The Bible of Options Strategies -...

The Bibleof OptionsStrategies

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The Bibleof OptionsStrategiesThe Definitive Guide for Practical Trading Strategies

Guy Cohen

Library of Congress Number: 2004116072

Vice President and Editor-in-Chief: Tim MooreExecutive Editor: Jim BoydEditorial Assistant: Kate E. StephensonDevelopment Editor: Russ HallMarketing Manager: Martin LitkowskiInternational Marketing Manager: Tim GalliganCover Designer: Sandra SchroederManaging Editor: Gina KanouseSenior Project Editor: Sarah KearnsCopy Editor: Ben LawsonIndexer: Larry SweazyCompositor: Interactive Composition CorporationManufacturing Buyer: Dan Uhrig

© 2005 by Pearson Education, Inc.

Publishing as FT Press

Upper Saddle River, New Jersey 07458

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Printed in the United States of America

ISBN: 0-13-171066-4

Pearson Education LTD.Pearson Education Australia PTY, Limited.Pearson Education Singapore, Pte. Ltd.Pearson Education North Asia, Ltd.Pearson Education Canada, Ltd.Pearson Educatión de Mexico, S.A. de C.V.Pearson Education—JapanPearson Education Malaysia, Pte. Ltd.

Fourteenth Printing: September 2013

To Dominic and Lulu, who keep reminding me of their omission from theAcknowledgments of my first book!

Table of Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxviiAcknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxvAbout the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxvi

The Four Basic Options Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Income Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Vertical Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Volatility Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Sideways Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Leveraged Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Synthetic Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Taxation for Stock and Options Traders . . . . . . . . . . . . . . . . . . . . . 293

Appendix A Strategy Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303Appendix B Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

8

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6

5

4

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Find Your Strategy By Chapter

The Four Basic Options Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Long Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.2 Short (Naked) Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.3 Long Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121.4 Short (Naked) Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Income Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212.1 Covered Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.2 Short (Naked) Put—Refer to Chapter 1 (1.4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282.3 Bull Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282.4 Bear Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322.5 Long Iron Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362.6 Long Iron Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412.7 Covered Short Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462.8 Covered Short Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512.9 Calendar Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572.10 Diagonal Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632.11 Calendar Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692.12 Diagonal Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762.13 Covered Put (Also Known as a Married Put) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Vertical Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893.1 Bull Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903.2 Bear Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 943.3 Bull Put Spread—Refer to Chapter 2 (2.3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993.4 Bear Call Spread—Refer to Chapter 2 (2.4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993.5 Bull Call Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

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x Find Your Strategy By Chapter

3.6 Bull Put Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1043.7 Bear Call Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1093.8 Bear Put Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Volatility Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1194.1 Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1214.2 Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1274.3 Strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1324.4 Strap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1374.5 Guts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1434.6 Short Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1484.7 Short Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1524.8 Short Call Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1574.9 Short Put Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1614.10 Short Iron Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1664.11 Short Iron Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Sideways Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1755.1 Short Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.2 Short Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1805.3 Short Guts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1845.4 Long Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1885.5 Long Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1935.6 Long Call Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1985.7 Long Put Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2035.8 Modified Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2085.9 Modified Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2125.10 Long Iron Butterfly—Refer to Chapter 2 (2.5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2175.11 Long Iron Condor—Refer to Chapter 2 (2.6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Leveraged Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2196.1 Call Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2196.2 Put Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2246.3 Ratio Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2296.4 Ratio Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

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Synthetic Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2397.1 Collar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2407.2 Synthetic Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2467.3 Synthetic Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2507.4 Long Call Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2547.5 Long Put Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2587.6 Short Call Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2637.7 Short Put Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2677.8 Long Synthetic Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2717.9 Short Synthetic Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2757.10 Long Combo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2787.11 Short Combo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2827.12 Long Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

Taxation for Stock and Options Traders . . . . . . . . . . . . . . . . . . . . 2938.1 Tax on Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2948.2 Tax on Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

Appendix A Strategy Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303Appendix B Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

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Find Your Strategy By Chapter xi

Find Your Strategy By Proficiency

The following strategies are appropriate for novice traders:

Novice Chapter PageLong Call 1 5Long Put 1 12Covered Call 2 23Synthetic Call 7 246Synthetic Put 7 250

The following strategies are appropriate for intermediate traders:

Intermediate Chapter PageBear Call Spread 3 99Bull Put Spread 2 28Bear Call Spread 2 32Bull Put Spread 3 99Calendar Call 2 57Collar 7 240Diagonal Call 2 63Long Call Butterfly 5 188Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Long Put Butterfly 5 193Short (Naked) Put 1 and 2 16, 28Short Call Butterfly 4 148Short Put Butterfly 4 152Straddle 4 121Strangle 4 127

xiv Find Your Strategy By Proficiency

The following strategies are appropriate for advanced traders:

Advanced Chapter PageBear Call Ladder 3 109Bear Put Ladder 3 114Bull Call Ladder 3 99Bull Put Ladder 3 104Calendar Put 2 69Call Ratio Backspread 6 219Covered Put 2 84Covered Short Straddle 2 46Covered Short Strangle 2 51Diagonal Put 2 76Long Call Condor 5 198Long Put Condor 5 203Short (Naked) Call 1 9Put Ratio Backspread 6 224Short Call Condor 4 157Short Iron Butterfly 4 166Short Iron Condor 4 170Short Put Condor 4 161Short Straddle 5 176Short Strangle 5 180

The following strategies are appropriate for expert traders:

Expert Chapter PageGuts 4 143Long Box 7 286Long Call Synthetic Straddle 7 254Long Combo 7 278Long Put Synthetic Straddle 7 258Long Synthetic Future 7 271Modified Call Butterfly 5 208Modified Put Butterfly 5 212Ratio Call Spread 6 229Ratio Put Spread 6 233Short Call Synthetic Straddle 7 263Short Combo 7 282

Short Guts 5 184Short Put Synthetic Straddle 7 267Short Synthetic Future 7 275Strap 4 137Strip 4 132

Find Your Strategy By Proficiency xv

Find Your Strategy By Direction

The following strategies are bullish:

Bullish Chapter PageBear Call Ladder 3 109Bull Call Spread 3 90Bull Put Spread 2 and 3 28, 99Calendar Call 2 57Calendar Put 2 69Call Ratio Backspread 6 219Collar 7 240Covered Call 2 23Covered Short Straddle 2 46Covered Short Strangle 2 51Diagonal Call 2 63Diagonal Put 2 76Long Call 1 5Long Combo 7 278Long Synthetic Future 7 271Modified Call Butterfly 5 208Modified Put Butterfly 5 212Short (Naked) Put 1 and 2 16, 28Ratio Put Spread 6 233Strap 4 137Synthetic Call 7 246

The following strategies are bearish:

Bearish Chapter PageBear Call Spread 2 and 3 32, 99Bear Put Spread 3 94

Bull Put Ladder 3 104Covered Put 2 84Long Put 1 12Short (Naked) Call 1 9Put Ratio Backspread 6 224Ratio Call Spread 6 229Short Combo 7 282Short Synthetic Future 7 275Strip 4 132Synthetic Put 7 250

The following strategies are direction neutral:

Direction Neutral Chapter PageBear Put Ladder 3 114Bull Call Ladder 3 99Guts 4 143Long Box 7 286Long Call Butterfly 5 188Long Call Condor 5 198Long Call Synthetic Straddle 7 254Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Long Put Butterfly 5 193Long Put Condor 5 203Long Put Synthetic Straddle 7 258Short Call Butterfly 4 148Short Call Condor 4 157Short Call Synthetic Straddle 7 263Short Guts 5 184Short Iron Butterfly 4 166Short Iron Condor 4 170Short Put Butterfly 4 152Short Put Condor 4 161Short Put Synthetic Straddle 7 267Short Straddle 5 176Short Strangle 5 180Straddle 4 121Strangle 4 127

Find Your Strategy By Direction xvii

Find Your Strategy By Volatility

The following strategies benefit from high volatility once you are in thetrade:

