The document provides a quick guide to various options strategies including bullish, bearish, and neutral strategies. It summarizes each strategy, outlines the general market outlook, risk, reward, impact of volatility and time erosion, and break-even points. The Options Industry Council (OIC) published this guide for educational purposes to help investors understand different options strategies and risks.
The document provides a quick guide to various options strategies including bullish, bearish, and neutral strategies. It summarizes each strategy, outlines the general market outlook, risk, reward, impact of volatility and time erosion, and break-even points. The Options Industry Council (OIC) published this guide for educational purposes to help investors understand different options strategies and risks.
The document provides a quick guide to various options strategies including bullish, bearish, and neutral strategies. It summarizes each strategy, outlines the general market outlook, risk, reward, impact of volatility and time erosion, and break-even points. The Options Industry Council (OIC) published this guide for educational purposes to help investors understand different options strategies and risks.
The document provides a quick guide to various options strategies including bullish, bearish, and neutral strategies. It summarizes each strategy, outlines the general market outlook, risk, reward, impact of volatility and time erosion, and break-even points. The Options Industry Council (OIC) published this guide for educational purposes to help investors understand different options strategies and risks.
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Options Strategies
QUICK GUIDE OIC is providing this publication for publication, nor does OIC warrant the informational purposes only. No statement suitability of this information for any in this publication is to be construed as particular purpose. Prior to buying or selling furnishing investment advice or being a an option, you must receive a copy of recommendation, solicitation or offer to Characteristics and Risks of Standardized buy or sell any option or any other security. Options. Copies of this document may be Options involve risk and are not suitable obtained from your broker, from any for all investors. OIC makes no warranties, exchange on which options are traded, expressed or implied, regarding the by calling 1-888-OPTIONS (678-4667), or completeness of the information in this by visiting www.optionseducation.org. ABOUT OIC
The Options Industry Council (OIC) was created to educate the investing public and brokers about the benefits and risks of exchange-traded options. In an effort to demystify this versatile but complex product, OIC conducts seminars, distributes educational software and brochures, and maintains a Web site focused on options education. OIC was formed in 1992. Today, its sponsors include the American Stock Exchange, Boston Options Exchange, the Chicago Board Options Exchange, the International Securities Exchange, NYSE Arca, the Philadelphia Stock Exchange and The Options Clearing Corporation. These participants have one goal in mind for the options investing public: to provide a financially sound and efficient marketplace where investors can hedge investment risk and find new opportunities for profiting from market participation. Education is one of many factors that assist in accomplishing that goal.
1-888-OPTIONS (678-4667) www.optionseducation.org Each strategy has an accompanying graph showing profit and loss at expiration. • The vertical axis shows the HOW TO USE THIS BOOK profit/loss scale. • When the strategy line is below the horizontal axis, it assumes you paid for the position or had a loss. When it is above the horizontal axis, it assumes you received a credit for the position or had a profit. profit • The dotted line indicates the + strike BEP strike price. price • The intersection of the strategy line and the horizontal axis is the break-even point (BEP) stock price not including transaction costs, commissions, or margin (borrowing) costs. • These graphs are not drawn - to any specific scale and are loss meant only for illustrative and educational purposes. • The risks/rewards described are generalizations and may be lesser or greater than indicated. Bull Strategies bull strategy LONG CALL
Example: Buy call profit
