Option Workshop blog #options-mechanics

Tuesday, 18 April 2017

Bear Call Spread

Strategy name and alternative names

Bear Call Spread. An alternative name is Credit Call Spread.

Main characteristics

Bearish position. It is a vertical spread involving an equal number of long and short calls on the same underlying asset and with the same expiration date. It is a credit spread, which means you receive money to put on the position. The strategy profits as long as the price of the underlying security remains below the breakeven point.

Options used in the combination

Sell to open one at-the-money (ATM) call and simultaneously buy to open one out-of-the money (OTM) call. The strike price of the short call is below that of the long call. The advantage of this spread is that it benefits from time decay and provides an immediate inflow of cash. The maximum gain and loss on the spread are very limited and well defined.

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Friday, 03 February 2017

Straddle

Strategy name and alternative names

Straddle. An alternative name is Long Straddle.

Main characteristics

Neutral position. It is a combination involving an equal number of long puts and long calls at the same strike price and the same expiration date. It is a debit combination, which means you must pay to put on the position. The strategy profits when the price of the underlying security moves up or down beyond the breakeven points.

Options used in the combination

Buy to open one at-the-money (ATM) call and simultaneously buy to open one ATM put. Both options derive from the same underlying stock and have the same strike price and expiration date. The advantage of this combination is that it benefits from volatility, independent of the direction of stock price movement. Both the put and the call have (potentially) unlimited upsides but limited loss exposure.

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Friday, 27 January 2017

Strangle

Strategy name and alternative names

Strangle. Alternative shorter names are Long strangle, poor-man’s straddle.

Main characteristics

Neutral position. It is a combination involving an equal number of out-of-the-money (OTM) long puts and long calls with the same expiration date. It is a debit combination, which means you must pay to put on the position. The strategy profits when the price of the underlying security moves up or down beyond the breakeven points.

Options used in the combination

Buy to open one OTM call and simultaneously buy to open one OTM put. Both options derive from the same underlying stock. The strike price of the put is below the current stock price by about the same amount as the call strike price is above the security price. For example, if the stock price is 100, you would buy a 95-strike put and a 105-strike call. The advantage of this combination is that it benefits from volatility, independently of the direction of stock price movement. Both the put and the call have (potentially) unlimited upsides but limited loss exposure.
A strangle is like a straddle, except that the put and call in a straddle have the same at-the-money strike price. Because the strangle uses cheaper OTM options, the total premium is less than that for a straddle, all other things being equal.

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Wednesday, 18 January 2017

Vertical Bull Debit Call Spread

Strategy name and alternative names

Vertical bull debit call spread. An alternative shorter name is bull call spread.

Main characteristics

Moderately bullish. It is a vertical spread, which means it involves two or more options at different strike prices with the same expiration date. It is a debit spread, which means you must pay to put on the position. The strategy profits when the underlying security rises moderately.

Options used in the spread

Buy to open one at-the-money (ATM) call and simultaneously sell to open one out-of-the money (OTM) call. Both calls derive from the same underlying stock. The advantage of this spread is that the credit from the sale of the OTM call partially offsets the debit paid for the ATM call. Basically, the spread allows you to buy the ATM call at a discount in exchange for a cap on the maximum profit you can extract from the spread.

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Tuesday, 20 December 2016

Option Expiration and Pinning

Options trading can appear intimidating to some traders. To make money, you must understand how option values fluctuate, the risks of option positions and the regulations pertaining to option expiration. You can have option positions that expire after periods ranging from one day to more than a year. Understanding the mechanics of option expiration will save you from unpleasant surprises.

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Friday, 02 December 2016

Day trading options

The term “day trading” assumes that a trader opens and closes positions within a single trading session and doesn’t take positions overnight.

Also, when talking about day trading, people generally think of instruments such as – equities, ETFs and futures. Not options.

However, let’s analyze whether we can use options for day trading and, if so, we should consider how to adjust trading styles and which nuances to focus on while trading options within such a short time frame.

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Friday, 18 November 2016

How to read P&L Charts (part 1)

The question considered in this article might seem too obvious, and one might say that there is nothing to discuss. But our user support experience tells us that often people who are entirely new in options spent excessive time on trying to figure out options payoff profiles. Having a well-developed skill of reading options risk profiles (alternative terms are P&L profiles, payoff function profiles) is essential to successful options trading.

For sure, sooner or later everyone will understand all the details, but we think that with this article we may accelerate this process.

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