High Volatility Chapter PageBear Call Ladder 3 109Bull Put Ladder 3 104Calendar Call 2 57Call Ratio Backspread 6 219Collar 7 240Diagonal Call 2 63Guts 4 143Long Box 7 286Long Call Synthetic Straddle 7 254Long Put Synthetic Straddle 7 258Put Ratio Backspread 6 224Short Call Butterfly 4 148Short Call Condor 4 157Short Iron Butterfly 2 and 4 166Short Iron Condor 2 and 4 170Short Put Butterfly 4 152Short Put Condor 4 161Straddle 4 121Strangle 4 127Strap 4 137Strip 4 132

The following strategies benefit from low volatility once you are in thetrade:

Low Volatility Chapter PageBear Call Ladder 3 109Bull Call Ladder 3 99Long Call Butterfly 5 188Long Call Condor 5 198Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Long Put Butterfly 5 193Long Put Condor 5 203Modified Call Butterfly 5 208Modified Put Butterfly 5 212Ratio Call Spread 6 229Ratio Put Spread 6 233Short Call Synthetic Straddle 7 263Short Guts 5 184Short Put Synthetic Straddle 7 267Short Straddle 5 176Short Strangle 5 180

Find Your Strategy By Volatility xix

Find Your Strategy By Risk / Reward

The following strategies have a capped risk profile:

Capped Risk Chapter PageBear Call Spread 2 and 3 32, 99Bear Call Ladder 3 109Bear Put Spread 3 94Bull Call Spread 3 90Bull Put Spread 2 and 3 28, 99Bull Put Ladder 3 104Calendar Call 2 57Calendar Put 2 69Call Ratio Backspread 6 219Collar 7 240Covered Call 2 23Diagonal Call 2 63Diagonal Put 2 76Guts 4 143Long Box 7 286Long Call 1 5Long Call Butterfly 5 188Long Call Condor 5 198Long Call Synthetic Straddle 7 254Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Long Put 1 12Long Put Butterfly 5 193Long Put Condor 5 203Long Put Synthetic Straddle 7 258

Modified Call Butterfly 5 208Modified Put Butterfly 5 212Short (Naked) Put 1 and 2 16, 28Put Ratio Backspread 6 224Short Call Butterfly 4 148Short Call Condor 4 157Short Iron Butterfly 4 166Short Iron Condor 4 170Short Put Butterfly 4 152Short Put Condor 4 161Straddle 4 121Strangle 4 127Strap 4 137Strip 4 132Synthetic Call 7 246Synthetic Put 7 250

The following strategies have an uncapped risk profile:

Uncapped Risk Chapter PageBear Put Ladder 3 114Bull Call Ladder 3 99Covered Put 2 84Covered Short Straddle 2 46Covered Short Strangle 2 51Long Combo 7 278Long Synthetic Future 7 271Short (Naked) Call 1 9Ratio Call Spread 6 229Ratio Put Spread 6 233Short Call Synthetic Straddle 7 263Short Combo 7 282Short Guts 5 184Short Put Synthetic Straddle 7 267Short Straddle 5 176Short Strangle 5 180Short Synthetic Future 7 275

Find Your Strategy By Risk/Reward xxi

xxii Find Your Strategy By Risk/Reward

The following strategies offer only a capped reward profile:

Capped Reward Chapter PageBear Call Spread 2 and 3 32, 99Bear Put Spread 3 94Bear Put Ladder 3 114Bull Call Spread 3 90Bull Call Ladder 3 99Bull Put Spread 2 and 3 28, 99Calendar Call 2 57Calendar Put 2 69Collar 7 240Covered Call 2 23Covered Put 2 84Covered Short Straddle 2 46Covered Short Strangle 2 51Diagonal Call 2 63Diagonal Put 2 76Long Box 7 286Long Call Butterfly 5 188Long Call Condor 5 198Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Long Put Butterfly 5 193Long Put Condor 5 203Modified Call Butterfly 5 208Modified Put Butterfly 5 212Short (Naked) Call 1 9Short (Naked) Put 1 and 2 16, 28Ratio Call Spread 6 229Ratio Put Spread 6 233Short Call Butterfly 4 148Short Call Condor 4 157Short Call Synthetic Straddle 7 263Short Guts 5 184Short Iron Butterfly 4 166Short Iron Condor 4 170Short Put Butterfly 4 152

Short Put Condor 4 161Short Put Synthetic Straddle 7 267Short Straddle 5 176Short Strangle 5 180

The following strategies offer an uncapped reward potential:

Uncapped Reward Chapter PageBear Call Ladder 3 109Bull Put Ladder 3 114Call Ratio Backspread 6 219Guts 4 143Long Call 1 5Long Call Synthetic Straddle 7 254Long Combo 7 278Long Put 1 12Long Put Synthetic Straddle 7 258Long Synthetic Future 7 271Put Ratio Backspread 6 224Short Combo 7 282Short Synthetic Future 7 275Straddle 4 121Strangle 4 127Strap 4 137Strip 4 132Synthetic Call 7 246Synthetic Put 7 250

Find Your Strategy By Risk/Reward xxiii

Find Your Strategy By Type

The following strategies enable to you capture a regular income:

Income Chapter PageBear Call Spread 2 and 3 32, 99Bear Put Ladder 3 114Bull Call Ladder 3 99Bull Put Spread 2 and 3 28, 99Calendar Call 2 57Calendar Put 2 69Covered Call 2 23Covered Put 2 84Covered Short Straddle 2 46Covered Short Strangle 2 51Diagonal Call 2 63Diagonal Put 2 76Long Iron Butterfly 2 and 5 36, 217Long Iron Condor 2 and 5 41, 217Short (Naked) Call 1 9Short (Naked) Put 1 and 2 16, 28Ratio Call Spread 6 229Ratio Put Spread 6 233Short Guts 5 184Short Put Synthetic Straddle 7 267Short Straddle 5 176Short Strangle 5 180

Find Your Strategy By Type xxv

The following strategies are for capital gain:

Capital Gain Chapter PageBear Call Ladder 3 109Bear Put Spread 3 94Bull Call Spread 3 90Bull Put Ladder 3 104Call Ratio Backspread 6 219Collar 7 240Guts 4 143Long Box 7 286Long Call 1 5Long Call Butterfly 5 188Long Call Condor 5 198Long Call Synthetic Straddle 7 254Long Combo 7 278Long Put 1 12Long Put Butterfly 5 193Long Put Condor 5 203Long Put Synthetic Straddle 7 258Long Synthetic Future 7 271Modified Call Butterfly 5 208Modified Put Butterfly 5 212Put Ratio Backspread 6 224Short Call Butterfly 4 148Short Call Condor 4 157Short Call Synthetic Straddle 7 263Short Combo 7 282Short Iron Butterfly 4 166Short Iron Condor 4 170Short Put Butterfly 4 152Short Put Condor 4 161Short Synthetic Future 7 275Straddle 4 121Strangle 4 127Strap 4 137Strip 4 132Synthetic Call 7 246Synthetic Put 7 250

Preface

How to Use This BookOptions give investors so much flexibility that when it came to writing a book namedThe Bible of Options Strategies, I found myself cursing just how flexible they can be!Sixty strategies is a lot of ground to cover, but in reviewing them all again (I’ve doneit several times already!), I was reminded of the beauty of these amazing tradinginstruments.

Options give us the ability to do so many things—they enable us to configure ourinvestment aims in any way we like. The benefits of options are often trotted out tonew students or prospective customers as the first salvo of an up-sell campaign, butthey’re worth looking at again, this time from a practical point of view.

Options enable us to:

■ Control more assets for less money.

One option contract represents 100 shares of stock and is usually a fraction of thecost of what you’d pay for the equivalent number of shares.

For example, ABCD stock is priced at $26.20 on June 2, 2004.

