Advanced Options Strategies
Volatile Options Trading Strategies
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Buy
Straddle
Buy
Strangle
Short
Butterfly
Buy Straddle
Expect prices to be very volatile
Strategy View
Investor thinks that the market will be very volatile in the short-term.
Strategy Implementation
Call option and put option are bought with the same strike price (a) -
usually at-the-money.
Upside Potential
Unlimited Breakeven Point at Expiry
Lower point is the strike minus the two premiums paid, and the upper is
the strike plus the two premiums.
Downside Risk
Limited to the two premiums paid. [If the investor would like to decrease
the premium paid, a buy strangle might be interesting]
Margin
Not required
Comment
Position loses value with passage of time as time value decreases on options
Buy Strangle
Expect prices to be volatile
Strategy View
Investor thinks that the market will be very volatile in the short-term
[this is similar to the buy straddle but the premium paid here is less]
Strategy Implementation
Put option is bought with a strike (a) and a call option is bought with
a strike (b).
Upside Potential
Unlimited - should the market fall or rise greatly.
Downside Risk
Limited to the two premiums paid. [If the investor would like to reduce
the premiums paid still further, a short butterfly might be interesting].
Margin
Not required
Comment
Position loses value with passage of time as time value decreases on options
Short Butterfly
Moderately expect prices to be
volatile
Strategy View
Investor mildly thinks that the market will be volatile.
Strategy Implementation
Call option is sold with strike (b), two call options are bought with
strike (a) and a call option is sold with strike (c). [A similar position
can be created with puts].
Upside Potential
Limited to initial credit received.
Downside Risk
Limited to the difference between the lower and middle strikes minus the
initial spread credit.
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
May be difficult to execute this strategy quickly. |