Market Outlook: Bullish +
Risk: Limited Reward: Unlimited Increase in Volatility: stock Helps position price
Time Erosion: Hurts position
BEP: Strike price plus premium paid - loss bull strategy BULL CALL SPREAD
Example: Buy 1 call;
profit sell 1 call at higher strike Market Outlook: Bullish + Risk: Limited Reward: Limited Increase in Volatility: stock price Helps or hurts depending on strikes chosen Time Erosion: Helps or hurts depending on strikes chosen - BEP: Long call strike plus loss net premium paid bull strategy CALL BACKSPREAD
Example: Sell 1 call;
buy 2 calls at higher strike Market Outlook: Very bullish profit
Risk: Limited + Reward: Unlimited Increase in Volatility: Typically helps position stock Time Erosion: price Typically hurts position BEP: Two BEPs 1. Short call strike plus premium received - 2. Long call strike plus [(the loss difference between the long call strike and short call strike) minus credit received] bull strategy COVERED CALL/BUY WRITE
Example: Buy stock; sell calls
profit on a share-for-share basis Market Outlook: Neutral to + slightly bullish Risk: Limited, but substantial (risk is from a fall in stock price) stock Reward: Limited price
Increase in Volatility: Hurts position Time Erosion: Helps position - BEP: Starting stock price minus loss premium received bull strategy PROTECTIVE/MARRIED PUT
Example: Own 100 shares of
profit stock; buy 1 put Market Outlook: Cautiously + bullish Risk: Limited Reward: Unlimited stock price Increase in Volatility: Helps position Time Erosion: Hurts position BEP: Starting stock price - plus premium paid loss bull strategy CASH-SECURED SHORT PUT
Example: Sell 1 put; hold cash
profit equal to strike price x 100 Market Outlook: Neutral to + slightly bullish Risk: Limited, but substantial Reward: Limited stock price Increase in Volatility: Hurts position Time Erosion: Helps position BEP: Strike price minus - premium received loss bull strategy BULL SPLIT-STRIKE COMBO
Example: Buy 1 call; profit
sell 1 put at lower strike + Market Outlook: Bullish Risk: Limited, but substantial Reward: Unlimited stock Increase in Volatility: Typically price helps position Time Erosion: Typically hurts position BEP: Two BEPs - loss 1. Long call strike plus premium paid 2. If established at a credit, short Note: This strategy is similar to a put strike minus premium Synthetic Long Stock when the strikes received are identical. Bear Strategies bear strategy LONG PUT
Example: Buy put profit
Market Outlook: Bearish +
Risk: Limited Reward: Limited, but substantial Increase in Volatility: stock Helps position price
Time Erosion: Hurts position
BEP: Strike price minus premium paid - loss bear strategy BEAR PUT SPREAD
Example: Sell 1 put;
profit buy 1 put at higher strike Market Outlook: Bearish + Risk: Limited Reward: Limited Increase in Volatility: stock price Helps or hurts depending on strikes chosen Time Erosion: Helps or hurts depending on strikes chosen - BEP: Long put strike minus loss net premium paid bear strategy PUT BACKSPREAD
Example: Sell 1 put;
buy 2 puts at lower strike Market Outlook: Bearish profit
Risk: Limited + Reward: Limited, but substantial Increase in Volatility: Typically helps position stock Time Erosion: Typically price hurts position BEP: Two BEPs 1. Short put strike minus premium received - 2. Long put strike minus loss [(difference between long put strike and short put strike) minus credit received] bear strategy BEAR SPLIT-STRIKE COMBO
Example: Buy 1 put; profit
sell 1 call at higher strike + Market Outlook: Bearish Risk: Unlimited Reward: Limited, but substantial stock price Increase in Volatility: Neutral Time Erosion: Neutral BEP: Two BEPs 1. Short call strike plus - premium received loss 2. If established at a debit, long put strike minus premium paid Note: This strategy is similar to a Synthetic Short Stock, if established at a debit. Neutral Strategies neutral strategy COLLAR
Example: Own stock, protect
by purchasing 1 put and selling profit 1 call with a higher strike + Market Outlook: Neutral Risk: Limited Reward: Limited stock Increase in Volatility: Effect price varies, none in most cases Time Erosion: Effect varies BEP: In principle, breaks even if, at expiration, the stock is - above/(below) its initial level by loss the amount of the debit/(credit) neutral strategy SHORT STRADDLE
Example: Sell 1 call;