An option to buy ABCD shares (a call option) might be priced at $2.60. Becauseone contract represents 100 shares, we can therefore buy one ABCD call contractfor $260.00 [100 * 2.60]. The alternative would be to buy 100 shares of the stockfor a total sum of $2,620. So, in this example, we can buy ABCD calls options foraround 10% of the stock price in order to control $2,620 of ABCD stock until theappropriate expiration date of the option.

■ Trade with leverage.

Because our cost basis is so low, the position is much more sensitive to the under-lying stock’s price movements, and hence our percentage returns can be so muchgreater.

■ Trade for income.

We can design strategies specifically for the purpose of generating income on aregular basis.

xxviii Preface

■ Profit from declining stocks.

We can use puts and calls to ensure that we can make money if the stock goes up,down, or sideways.

■ Profit from volatility or protection against various factors.

Different options strategies protect us or enable us to benefit from factors such astime decay, volatility, lack of volatility, and more.

■ Reduce or eliminate risk.

Options enable us to substantially reduce our risk of trading, and in certain rarecases, we can even eliminate risk altogether, albeit with the trade-off of very lim-ited profit potential!

So, with all the different benefits of options, why on earth would traders not be curi-ous to learn more about them? Well, for a start, the initial barrier to entry is quitehigh, in that options are reasonably complex instruments to understand for the firsttime. After you’re over that hurdle, though, they become more and more fascinating!The other reason is that there is such a multitude of other investment securities forpeople to choose from, many will pick what seems like the simplest, rather than whatmay fit their investment aims the best.

Given that options can be a challenge, it’s my job to make life as simple as possi-ble for you. One of the ways in which I do this is to break things down into picturesso we can see what we’re doing. As soon as we can see what we’re doing, lifebecomes much clearer when you’re creating options strategies. Everything to dowith OptionEasy and all my material is designed to be visual-friendly. This goes backto when I started to learn all about options and the fact that the penny only startedto drop when I converted the concepts into pictures. All of a sudden, everything fitinto place, and I started to be able to extend logic faster and further than before.

This book is designed to be a reference book, one that you can pick up any timeto learn about and understand a strategy. It isn’t an academic workbook. It’s a prac-tical book, written for traders, designed to work interactively with your tradingactivities. As the title suggests, it’s a book about options strategies, of which we takeon 58! That’s not to say you need to learn about each and every one of them, but atleast you have the choice!

In order to make life easier for you, we categorize the strategies into differentdescriptions for the following criteria:

Proficiency LevelEach strategy is assigned a “value” in term of its suitability for different levels oftrader. Each level is given an associated icon.

Strategies suitable for novices

Strategies suitable for intermediates

Preface xxix

Strategies suitable for advanced traders

Strategies suitable for expert traders

The allocations are defined according to a subjective view of complexity, risk, anddesirability of the strategy. Therefore, some highly risky and undesirable strategieshave been put into the Expert basket in order to warn novices and intermediates away.Also Novice strategies are not exclusive to novice traders. It’s simply a question ofsuitability, and novice strategies are highly relevant and suitable to all levels of trader.

In some cases, the strategy is not complex at all but is considered unacceptablyrisky for novice and intermediate traders (at least without a warning). I have tried tobe objective here, but I’m mindful not just of my own experiences but also the manystudents who regularly show me their trading disasters! Conservative by nature,I’m a believer that loss of opportunity is preferable to loss of capital (Joe DiNapoli), andperhaps some of these rankings bear testimony to this philosophy.

Market OutlookThis is where we define whether a strategy is suitable to bullish, bearish, or directionneutral outlooks.

Strategies suitable for bullish market conditions

Strategies suitable for bearish market conditions

Strategies suitable for sideways market conditions

VolatilityVolatility is one of the most important factors affecting option pricing and thereforeoption trading. You really should familiarize yourself with the concept, which, for-give the plug, is dealt with in my first book, Options Made Easy.

Here, we define whether a strategy is suitable for trades anticipating high volatil-ity or low volatility in the markets. Some strategies, such as Straddles, require highvolatility after you’ve placed the trade, so a Straddle would fall into the HighVolatility category.

Strategies suitable for high volatility markets

Strategies suitable for low volatility markets

RiskWith any trade you’re looking to make, you must be aware of your potential risk,reward, and breakeven point(s).

Some strategies have unlimited risk; others have limited risk, even if that “limited”risk means 100% of the trade. Believe it or not, sometimes with options it’s possible tolose more than 100%. In such cases, or when there is no definable stop to the potentialrisk of a trade, you’re well advised to be aware of such a position in advance!

xxx Preface

Here, we show you which strategies have capped or uncapped risk. Strategieswith uncapped risk aren’t necessarily all bad, but you should at least be aware ofwhat you are getting into. Often you can mitigate such risk with a simple stop lossprovision, in which case you’re not going to be liable to uncapped risk. Often, suchuncapped risk scenarios only occur if the stock falls to zero or rises to infinity, whichmostly are rare circumstances, but you’re better off being aware!

Strategies with capped risk

Strategies with uncapped risk

RewardFollowing the risk scenarios described previously, the strategies also have potentialreward scenarios, too.

Just because a strategy has unlimited reward potential doesn’t mean that it’s nec-essarily a great strategy, and just because it may have capped reward doesn’t meanit’s necessarily a bad strategy.

Strategies with capped reward

Strategies with uncapped reward

Strategy TypeStrategies can be used for income purposes (usually short-term) or to make capitalgains. Many traders like the Covered Call because it’s suitable for novices andbecause it’s an income strategy that they can use every month.

Income strategies

Capital gain strategies

Strategy LegsEach strategy contains different legs. Some have just one, and others have up to four.Each leg must be composed of any one of the basic four option strategies (long orshort call or put) or a long or short stock position. Here’s how we identify them:

Long stock

Short stock

Long call

Short call

Long put

Short put

All strategies contain real-life examples at the end of each guide.

Preface xxxi

Chapter by Chapter

In terms of structure, I’ve tried to make this book as easily navigable as possible, andmuch of that is solved by matrix-style tables of contents.

Each chapter contains strategies that are commensurate with a specific style ofoptions trading. Inevitably there’s some overlap between chapters for certain strate-gies, which we address in the appropriate places.

Chapter 1 addresses the basic strategies, including buying and selling stocks andthen buying and selling calls and puts. After you understand those cornerstonesand how the pictures relate to each strategy, then you can fast-forward to any partof the book and any strategy you like. All strategy guides are modular and followthe same format, so that you can become familiar with the style and structure of thecontent.

Chapter 2 is all about income strategies. An income strategy is when you’re effec-tively a net seller of short-term options, which generates (monthly) income. You haveto be careful, though, not to expose yourself to unlimited risk scenarios, which iswhy we use icons to identify excess risk.

In Chapter 3, we cover “vertical spreads.” A vertical spread is where we buy andsell the same numbers of the same options (calls or puts) but with different strikeprices. Obviously, there’s some overlap here with other chapters, which is why thechapter is comparatively small.

Chapter 4 goes into volatility strategies and is bound to be as popular as theincome strategies chapter! Here we address those strategies that benefit from increas-ing volatility after you’ve placed the trade.

In Chapter 5, we reverse this and explore those strategies that benefit fromdecreasing volatility after you’ve placed the trade. So here we’re looking for stocksthat we think will be rangebound for some time. Typically these are short-termstrategies.

Chapter 6 identifies the ratio spreads and backspreads, where you’re usingincreasing leverage to increase your returns. These are for advanced and experiencedtraders only!

In Chapter 7, we look at synthetic strategies that mainly mimic other strategicgoals, using a combination of stock legs, call legs, and put legs. For example, we canreplicate owning a stock purely by buying and selling calls and puts in such a waythat we hardly pay any cash out. In other words, we’ve simulated the risk of owningthe stock, but with no cash outlay. We can also synthetically re-create straddle posi-tions and other strategies.

