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Options strategies (Spreads & Combinations (Bull spread
buy low X…
Options strategies
Spreads & Combinations
Bull spread
- buy low X call, sell higher X call
- valuable when price rises
Bear spread
- buy higher X, sell lower X
- valuable when price falls
Straddle
- long call and put at same X (long straddle)
- expectation of large price movement
Collar
- long stock + short call (higher X) + long put (lower X)
- covered call + put/ protective put + short call
- protect gains on position
Calendar spread
- buy/sell of call/put (same X) but with different expiration dates
- long calendar spread = sell near, buy long date
- short calendar spread = buy near, sell long date
- theta play -> near term option time value decays faster
- neutral short term view, bull/bear long term
Returns using options
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Synthetic forward position (Long)
- long call, short put
- hedge an existing short forward position
- arb overprice forward
- create a long forward
Synthetic forward position (short)
- short call, long put
- hedge long forward position
- arb underpriced forward
- create short forward
Volatility
Historical vol
- derived from past return data of the underlying
Implied volatility
- derived from option pricing model
- IV of options of a given expiration are dependent on their strikes
Delta hedged risk reversal
- long OTM call at higher X, short OTM put at low X
Covered call
- long stock, short call (receive premium)
Objectives
- Yield enhancement (belief in limited upside)
- Position reductions
- Position exit at target price
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Objectives
- Protect against loss for period of time
- Higher strike, long the time, higher the cost
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