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Advanced Options Strategies

Neutral Options Trading Strategies

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Sell Straddle

Sell Strangle

Long Butterfly

Calendar Spread

Covered Call

Sell Straddle

Expect prices to fluctuate in very narrow range

Strategy View
Investor is certain that the market will not be very volatile (will neither go up nor down very much).

Strategy Implementation
A call option and a put option are sold with the same strike price (a).

Upside Potential
Limited to the two premiums received – will be realized if market at expiry is exactly at the strike price level.

Breakeven Point
The lower point (b) will be the strike minus the value of two premiums received, the upper point (c) will be the strike plus the two premiums received. [If the investor would like to broaden this band, a sell strangle might be interesting].

Downside Risk
Unlimited – should the market fall or rise greatly

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received

Comment
If the market does little then the value of the position will benefit as the short positions gain when the option time value falls.

Sell Strangle

prices might flutuate in a broader range

Strategy View
The investor thinks that the market will not be volatile within a broadish band.

Strategy Implementation
Put option is sold with a strike price of (a) and a call option is sold with the higher strike price (b)

Upside Potential
Limited to the two premiums received.

Breakeven Point at Expiry
Lower point (c) will be the lower strike minus the two premiums received, the upper point (d) will be the higher strike plus the two premiums received.

Downside Risk
Unlimited – should the market fall or rise greatly. [If the investor likes the strategy, but not the downside risk, a long butterfly might be interesting].

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received

Comment
If the market does little then the value of the position will benefit as the short positions gain when the option time value falls.

Long Butterfly

Moderately certain that prices will not fluctuate much

Strategy View
Investor thinks that the market will not be volatile, but wants to cap the downside risk. .

Strategy Implementation
Call option with low strike (b) bought and 2 call options with medium strike (a) sold and call option with high strike (c) bought. (The same position can be created with puts, but is less common).

Upside Potential
Limited – to the difference between the lower and middle strikes minus the net debit of establishing the spread.

Downside Risk
Limited to the initial net debit of establishing the spread.

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received

Comment
Can be difficult to execute such strategies quickly.

Calendar Spread

Short-term weakness but longer term rally

Strategy View
Investor thinks that the market will be weak in the short-term, but rally in the longer-term.

Strategy Implementation
Near dated call option is sold, and a longer-dated call option with the same strike is bought. [If the investor holds the opposite view, then a comparable strategy can be constructed with puts].

Upside Potential
Large, if the bought option is held after the short option expires (the position then becomes a buy call). If the position is closed at expiry of the near option, maximum profit will accrue if the market is at the level of the sold strike.

Breakeven Point at Expiry
Strike price plus premium

Downside Risk
Limited to the initial debit incurred for establishing the spread. .

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received.

Comment
Sometimes called a horizontal or time spread.

Covered Call

Hold position but expect no movement

Strategy View
An investor long spot position but does not think the market will rise in the short term, or that the market will be neutral, income can be gained by selling call options against the open long spot position.

Strategy Implementation
Call options are sold. The number of call options sold will be determined by the investor’s market view and the size of the open long position.

Upside Potential
Limited – by selling calls, the investor is writing off the potential profit of the open long spot position. Maximum profit is the strike minus the market price plus the premium received.

Downside Risk
Large: Similar to that incurred with long spot positioning, only off-set partially by the (fixed) option premium received. Main loss could be the opportunity loss if the market rises strongly.

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received

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