Lastly, in Chapter 8, we investigate some of the taxation issues that will confrontyou during your trading careers. This is not a definitive tax guide but rather more aflag raiser.

xxxii Preface

Strategy by Strategy

Each strategy is presented in a modular format. In this way, the book should be easyto navigate. The modules are numbered, and the numbering system applies through-out each chapter and each strategy:

■ The first number refers to the chapter itself. So, all headings in Chapter 2 willstart with “2.”

■ The second number refers to the strategy in question. So, 2.1 refers to the firststrategy (Covered Call) in Chapter 2.

■ The third number refers to the module. So, 2.1.1 refers to the “Description” mod-ule for the first strategy (Covered Call) in Chapter 2. Because the modules areidentical throughout the book, each module number is the same throughout allthe strategies. Therefore, module “1,” which appears as the third decimal place,is always “Description.” The modules are outlined as follows:

■ x.y.1 Description

Here, we describe the strategy in both words and pictures. We identify thesteps for each leg and some general comments about what the overall posi-tion will mean to you.

■ x.y.2 Context

This section describes the outlook and rationale for the strategy. We also high-light the net position in your account as a result of the trade as well as identi-fy the effect of time decay and the appropriate time period for the strategy. Stockand option-leg selection are important elements of any trade, so these are cov-ered as well.

■ x.y.3 Risk Profile

This section provides, where possible, simple calculations for you to evaluatethe risk, reward, and breakeven points for each strategy.

■ x.y.4 Greeks

This is where we graphically explain each of the “Greeks.” The Greeks aresimply sensitivities of options to various factors, such as price movement,time decay, volatility, and interest rates. The Greeks are as follows:

Delta:

The movement of the option position relative to the movement of the under-lying (say, stock) position. The resulting figure gives us an indication of thespeed at which the option position is moving relative to the underlying stockposition. Therefore, a Delta of 1 means the option position is moving 1 pointfor every point the stock moves. A Delta of –1 means the option position ismoving –1 point for every point the underlying stock moves.

Preface xxxiii

Typically, at-the-money options move with a Delta of 0.5 for calls and –0.5for puts, meaning that ATM options move half a point for every 1 point thatthe underlying asset moves. This does not mean the option leg is movingslower in percentage terms, just in terms of dollar for dollar.

Delta is another way of expressing the probability of an option expiringin-the-money. This makes sense because an ATM call option has a Delta of0.5; i.e., 50%, meaning a 50% chance of expiring ITM. A deep ITM call willhave a Delta of near 1, or 100%, meaning a near 100% chance of expirationITM. A very out-of-the-money call option will have a Delta of close to zero,meaning a near zero chance of expiring ITM.

So, Delta can be interpreted both in terms of the speed of the position andthe probability of an option expiring ITM. Some advanced traders like totrade with the sum of their portfolio Delta at zero, otherwise known as Delta-Neutral trading. This is by no means a risk-free method of trading, but it is astyle that enables profits to be taken regardless of the direction of marketmovement. However, this is only really suited to professional-style traderswho have the very best technology solutions and a lot of experience.

Gamma:

Gamma is mathematically the second derivative of the underlying asset’sprice, or the first derivative of Delta, and can be viewed in two ways: eitheras the acceleration of the option position relative to the underlying stock price,or as the odds of a change in probability of the position expiring ITM (in otherwords, the odds of a change in Delta). Gamma is effectively an early warningto the fact that Delta could be about to change. Both calls and puts have pos-itive Gammas. Typically, deep OTM and deep ITM options have near zeroGamma because the odds of a change in Delta are very low. Logically,Gamma tends to peak around the strike price.

Theta:

Theta stands for the option position’s sensitivity to time decay. Long options(i.e., options that you have bought) have negative Theta, meaning that everyday you own that option, time decay is eroding the Time Value portion of theoption’s value. In other words, time decay is hurting the position of an optionholder. When you short options, Theta is positive, indicating that time decayis helping the option writer’s position.

Vega:

Vega stands for the option position’s sensitivity to volatility. Options tend toincrease in value when the underlying stock’s volatility increases. So, volatil-ity helps the owner of an option and hurts the writer of an option. Vega is pos-itive for long option positions and negative for short option positions.

Rho:

Rho stands for the option position’s sensitivity to interest rates. A positive Rhomeans that higher interest rates are helping the position, and a negative Rho

xxxiv Preface

means that higher interest rates are hurting the position. Rho is the leastimportant of all the Greeks as far as stock options are concerned.

■ x.y.5 Advantages and Disadvantages

As indicated, this section highlights the strengths and weaknesses of thestrategy in question and the context of suitability for the trader.

■ x.y.6 Exiting the Trade

This module indicates the steps required to exit the position or to mitigate a loss.

■ x.y.7 Example

Every strategy ends with an illustrated example. The examples are all takenfrom real stocks using real data. However, because they are intended to beobjectively indicative of how the strategies work, I have renamed the stock“ABCD” for every example. This helps us keep our minds focused on thestructure of the strategy and avoid any preconceived prejudices against theactual stocks that were selected.

Tables of ContentsWith so many strategies to choose from, it’s crucial that you don’t get lost! The multi-tables of contents are designed so that you can find the appropriate strategy easily,without having to thumb your way through the entire book to get there first.Familiarize yourself with this area because it’s going to save you a lot of time as youuse it later on. In print, we’re restricted to two dimensions, but on the web site, youcan use the Strategy Matrix completely interactively.

Free Software for Analyzing StrategiesYou can use the free Strategy Analyzers on www.optioneasy.com to analyze anystrategy in this book. The dynamic Analyzers help you see the impact of changingany parameters (such as time decay and volatility) in a user-friendly and visual form.Creating these Analyzers enabled me to hone my expertise with numerous options

General CommentsWithin the strategy modules, there are references to concepts and definitions thatyou’ll be able to find in the Glossary. For example, “Trading Plan” is referred tothroughout the guides and is defined in the Glossary.

As options traders, we should definitely acquaint ourselves with the concepts offundamental and technical analysis. Fundamental analysis involves the interpreta-tion of how economies, sectors, and individual corporations are performing in termsof assets, liabilities, revenues, and profits.

Technical analysis involves the interpretation of price charts for securities. Wereally should understand the basic chart patterns such as pennants, flags, head andshoulders, support, resistance, and Fibonacci retracements. Remember, an option isa derivative—it is derived from an underlying security. Therefore, it makes sense for usto understand how that underlying security is likely to move and why.

strategies in a very quick time, and will do the same for you.

I hope you enjoy this reference book and use it for many years to come. By allmeans, read it from cover to cover, but you’ll probably get the best value by dippingin whenever the need arises.

Good luck.

Guy Cohen

Acknowledgments

First, to my colleagues at FlagTrader, whose diligence and ability have enabled usto create institutional grade tools.

To Lulu and Dominic for being extraordinary family friends.

And finally, to the students who have attended my workshops. I have learned somuch from you.

About the Author

Guy Cohen BSc ARIC MBA, is developer of OptionEasy, the world’s most com-prehensive and user-friendly online options trading and training application. Asuccessful private investor and trader, Guy has developed a global reputation forteaching technical analysis, options strategies, and trading psychology.

Guy is author of the global bestseller Options Made Easy, the definitive plain-English guide to options trading for private investors. He holds an MBA in financefrom City University (Cass) Business School, London, UK.

For more information, go to www.optioneasy.com.For all inquiries, write to [email protected].

www.optioneasy.com

IntroductionThe easiest way to learn options is with pictures so that you can begin to piecetogether strategies step-by-step. However, first we need to understand the fourbasic strategies. From that point, logic kicks in, and our learning can progressexponentially.

A risk profile chart shows us our profit/loss position for each trade. It differs froma standard price/time chart that we’re used to seeing to monitor stock prices.

