Options Trading Strategies

Options Trading Strategies

• Single Option & Future
  • Covered Call
  • Protective Put
• Spreads
  • Bull Spread
  • Bear Spread
• Combinations
  • Straddle 
  • Strangle

Covered Call :
Sell a Call option and Buy Future

Covered Call :

Covered Call :
Buy a Future, Sell a Call Option

Advantage :

• When there is a sharp rise in the future price, purchased  future protects the seller of the call from pay-off

When is this appropriate?

• A sharp rise in future prices is expected

Bull Spreads with Call (Buy Call option and Sell Call on a higher strike price)

Bull Spread

Bull Spread

Advantage:

• Limits the investor’s upside & downside risk

When is this appropriate?

• The investor expects Future prices to go up.

Straddle (Buy Call and Put at the same Strike Price and Expiration)

Straddle :

Straddle (Buy Call & Put, Same Strike Price, Expiration Date)

Advantage

• If there is a sufficiently large move in either direction, a significant PROFIT will result

Disadvantage

• If Future price is close to strike price at expiration of options –> LOSS

When is this appropriate to use?

• Investor is expecting a large move in a Future price but does not know in which direction  the move will be; a big jump in the price of Future is expected.

Strangle (Buy 1 Call and 1 Put at the same Expiration date but with different Strike Price)

Strangle :

Strangle(Buy Put & Call, Same Expiration Dates, Different Strike Prices; K2 > K1)

When is this appropriate?

• The investor is betting that there will be a large price move but is uncertain whether it will be an increase or decrease.
• The Future price has to move farther in a strangle than in a straddle for the  investor to make a profit

Disadvantage

• The downside risk if the Future price ends up at a central value is less with a  strangle

Advantage

• The farther strike prices are apart, the less the downside risk and the farther  the Future price has to move for a profit to be realized