Option Workshop blog #trading-strategy

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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Thursday, 23 March 2017

Option Workshop, version 17.3.1431

We prepared a major update for Option Workshop. Many new features have been added to help our users trade efficiently.

There are two new tabs in the Positions manager:

  • Orders – contains orders that are linked to selected strategy. On this form, you can place or cancel orders, and shift orders one step up or down from the midmarket price.
  • Notes – contains text comments about the selected strategy. You can write comments on any strategy. Notes are displayed when you hover the cursor over the strategy name.

In the new version, you can change the position’s opening price, set the commission for the exchange/underlying assets/option series/futures, display the IV curves for several pricing models simultaneously, etc. We will discuss these and other features in this article.

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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

One Easy fix for traders getting stopped out too early or cutting profits too soon…

If you’ve traded actively for at least a few months or years, you’ll know all too often the agony that comes with getting stopped out of a position and immediately, the trade takes off. A similar but lesser form of agony is felt when a trade has hit your price target and you proudly sell your position. Except, it keeps going and going…

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Monday, 12 December 2016

Trading like this can be fatal for you, Part 2

In the first part of this article, I briefly discussed a rather painful early trading experience during the financial crises in 2007/2008. I was short and still somehow killed my account.

I let my emotions dominate my trades earlier in my career. My self-worth was tied to each dollar made or lost. I was many things back then. Too eager, too risk-loving, too young.

Eventually, learned that my trading career is like a war that never ends. Every minute of trading is a battle with others trying to separate me from my money. If we fail to manage our emotions, we become easy targets. After blowing up my account multiple times, I learned some very painful lessons.

As promised, I will share with you my framework to keep psychologically sane while trading and also what to do when off balance.

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Monday, 12 December 2016

Trading like this can be fatal for you, Part 1

I was 24 years old and it was July 2007. I was sitting on the fixed income trading floor of BNP Paribas at the time and was just itching to take a big short on the stock market. Equities had been rallying in the face of a crashing fixed income market. It was like smiling into the fist of a much younger Mike Tyson.

I finally pulled the trigger after months of waiting and shorted as much high beta stocks my margin would allow. After all, that’s how the legendary Jesse Livermore used to do it right? I doubled my money in a matter of weeks and was on an emotional high. I truly believed I had found my calling in life.

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