There are four easy steps to creating a risk profile chart:

Step 1: Y axis for profit/loss position

Profit +

Loss -

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0

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1The Four Basic OptionsStrategies

2 The Bible of Options Strategies

Step 2: X axis for underlying asset price range

Step 3: Breakeven line

Step 4: Risk Profile line

Breakeven

Profit +

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Stock Purchase Price

Loss -

0

0

Asset Price ($)

50250

Profit +

Loss -

Breakeven

+25

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-250

Asset Price ($)5025

Profit +

Loss -

+25

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50250

Asset Price ($)

This chart shows our risk profile for a long stock position. As the asset price risesabove our purchase price (along the x-axis), we move into profit. Our risk is cappedto what we paid, as is our breakeven point, and our potential reward is uncapped.

The reverse position is when we short a stock, in which case the opposite occurs.Here, as the stock price rises above our short price, our short position shows a loss,which can be unlimited as the stock continues to rise. Our risk is uncapped as thestock rises, and our potential reward is the price we shorted at, as is our breakevenpoint.

Now that we know how to interpret a risk profile chart, we can proceed withanalyzing each strategy.

The four basic strategies that underpin your entire options trading knowledge are:

■ Long Call

■ Short Call

■ Long Put

■ Short Put

We should already know that owning an option exposes us to time decay, so typi-cally we like to own options with expiration dates that are reasonably far away togive us a chance of our option increasing in value.

With options, we have the “Rule of the Opposites,” where if one thing isn’t true,then the opposite must be true. Therefore, if time decay hurts us when we buyoptions, it must help us when we sell options. Because time value decreases (or timedecay increases) exponentially during the last month to expiration, we typicallydon’t like to own options into that last month, but we do like to sell options with onemonth left to expiration.

With these four strategies, we would buy calls and puts with at least threemonths (or more) left to expiration, thereby looking for the options to increase invalue during that time.

We would short calls and puts with a month or less to expiration, thereby look-ing for short-term income as the option hopefully expires worthless.

Profit +

Loss -

0

0

Stock Short Price

Asset Price ($)

The Four Basic Options Strategies 3


Buying a Call

■ Belief that stock will rise (bullish outlook) ■ Risk limited to premium paid ■ Unlimited maximum reward

Buying a Put

■ Belief that stock will fall (bearish outlook)■ Risk limited to premium paid ■ Unlimited maximum reward up to the strike

price less the premium paid

Writing a Put

■ Belief that stock will rise (bullish outlook) ■ Risk “unlimited” to a maximum equating to

the strike price less the premium received■ Maximum reward limited to the premium

received■ Can be combined with another position to

limit the risk

Writing a Call

■ Belief that stock will fall (bearish outlook) ■ Maximum reward limited to premium

received■ Risk potentially unlimited (as stock price

rises)■ Can be combined with another position to

limit the risk

The Four Basic Options Risk Profiles

Imagine that the dotted lines are mirrors and see how each strategy is the oppositeof the one on the other side of the mirror.

1.1 Long Call

Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type

N/A

Novice Bullish Long Call Capped Uncapped Capital Gain

1.1.1 DescriptionBuying a call is the most basic of all option strategies. For many people, it constitutestheir first options trade after gaining experience buying and selling stocks.

Calls are easy to understand. A call is an option to buy, so it stands to reason thatwhen you buy a call, you’re hoping that the underlying share price will rise.

ITM In the Money stock � call strike price

ATM At the Money stock � call strike price

OTM Out of the Money stock � call strike price

Buy call

Steps to Trading a Long Call

1. Buy the call option.

■ Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a call, you will have to pay$100 for one contract.

■ For S&P Futures options, one contract is exercisable into one futures con-tract. If the option price is $1.00, you will pay $250 for one futures contractupon exercise.

Steps In

■ Try to ensure that the trend is upward and identify a clear area of support.

Steps Out

■ Manage your position according to the rules defined in your Trading Plan.

■ Sell your long options before the final month before expiration if you wantto avoid the effects of time decay.

■ If the stock falls below your stop loss, then exit by selling the calls.

!



1.1.2 Context

Outlook

■ With a Long Call, your outlook is bullish. You expect a rise in the underlyingasset price.

Rationale

■ To make a better return than if you had simply bought the stock itself. Doensure that you give yourself enough time to be right; this means you shouldgo at least six months out, if not one- or two-year LEAPs. If you think these areexpensive, then simply divide the price by the number of months left to expi-ration and then compare that to shorter-term option prices. You will see thatLEAPs and longer-term options are far better value on a per month basis, andthey give you more time to be right, thus improving your chances of success.Another method is to buy only shorter-term deep ITM options.

Net Position

■ This is a net debit transaction because you pay for the call option.

■ Your maximum risk is capped to the price you pay for the call.

■ Your maximum reward is uncapped.

Effect of Time Decay

■ Time decay works against your bought option, so give yourself plenty of timeto be right.

■ Don’t be fooled by the false economy that shorter options are cheaper.Compare a one-month option to a 12-month option and divide the longeroption price by 12. You will see that you are paying far less per month for the12-month option.

Appropriate Time Period to Trade

■ At least three months, preferably longer, depending on the particular circum-stances.

Selecting the Stock

■ Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).


Selecting the Option

■ Choose options with adequate liquidity; open interest should be at least 100,preferably 500.

■ Strike—Look for either the ATM or ITM (lower) strike below the current stock.

■ Expiration—Give yourself enough time to be right; remember that time decayaccelerates exponentially in the last month before expiration, so give yourself aminimum of three months to be right, knowing you’ll never hold into the lastmonth. That gives you at least two months before you’ll need to sell. Longerwould be better, though.

1.1.3 Risk Profile

■ Maximum Risk [Call premium]

■ Maximum Reward [Uncapped]

■ Breakeven [Call strike � call premium]

1.1.4 Greeks

Risk Profile Theta

Delta

Gamma Rho

Vega

Key:ExpirationToday – 6 monthsTime(t) – 1 month


Risk ProfileAs the stock pricerises, the long callmoves into profitmore and morequickly, particularlywhen the stock priceis greater than thestrike price.

RhoRho is positive, illus-trating that higherinterest rates wouldincrease the valueof the calls andtherefore help theposition.

VegaVega is positive, illus-trating that volatilityis helpful to the posi-tion because highervolatility translatesinto higher optionvalues.

ThetaTheta is negative,illustrating that timedecay hurts the longcall position.

DeltaDelta (speed) is posi-tive and increases atits fastest rate aroundthe strike price, untilit reaches 1. Noticehow Delta is zerowhen the option isdeep OTM.

GammaGamma (acceleration)is always positive witha long call, and itpeaks when Delta isat its fastest (steep-est) rate.


1.1.5 Advantages and Disadvantages

Advantages

■ Cheaper than buying the stock outright.

■ Far greater leverage than simply owning the stock.

■ Uncapped profit potential with capped risk.

Disadvantages

■ Potential 100% loss if the strike price, expiration dates, and stock are badlychosen.

■ High leverage can be dangerous if the stock price moves against you.

1.1.6 Exiting the Trade

Exiting the Position

■ Sell the calls you bought!

Mitigating a Loss

■ Use the underlying asset or stock to determine where your stop loss should beplaced.

1.1.7 Example

ABCD is trading at $28.88 on February 19, 2004.

Buy the January 2005 $27.50 strike call for $4.38.

You Pay Call premium$4.38

Maximum Risk Call premium$4.38Maximum risk is 100% of our total cost here

Maximum Reward Unlimited as the stock price rises

Breakeven Strike price � call premium$27.50 � $4.38 � $31.88

1.2 Short (Naked) Call


N/A

Advanced Bearish Short Call Uncapped Capped Income

1.2.1 DescriptionAlthough simple to execute, shorting a call (without any form of cover) is a riskystrategy, hence its categorization as an advanced strategy. A Short Call exposes us touncapped risk if the stock rises meteorically, and brokers will only allow experi-enced options traders to trade the strategy in the first place.

A call is an option to buy, so it stands to reason that when you buy a call, you’rehoping that the underlying share price will rise. If you’re selling or shorting a call,it’s therefore logical that you’d want the stock to do the opposite—fall.

