OPTION STRATEGIES

VERTICAL SPREAD i.e. Bull-PUT-spread and Bear-CALL-spread.

The trade is setup by selling an out-of-the-money PUT (or CALL) and simultaneously buying a further-out-of-the-money PUT (or CALL).

e.g. MS share price at $15.10. Sell one PUT-$15.00 and buy one PUT-$12.50. BULL-PUT-SPREAD.

(To deploy when Implied Volatility is higher than average and there is an identifiable support (or resistance) level. To profit from time decay or a decline in volatility)

Cut loss is at the negative of same amount of max potential profit.

Take profit when 80% of max potential profit has been achieved.

CALENDAR SPREAD

PURPOSE: To take advantage of differences in option volatilities.

A calendar spread is entered into by buying one option of a given strike price and expiration month and simultaneously writing an option with the same strike price but a different expiration
month that has less time until expiration than the option you bought.

Key Factors
1. The option sold should be trading at a volatility at least 15% higher than that of the option bought.
2. Do not use this strategy if option volatility is high (the lower the volatility, the better).
3. No more than 45 days remain until the option sold expires.
4. You have some reason to believe the underlying will remain within a particular range of prices.

SYNTHETIC LONG FUTURE POSITION

The trade is setup by buying an out-of-the-money CALL and simultaneously selling an out-ofthe-money PUT.

e.g. MS share price at $11. Buy one CALL with strike of $12.50 and SELL one PUT with strike of $10.00.

RATIO SPREAD

The trade is setup by buying one at-the-money CALL and simultaneously selling two out-of-the-money CALL.

e.g. AAPL share price at $67.65. Buy one CALL-$70 and SELL two CALL-$75.

STRADDLE (and STRANGLE)

PURPOSE: To take advantage of low volatility or quiet market conditions to profit from the next big price move.
Buying a Straddle involves buying a CALL and a PUT of the same strike price simultaneously. Buying a Strangle involves buying a CALL and a PUT with different strike prices simultaneously.

Key Factors
1. You have some reason to expect a sizable price movement by the underlying.
2. Option volatility is low.
3. Adequate time remains until expiration.
4. There is an equal opportunity to make money whether the underlying rises or falls.

BUTTERFLY SPREAD

PURPOSE: To take advantage of high volatility and trading range conditions to collect option premium.

The butterfly spread strategy using CALLS involves buying a CALL option at one strike price, writing two CALL at a higher strike price, and buying one more CALL at an even higher strike price.
The butterfly spread strategy using PUTS involves buying a PUT option at one strike, writing two PUT at a lower strike, and buying one more PUT at an even lower strike price.

This trade is always done in a ratio of 1:2:1. Can enter the spread in a ratio of 1:2:1, 2:4:2, 3:6:3, 5:10:5, 10:20:10, and so on. From a strictly mathematical viewpoint, the butterfly spread canoffer a very high probability of making money on any given trade.

Key Factors
1. You have some reason to expect the underlying to stay in a trading range.
2. Option volatility is high (the higher, the better).
3. Less than 60 days remain until expiration.
4. You can enter the spread at a favorable price.