profit sell 1 put at same strike Market Outlook: Neutral + Risk: Unlimited Reward: Limited Increase in Volatility: stock price Hurts position Time Erosion: Helps position BEP: Two BEPs 1. Call strike plus premium - received loss 2. Put strike minus premium received neutral strategy LONG STRADDLE
Example: Buy 1 call;
buy 1 put at same strike profit Market Outlook: Large move + in either direction Risk: Limited Reward: Unlimited stock Increase in Volatility: price Helps position Time Erosion: Hurts position BEP: Two BEPs 1. Call strike plus premium paid - 2. Put strike minus premium paid loss neutral strategy LONG STRANGLE
Example: Buy 1 call;
buy 1 put at lower strike profit Market Outlook: Large move + in either direction Risk: Limited Reward: Unlimited stock Increase in Volatility: price Helps position Time Erosion: Hurts position BEP: Two BEPs 1. Call strike plus premium paid - 2. Put strike minus premium paid loss neutral strategy SHORT STRANGLE
Example: Sell 1 call;
sell 1 put at lower strike profit Market Outlook: Neutral + Risk: Unlimited Reward: Limited Increase in Volatility: stock Hurts position price Time Erosion: Helps position BEP: Two BEPs 1. Call strike plus premium received - 2. Put strike minus premium loss received neutral strategy RATIO SPREAD WITH CALLS
Example: Buy 1 call; profit
sell 2 calls at higher strike + Market Outlook: Neutral to slightly bullish Risk: Unlimited Reward: Limited stock price Increase in Volatility: Typically hurts position Time Erosion: Typically helps position BEP: Two BEPs - 1. Long call strike plus premium paid loss 2. Short call strike plus [(the difference between the long The maximum profit potential is call strike and short call strike) limited to the difference between the strikes plus/(minus) the premium minus premium paid] received/(paid). neutral strategy LONG CALL BUTTERFLY
Example: Sell 2 calls;
buy 1 call at next lower strike; buy 1 call at next higher strike profit (the strikes are equidistant) Market Outlook: Neutral around + strike Risk: Limited Reward: Limited stock price Increase in Volatility: Typically hurts position Time Erosion: Typically helps position BEP: Two BEPs - 1. Lower long call strike plus loss net premium paid 2. Higher long call strike minus net premium paid Glossary Break-Even Point (BEP): The stock price(s) at which an option strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
In-the-money: A call option is in-the-money if the strike price is
less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Long position: A position wherein an investor is a net holder in a
particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike
price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Premium: The price a put or call buyer must pay to a put or call seller (writer) for an option contract. Market supply and demand forces determine the premium.
Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time. Short position: A position wherein the investor is a net writer (seller) of a particular options series.
Strike price or exercise price: The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Synthetic position: A strategy involving two or more instruments
that has the same risk/reward profile as a strategy involving only one instrument.
Time decay or erosion: A term used to describe how the time value of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the
underlying security. Mathematically, volatility is the annualized standard deviation of returns. FOR MORE INFORMATION
The American Stock NYSE Arca
Exchange LLC 100 South Wacker Drive 86 Trinity Place Chicago, IL 60606 New York, NY 10006 (312)960-1696 1-800-THE-AMEX www.nyse.com (212) 306-1000 Philadelphia Stock www.amex.com Exchange, Inc. Boston Options Exchange 1900 Market Street 100 Franklin Street Philadelphia, PA 19103 Boston, MA 02110 1-800-THE-PHLX (617) 235-2000 (215) 496-5000 www.bostonoptions.com www.phlx.com Chicago Board Options The Options Clearing Corporation Exchange, Incorporated One North Wacker Drive 400 South LaSalle Street Suite 500 Chicago, IL 60605 Chicago, IL 60606 1-877-THE-CBOE 1-800-537-4258 (312) 786-5600 (312) 322-6200 www.cboe.com www.optionsclearing.com International Securities The Options Industry Council Exchange, Inc. 1-888-OPTIONS 60 Broad Street 1-888-678-4667 26th Floor www.optionseducation.org New York, NY 10004 (212) 943-2400 www.ise.com 1-888-OPTIONS www.optionseducation.org