Sell call

Steps to Trading a Short Call

1. Sell the call option with a strike price higher than the current stock price.

■ Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a call, you will receive $100 forone contract.

Steps In

■ Try to ensure that the trend is downward or rangebound and identify aclear area of resistance.

Steps Out


■ Hopefully the stock will decline or remain static, allowing your sold optionto expire worthless so you can keep the entire premium.

■ If the stock rises above your stop loss, then exit the position by buying backthe calls.

■ Time decay will be eroding the value of your call every day, so all otherthings being equal, the call you sold will be declining in value every day,allowing you to buy it back for less than you bought it for, unless theunderlying stock has risen of course.



1.2.2 Context

Outlook

■ Bearish—You are expecting a fall in the stock price; you are certainly notexpecting a rise in the stock.

Rationale

■ To pick up short-term premium income as the stock develops price weakness.

Net Position

■ This is a net credit transaction because you are receiving a premium for thecall.

■ Your maximum risk is uncapped.

■ Your maximum reward is capped to the price you receive for the call.


■ Time decay is helpful to your naked sold option, so take advantage of the max-imum time erosion. Maximum time decay (or theta decay) occurs in the lastmonth before the option’s expiration, so it makes sense to sell one-month orless options only.

■ Don’t be fooled by the false economy that selling longer options would bemore lucrative. Compare a one-month option to a 12-month option and multi-ply the shorter option price by 12. You will see that you are receiving far moreper month for the one-month option. Also remember that you want the personon the long side of this trade to have as short a time as possible to be right.

■ Give yourself as little time as possible to be wrong because your maximumrisk is uncapped.


■ One month or less.

Selecting the Stock


■ Try to ensure that the trend is downward and identify a clear area ofresistance.



■ Strike—Look for OTM strikes above the current stock price.

■ Expiration—Give yourself as little time to be wrong. Remember that yourshort position exposes you to uncapped risk, and that time decay acceleratesexponentially (in your favor when you’re short) in the last month before expi-ration, so only short the option with a maximum of one month to expiration,preferably less.

1.2.3 Risk Profile

■ Maximum Risk [Uncapped]

■ Maximum Reward [Call premium]

■ Breakeven [Call strike � call premium]

1.2.4 Greeks

Risk Profile Theta

Delta

Gamma Rho

Vega



Risk ProfileAs the stock pricerises, the short callloses money moreand more quickly,particularly when thestock price is greaterthan the strike price.

RhoRho is negative, illus-trating that higherinterest rates wouldharm the Short Callposition.

VegaVega is negative, illus-trating that volatilityis unhelpful to theposition becausehigher volatility trans-lates into higheroption values. As theseller of option pre-mium, we’d ratherthe option valuedecreases.

ThetaTheta is positive,illustrating that timedecay helps the shortcall position. As anoption seller, this is ofcourse completelylogical.

DeltaDelta (speed) is nega-tive and moves at itsfastest (negative) ratearound the strikeprice, until it reaches-1. Notice how Deltais zero when theoption is deep.

GammaGamma (acceleration)is always negativewith a Short Call, andit peaks inverselywhen Delta is at itsfastest (steepest)rate. Gamma is zerowhen the position isdeep OTM or ITM(i.e., when Delta isn’tmoving).



Advantages

■ If done correctly, you can profit from falling or rangebound stocks in this way.

■ This is another type of income strategy.

Disadvantages

■ Uncapped risk potential if the stock rises.

■ A risky strategy that is difficult to recommend on its own.



■ Buy back the options you sold or wait for the sold option to expire worthless(if the underlying stock falls and stays below the strike price) so that you cankeep the entire premium.

Mitigating a Loss


1.2.7 Example


Sell the March 2004 $30.00 strike call for $0.90.

You Receive Call premium$0.90

Maximum Risk Uncapped

Maximum Reward Call premium$0.90

Breakeven Strike price � call premium$30.00 � $0.90 � $30.90

1.3 Long Put


N/A

Novice Bearish Long Put Capped Uncapped Capital Gain

!

1.3.1 DescriptionBuying a put is the opposite of buying a call. A put is an option to sell. When youbuy a put, your outlook is bearish.

ITM In the Money stock � put strike price

ATM At the Money stock � put strike price

OTM Out of the Money stock � put strike price

Buy put

Steps to Trading a Long Put

1. Buy the put option.■ Remember that for option contracts in the U.S., one contract is for 100

shares. So when you see a price of $1.00 for a put, you will have to pay$100 for one contract.


Steps In


Steps Out


■ Sell your long options before the final month before expiration if you wantto avoid the effects of time decay.

■ If the stock rises above your stop loss, then exit by selling the puts.

1.3.2 Context

Outlook

■ With a Long Put, your outlook is bearish. You expect a fall in the underlyingasset price.

Rationale

■ To make a better return than if you had simply sold short the stock itself. Doensure that you give yourself enough time to be right; this means you shouldgo at least six months out, if not one or two year LEAPs. If you think these are



expensive, then simply divide the price by the number of months left to expi-ration and then compare that to shorter-term put prices. You will see thatLEAPs and longer-term options are far better value per month, and they giveyou more time to be right, thus improving your chances of success. Anothermethod is to buy only deep ITM options.

Net Position

■ This is a net debit transaction because you pay for the put option.

■ Your maximum risk is capped to the price you pay for the put.

■ Your maximum reward is uncapped until the stock falls to zero, whereuponthe maximum profit is the strike price less what you paid for the put.


■ Time decay works against your bought option, so give yourself plenty of timeto be right.

■ Don’t be fooled by the false economy that shorter options are cheaper.Compare a one-month option to a 12-month option and divide the longeroption price by 12. You will see that you are paying far less per month for the12-month option.


■ At least three months, preferably longer depending on the particularcircumstances.

Selecting the Stock





■ Strike—Look for either the ATM or ITM (higher) strike above the currentstock.

■ Expiration—Give yourself enough time to be right; remember that time decayaccelerates exponentially in the last month before expiration, so give yourself aminimum of three months to be right, knowing you’ll never hold into the lastmonth. That gives you at least two months before you’ll need to sell. Longerwould be better, though.

1.3.3 Risk Profile

■ Maximum Risk [Put premium]

■ Maximum Reward [Put strike � put premium]

■ Breakeven [Put strike � put premium]

1.3.4 Greeks


Advantages

■ Profit from declining stock prices.

■ Far greater leverage than simply shorting the stock.

■ Uncapped profit potential with capped risk.

Risk Profile Theta

Delta

Gamma Rho

Vega



Risk ProfileAs the stock pricefalls, the long putmoves into profitmore and morequickly, particularlywhen the stock priceis lower than thestrike price.

RhoRho is negative, illus-trating that higherinterest rates wouldreduce the value ofthe puts and there-fore hurt the position.

VegaVega is positive, illus-trating that volatilityis helpful to the posi-tion because highervolatility translatesinto higher optionvalues.

ThetaTheta is negative,illustrating that timedecay hurts the longput position.

DeltaDelta (speed) is nega-tive and moves at itsfastest rate aroundthe strike price, untilit reaches -1. Noticehow Delta is zerowhen the option isdeep OTM.

GammaGamma (acceleration)is always positive witha long put, and itpeaks when Delta isat its fastest (steep-est) rate.


Disadvantages

■ Potential 100% loss if the strike price, expiration dates, and stock are badlychosen.

■ High leverage can be dangerous if the stock price moves against you.



■ Sell the puts you bought!

Mitigating a Loss


1.3.7 Example


Buy the January 2005 $30.00 strike put for $4.38.

You Pay Put premium$4.38

Maximum Risk Put premium$4.38Maximum risk is 100% of our total cost here

Maximum Reward Strike price � put premium$30.00 � $4.38 � $25.62

Breakeven Strike price � put premium$30.00 � $4.38 � $25.62

1.4 Short (Naked) Put


N/A

Intermediate Bullish Short Put Capped* Capped Income

*Risk uncapped until the stock falls to zero.

