Option Strategies are combinations of trading options that one can speculate on expected movements of the underlying value accurately. It offers more features than investing in individual calls or puts. Some combinations like synthetics are for professional traders reserved only, because the transaction costs for private investors do not outweigh the possible return.
The examples below are assumed stock options, but these structures are also possible on other underlying assets. The various strategies are mainly described as one can buy it only selling such combinations may be an equally good strategy.
A straddle involves simultaneously call and put options bought in the same proportion with the same expiration date and strike price then be sold. One can buy a straddle as expected in the underlying stock, a move but it is not known whether this will be up or down. If the stock goes up, the buyer exercises the call option, if the stock goes down, the buyer exercises the put option, in both cases quickly at a profit.
The risk the buyer takes is that the straddle purchased (almost) expires worthless if the expected movement is not provided or is very small. For the seller, who hopes the move fails and before taking unlimited risk, that is precisely the maximum profit.
A strangle involves simultaneously call and put options on the same stock purchased with the same expiration date will be sold, but with different strike prices. Usually one chooses strike prices in which both the call and the put are out-of-the-money. If the proportion is growing considerably, the buyer exercises the call option, the price drops significantly, then the buyer exercises the put option, in both cases quickly at a profit. The risk that the purchaser is that the strangle bought (almost) expires worthless if the expected movement is not large enough or non-existent. For the seller, who hopes that the movement is limited and therefore take unlimited risk, that is precisely the maximum profit.
A spread is an option position which simultaneously (usually in equal numbers) options are bought and sold. That may be options with different maturities (a time spread or a calendar spread), with different strike prices (such as a call spread) or both with different strike prices and maturities (diagonal calendar spread).
We speak of a bull spread or call spread as it is expected that the underlying asset will rise in price. The difference with buying a single call is that one part in the spread of the possible profit cedes in exchange for a lower investment. One buys the call that is closest to the current price, and sells a call that goes out-of-the-money is. Besides lower investment also the vision of the buyer of the call spread will increase the share, but only to a certain level. The gain is maximum when one ends at the level of the sold call. One can also buy a call option in the money and writing a call out of the money.
A ratio spread is a spread where one buys an uneven number of options when selling. In practice, this usually means that one buys an out-of-the-money option and located further away, cheaper, selling options. The potential profit is exactly the same as a normal spread, but the cost of the investment is much lower. Depending on the ratio and the chosen strike prices can be set up even the construction with a credit – one gets money to.
With this combination of call options or put options you can respond to the view that a share at some point will be at the end of the options. One can speculate up or down or just set up an option position on a limited movement to speculate to no movement – all this without much risk.
The gain is maximum in the middle of the butterfly, at level X. With an exhalation outside the upper or lower call the structure is worthless. The same can be set up for the putt. The advantage of this position is that one can not lose more than the investment, and yet can speculate on a lack of movement of a stock. In addition, the out-of-the-money butterflies are often low in price in absolute terms.
Options Butterfly: Condor
A condor is a variant of the butterfly. Instead of the middle strike to sell two times are two consecutive strikes now being sold. This maximum profit is not a feasible point but in between the two options written. The downside is that the investment is higher.
In a synthetic one makes an artificial long or short position in a stock after. In the same strike with the same period one buys the call and sells one of the put. This is called the reversal. Conversely (sell call, buy put) is called the conversion. The performance is a straight line.
There are two advantages to this construction:
- Dividend: If one is to buy / sell the underlying asset, one can avoid any exchange rate risk and thus only act in future dividend (and interest).
- Borrowing: One can speculate on a decline, without complicated structures with short selling of shares and stock short without the fee one has to pay if one goes short in stocks.
Combining two synthetics with different maturities makes it possible to speculate on the timing of the dividend in the future. Companies change their dividend policy sometimes, for example, half dividend to quarterly dividends.
Combining two synthetics with different strike prices but the same term is called a box. There’s no dividend risk and interest rate risk only slightly. Trade in a box is only useful for sophisticated financing purposes for larger parties. Another word for box spread is “alligator-spread” options.
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