Advanced Options Strategies
Neutral Options Trading Strategies
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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.
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.
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.
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.
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