1.4.1 DescriptionSelling a put is a simple, short-term income strategy. A put is an option to sell. Whenyou sell a put, you have sold someone the right to sell. As the stock falls, you maybe obligated to buy the stock if you are exercised. Therefore, only sell puts Out of the

!

Money and on stocks you’d love to own at the strike price (which is lower than thecurrent stock price).

The maximum risk of a naked put is the strike price less the premium youreceive. Some people consider this to be an unlimited risk profile, and others con-sider it to be limited risk. A compromise is to consider it unlimited until the stockfalls to zero—in other words, unlimited until the stock falls to zero.

Sell put

Steps to Trading a Naked Put

1. Sell the put option with a strike price lower than the current stock price.

■ Remember that for option contracts in the U.S., one contract is for 100shares. So when you see a price of $1.00 for a put, you will receive $100 forone contract.


Steps In

■ Try to ensure that the trend is upward (or sideways) and identify a cleararea of support.

Steps Out


■ Hopefully the stock will rise or remain static, allowing your sold option toexpire worthless so that you can keep the entire premium.

■ If the stock falls below your stop loss, then exit the position by buying backthe puts.

■ Time decay will be eroding the value of your put every day, so all otherthings being equal, the put you sold will be declining in price every day,allowing you to buy it back for less than you bought it for, unless theunderlying stock has fallen of course.

1.4.2 Context

Outlook

■ Bullish—You are expecting the stock to rise or stay sideways at a minimum.

Rationale

■ To pick up short-term premium income as the share develops price strength.

■ To lower the cost basis of buying a share (if the put is exercised).



Net Position

■ This is a net credit transaction because you receive a premium for selling theput.

■ Your maximum risk is the put strike price less the premium you receive for theput. This is considered a high-risk strategy.

■ Your maximum reward is limited to the premium you receive for the option.


■ Time decay works with your naked sold option. To take advantage of the max-imum rate of time decay, sell the put in the last month before the option’sexpiration.

■ Don’t be fooled by the false economy that options with longer to expiration aremore lucrative. Compare a one-month option to a 12-month option and multi-ply the shorter option price by 12. You will see that you are receiving far moreper month for the one-month option.


■ One month or less.

Selecting the Stock





■ Strike—Look for OTM (lower strike) options, below the current stock price.

■ Expiration—Give yourself as little time to be wrong; remember that your shortposition exposes you to uncapped risk (until the stock falls to zero) and thattime decay accelerates exponentially (in your favor when you’re short) in thelast month before expiration, so only short the option with a maximum of onemonth to expiration, preferably less.

1.4.3 Risk Profile

■ Maximum Risk [Put strike � put premium]

■ Maximum Reward [Put premium]

■ Breakeven [Put strike � put premium]

1.4.4 Greeks


Advantages

■ If done correctly, you can use Naked Puts to gain a regular income from risingor rangebound stocks.

■ The Naked Put is an alternative way of buying a stock at a cheaper price thanin the current market. This is because if you’re exercised, you’re obligated tobuy stock at the low strike price, having already received a premium forselling the puts in the first place.

Disadvantages

■ Naked Puts expose you to uncapped risk (as the stock falls to zero) if the stock falls.

■ Not a strategy for the inexperienced. You must only use this strategy on stocksyou’d love to own at the put strike price you’re selling at. The problem is that if

Risk Profile Theta

Delta

Gamma Rho

Vega



Risk ProfileAs the stock pricefalls, the naked putmoves into loss moreand more quickly,particularly when thestock price is lowerthan the strike price.

RhoRho is positive, illus-trating that higherinterest rates wouldhelp the naked putposition.

VegaVega is negative,illustrating thatvolatility is harmful tothe position becausehigher volatility trans-lates into higheroption values.

ThetaTheta is positive,illustrating that timedecay helps thenaked put position.

DeltaDelta (speed) is posi-tive and falls to zeroafter the positionreaches its maximumprofit potential afterthe stock has risenabove the strike price.

GammaGamma (acceleration)is always negativewith a naked put(because you are netseller of options), andit peaks inverselywhen Delta is at itsfastest (steepest)rate, which is whenthe position is ATM.


you were to be exercised, you’d be buying a stock that is falling. The way to avoidthis is to position the put strike around an area of strong support within the con-text of a rising trend. A Fibonacci retracement point would be the type of areayou’d use to position your naked put strike . . . well below the current stock price.



■ Buy back the options you sold or wait for the sold put to expire worthless sothat you can keep the entire premium.

Mitigating a Loss


1.4.7 Example

ABCD is trading at $27.35 on May 12, 2004.

Sell the June 2004 $25.00 strike put for $1.05.

You Receive Put premium$1.05

Maximum Risk Strike price � put premium$25.00 � $1.05 � $23.95

Maximum Reward Put premium$1.05

Breakeven Strike price � put premium$25.00 � $1.05 � $23.95

Return on Risk 4.38%

Cushion (from Breakeven) $3.40 or 12.43%

Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic Straddle

strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251

advanced tradersBear Call Ladder strategy, 99, 109

exiting, 113trading, 109–113

Bear Put Ladder strategy, 114exiting, 118trading, 114–118

Bull Call Ladder strategyexiting, 103trading, 100–103

Bull Put Ladder strategy, 104exiting, 108trading, 104–108

Calendar Put strategy, 70exiting, 73trading, 70–75

Call Ratio Backspread strategy, 220–224

Index

AADV (Average Daily Volume), 6, 129

Bear Call Ladder strategy, 111Bear Call strategy, 34Bear Put Ladder strategy, 116Bull Put Ladder strategy, 106Bear Put spreads, 96Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put strategy, 30Calendar Call, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 86–87Covered Short Straddle, 48Covered Short Strangle, 54Diagonal Call strategy, 65Diagonal Put strategy, 77–78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Long Iron Butterfly, 38Long Iron Condor, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Put Synthetic Straddle

strategy, 260Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226

332 Index

advanced traders (Contd.)Covered Put strategy, 84


Covered Short Straddle strategy, 46–51Covered Short Strangle strategy, 51


Diagonal Put strategy, 76exiting, 79–80trading, 77–84

Long Call Condor strategy, 198exiting, 202trading, 198–202

Long Put Condor strategy, 203exiting, 207trading, 203–207

Put Ratio Backspread strategy, 224exiting, 227trading, 225–229

Short Call Condor strategy, 157exiting, 160trading, 157–161

Short Iron Butterfly strategy, 166exiting, 169trading, 166–169

Short Iron Condor strategy, 170exiting, 174trading, 171–174

Short Put Condor strategy, 161exiting, 165trading, 162–165

Short Straddle strategy, 177exiting, 180trading, 178–180

Short Strangle strategy, 180exiting, 184trading, 181–184

advantagesof Bear Call Ladder strategy, 112of Bear Call spread strategy, 35of Bear Put Ladder strategy, 117of Bear Put spreads, 98of Bull Call Ladder strategy, 102of Bull Call spreads, 93of Bull Put Ladder strategy, 107of Bull Put spread strategy, 31

of Calendar Call strategy, 60of Calendar Put strategy, 72of Call Ratio Backspread strategy, 222of Collar strategy, 244of Covered Call strategy, 26of Covered Put strategy, 87of Covered Short Straddle strategy, 50of Covered Short Strangle strategy, 55of Diagonal Call strategy, 67of Diagonal Put strategy, 79of Guts strategy, 146of Long Box strategy, 290of Long Call Butterfly strategy, 192of Long Call Condor strategy, 201of Long Call Synthetic Straddle

strategy, 257of Long Combo strategy, 281of Long Iron Butterfly strategy, 40of Long Iron Condor strategy, 44of Long Put Butterfly strategy, 196of Long Put Condor strategy, 206of Long Put Synthetic Straddle

strategy, 261of Long Synthetic Future strategy, 274of Modified Call Butterfly strategy, 211of Modified Put Butterfly strategy, 215of Put Ratio Backspread strategy, 227of Ratio Call Spread strategy, 232of Ratio Put Spread strategy, 236of Short Call Butterfly strategy, 151of Short Call Condor strategy, 160of Short Call Synthetic Straddle

strategy, 265of Short Call Synthetic strategy, 270of Short Combo strategy, 285of Short Guts strategy, 187of Short Iron Butterfly strategy, 169of Short Iron Condor strategy, 173of Short Put Butterfly strategy, 155of Short Put Condor strategy, 164of Short Straddle strategy, 179of Short Strangle strategy, 183of Short Synthetic Future strategy, 277of Straddle strategy, 125of Strangle strategy, 130of Strap strategy, 141of Strip strategy, 136

of Synthetic Call strategy, 249of Synthetic Put strategy, 253

aggressively bearish market outlook, 225aggressively bullish market outlook, 220analysis, 3. See also strategyATM (At the Money), 5

