Strategies under options
Together, they produce a position that predicts a narrow trading range for the underlying stock. Before there were options, it was difficult for investors to profit directly from an accurate prediction that didn't involve a steep rise or fall in the stock. The short straddle is an example of a strategy that does. By collecting two up-front premiums initially, the investor builds a larger margin of error, compared to writing just a call or a put option. However, the risks are substantial on the downside and unlimited on the upside, should a large move occur.
The investor may be able to reduce the chance of assignment by selecting a longer term to expiration, and by monitoring the underlying stock closely and being ready to take quick action. Still no precaution can change the fundamentals: limited rewards for unlimited risk.
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Net Position at expiration. The strategy hopes for a steady stock price during the life of the options, and an even or declining level of implied volatility. Because of the substantial risk, should the stock price move out of the expected trading range, the opinion about the stock's near-term steadiness is likely to be fairly strongly held.
It generally profits if the stock price and volatility remain steady. A short straddle assumes that the call and put options both have the same strike price. See the discussion under short strangle for a variation on the same strategy, but with a higher call strike and a lower put strike. In yet another application, a cautious but still bullish stockowner could reduce an existing long stock position and simultaneously write an at-the-money short straddle, a strategy known as a protective straddle or covered straddle.
For a longer discussion of this concept, refer to covered strangle. The maximum risk is unlimited. The worst that can happen is for the stock to rise to infinity, and the next-to-worst outcome is for the stock to fall to zero. In the first case, the loss is infinitely large; and in the second, the loss is the strike price. In either event, the loss is reduced by the amount of premium income received for selling the options. Bear Put Spread Basic Characteristics Bear put spread is a bearish strategy — it profits when underlying price goes down.
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The position consists of two [more…]. This page explains bull put spread payoff at expiration and the calculation of its maximum profit, maximum loss, break-even point and risk-reward ratio. Bull Put Spread Basic Characteristics Bull put spread, also known as short put spread, is a position created with two put options: Buying a put with lower [more…]. This page explains bear call spread profit and loss at expiration and the calculation of its maximum gain, maximum loss, break-even point and risk-reward ratio.
Bear Call Spread Basic Characteristics Bear call spread, also known as short call spread, is a bearish option strategy using two call options — one [more…]. This page explains long straddle profit and loss at expiration and the calculation of its risk and break-even points. Long Straddle Basic Characteristics Long straddle is a position consisting of a long call option and a long put option, both with the same strike and the same expiration date. It [more…].
This page explains long strangle profit and loss at expiration and the calculation of its risk and break-even points. Long Strangle Basic Characteristics Strangle is a position made up of a long call option and a long put option with the same expiration date. It is similar to a straddle; [more…]. This page explains short straddle profit and loss at expiration and the calculation of its break-even points.
Short Straddle Basic Characteristics Short straddle is non-directional short volatility strategy. It is composed of a short call option and a short put option, both with the same strike price and expiration date [more…]. This page explains short strangle profit and loss at expiration and the calculation of its break-even points. Short Strangle Basic Characteristics Short strangle is a position created by selling a higher strike call option and selling a lower strike put option with the same expiration date.
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It is a non-directional [more…]. This page explains iron condor profit or loss at expiration and the calculation of its maximum profit, maximum loss, break-even points and risk-reward ratio. Iron Condor Basic Characteristics Iron condor is a non-directional short volatility strategy with limited risk and limited profit potential. It got its name from the shape [more…]. This page explains iron butterfly payoff profile and the calculation of its maximum loss, maximum profit, break-even points and risk-reward ratio.
Options Strategy
Iron Butterfly Basic Characteristics Iron butterfly is a non-directional short volatility strategy, typically used when a trader expects the underlying price to move sideways or stay at approximately the [more…]. This page explains the payoff profile of collar option strategy — different scenarios at expiration, maximum profit, maximum loss, break-even point and risk-reward ratio. Collar Strategy Basic Characteristics Collar is an option strategy that involves a long position in the underlying, a short call and a long put.
The common [more…]. You hold the stock, but don't want to sell it. You could buy a put option, also called a protective put.
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Let's decode covered calls. When looking for a call option to sell to generate income on a stock you own, you might see something like this:. You believe the price won't move much over the near term, but you'd like to make some income on it. You could sell write a covered call option. Investors are responsible for their own investment decisions.
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Learning something new and striving to master it — that's what motivates this investor's options trading.
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