calls
Descrip on: The front spread with calls, also known as ra o ver cal spread, is a neutral strategy. This
play is a good play if you are looking to take advantage of a decreasing vola lity. The cau on with this trade is the unlimited risk to the upside.
Setup: Buy (long) Strike A call and Sell (short) 2 Strike B calls
Bias: Neutral to Slightly Bullish
Break-Even: Strike B + Max Profit
Max Profit: Limited: Strike B - Strike A + Credit Received
Max Loss: Unlimited if the underlying climbs
Margin: Margin equals the requirement for the short call Max Loss: Unlimited if the underlying climbs
Margin: Margin equals the requirement for the short call
Time Decay: Time decay is a neutral effect. It will have a posi ve effect on the short call but a nega ve
effect on the long put
Implied Vola lity: The effect of implied vola lity is neutral. It will have a posi ve effect on the long put
Name: Front Spread With Puts or Ra o Ver cal Spread With Puts
Descrip on: The front spread with puts, also known as ra o ver cal spread, is a neutral strategy. This
play is a good play if you are looking to take advantage of a decreasing vola lity. The cau on with this trade is the substan al risk to the downside.
Setup: Sell (short) 2 Strike A puts and Buy (long) Strike B put - contracts will have the same expira on
Bias: Neutral to Slightly Bearish
Break-Even: Strike A - Max Profit
Max Profit: Limited: Strike A - Strike B + Credit received
Max Loss: Limited: Capped if the stock goes to $0.00
Margin: Margin equals the requirement for the short put Time Decay: Time decay is a posi ve effect. As me goes on it will lower the value of your long call but
also lower the value of your short calls which outweigh the long
Implied Vola lity: A er the play is put on you want vola lity to decrease as it will have a greater
Name: Front Spread With Puts or Ra o Ver cal Spread With Puts
Descrip on: The front spread with puts, also known as ra o ver cal spread, is a neutral strategy. This
play is a good play if you are looking to take advantage of a decreasing vola lity. The cau on with this trade is the substan al risk to the downside.
Setup: Sell (short) 2 Strike A puts and Buy (long) Strike B put - contracts will have the same expira on
Bias: Neutral to Slightly Bearish
Break-Even: Strike A - Max Profit
Max Profit: Limited: Strike A - Strike B + Credit received
Max Loss: Limited: Capped if the stock goes to $0.00
Margin: Margin equals the requirement for the short put Time Decay: Time decay is a posi ve effect. As me goes on it will lower the value of your long call but
also lower the value of your short calls which outweigh the long
Implied Vola lity: A er the play is put on you want vola lity to decrease as it will have a greater