Bear Put Ladder strategy, 116Bear Put spreads, 97Bull Call Ladder strategy, 101Bull Call spreads, 92Calendar Call strategy, 59Calendar Put strategy, 71Covered Call strategy, 25Covered Put strategy, 87Diagonal Call strategy, 65Long Call Butterfly strategy, 190Long Iron Butterfly strategy, 37Long Put Butterfly strategy, 195Modified Call Butterfly strategy, 210Modified Put Butterfly strategy, 214Short Call Butterfly strategy, 150Short Iron Butterfly strategy, 167Short Put Butterfly strategy, 154Short Straddle strategy, 178Straddle strategy, 124Strap strategy, 140Strip strategy, 136

Average Daily Volume. See ADV

Bbackspreads, 219

Call Ratio Backspread strategy, 220exiting, 223trading, 220–224


Ratio Call Spread strategy, 229exiting, 232trading, 229–230, 233

Ratio Put Spread strategy, 233exiting, 237trading, 234–235, 237–238

Bear Call Ladder strategy, 99, 109exiting, 113trading, 109–113

Index 333

Bear Call Ladder strategy,109Bear Call spread strategy, 32. See also

Long Iron Butterflyexiting, 36trading, 33–36


Bear Put spreadsexiting, 98trading, 95–99

bearish market condition strategiesBear Call spread, 33Covered Put strategy, 86Diagonal Put strategy, 77long put, 13short call, 10

bearish market outlookBear Put spreads, 96Bull Put Ladder strategy, 105Put Ratio Backspread strategy, 225Ratio Call Spread strategy, 230Short Combo strategy, 283Short Synthetic Future strategy, 275Synthetic Put strategy, 251

bed and breakfast sales (taxation), 295breakeven lines (creation of risk profile

charts), 2Bull Call Ladder strategy


Bull Call spreadsexiting, 94trading, 91–94


Bull Put spread strategy, 28. See alsoLong Iron Butterfly


bullish market condition strategiesBull Call spreads, 91Bull Put spread, 29Calendar Call strategy, 58, 71Covered Call strategy, 24Covered Short Straddle, 48Covered Short Strangle, 53

334 Index

bullish market condition strategies (Contd.)Diagonal Call strategy, 65long calls, 6short puts, 17

bullish market outlookBear Call Ladder strategy, 110Call Ratio Backspread strategy, 220Collar strategy, 242Long Combo strategy, 279Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 213Ratio Put Spread strategy, 234Synthetic Call strategy, 247

buying. See also tradingcalls, 4–5long calls, 5–8Long Iron Butterfly strategy, 40long puts, 13puts, 4short calls, 9–12short puts, 16–20

CCalendar Call strategy, 57


Calendar Put strategy, 70exiting, 73trading, 70–75


callsBear Call Ladder strategy, 99, 109


Bear Call spread strategyexiting, 36trading, 33–36

Bear Call strategy, 32Bear Put spreads, 95Bull Call Ladder strategy

exiting, 103trading, 100, 102–103

Bull Call spreads, 90exiting, 94trading, 91–94

buying, 4–5Calendar Call strategy, 57



Collar strategy, 240exiting, 245trading, 241–245

Covered Call strategy, 23exiting, 27taxation, 299–301trading, 23–28

Covered Short Straddle strategy, 46–51

Covered Short Strangle strategy, 51exiting, 56trading, 52–56

Diagonal Call strategy, 63exiting, 67trading, 64–69

long calls, 5selling, 8trading, 5–8

Long Box strategy, 287exiting, 290trading, 287, 290–291

Long Call Butterfly strategy, 189exiting, 192trading, 189–193


Long Call Synthetic Straddle strategy, 254


Long Combo strategy, 279exiting, 282trading, 279–282

Long Iron Butterfly strategy, 37exiting, 40trading, 37–39, 41

Long Iron Condor strategy, 41–45Long Synthetic Future strategy, 271


Modified Call Butterfly strategy, 208exiting, 211trading, 208–212

Ratio Call Spread strategy, 229exiting, 232trading, 229–233

short callsbuying, 12trading, 9–10

Short Call Butterfly strategy, 148exiting, 151trading, 148–151

Short Call Condor strategy, 157exiting, 160trading, 157–161

Short Call Synthetic Straddle strategy, 263


Short Combo strategy, 283exiting, 286trading, 283–286

Short Synthetic Future strategy, 275exiting, 278trading, 275–278

strike price. See strike pricesynthetic (taxation), 299Synthetic Call strategy, 246


writing, 4capital gains taxation (stocks), 294capped rewards. See also rewardcapped risk, 6. See also riskcharts (risk profiles), 1Collar (synthetic) strategy, 240


conservatively bullish market outlook.See also bullish market outlook

Collar strategy, 242Synthetic Call strategy, 247

contracts, 5

Index 335

Covered Call strategy, 23Covered Short Straddle strategy, 46Covered Short Strangle strategy, 51Diagonal Call strategy, 63exiting, 27taxation, 299–301trading, 23–28

Covered Put strategy, 84exiting, 88trading, 84–88


trading, 52–56

Ddecay (of time)

Bear Call Ladder strategy, 110Bear Call spread strategy, 34Bear Put Ladder strategy, 115Bear Put spread strategy, 96Bull Call Ladder strategy, 101Bull Call spreads, 91Bull Put Ladder strategy, 105Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 242Covered Call strategy, 25Covered Put strategy, 86Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 77Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 199Long Call strategy, 6Long Call Synthetic Straddle strategy, 256Long Combo strategy, 280Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Put strategy, 14

336 Index

decay (of time) (Contd.)Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call strategy, 10Short Call Synthetic Straddle

strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Put strategy, 18Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251



direction neutral market condition strategy

Long Iron Butterfly, 38Long Iron Condor, 42

direction neutral market outlookBear Put Ladder strategy, 115Bull Call Ladder strategy, 100Guts strategy, 144Long Box strategy, 288Long Call Butterfly strategy, 189Long Call Condor strategy, 199Long Put Butterfly strategy, 194

Long Put Condor strategy, 204Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic Straddle

strategy, 264Short Call Synthetic strategy, 268Short Guts strategy, 185Short Iron Butterfly strategy, 167Short Iron Condor strategy, 171Short Put Butterfly strategy, 153Short Put Condor strategy, 162Short Straddle strategy, 177Short Strangle strategy, 181Straddle strategy, 123Strangle strategy, 128

direction neutral to moderately bullishmarket outlook

Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 213

disadvantagesof Bear Call Ladder strategy, 112of Bear Call spread strategy, 35of Bear Put Ladder strategy, 117of Bear Put spreads, 98of Bull Call Ladder strategy, 103of Bull Call spreads, 93of Bull Put Ladder strategy, 107of Bull Put spread strategy, 31of Calendar Call strategy, 60of Calendar Put strategy, 73of Call Ratio Backspread strategy, 223of Collar strategy, 244of Covered Call strategy, 27of Covered Put strategy, 88of Covered Short Straddle strategy, 50of Covered Short Strangle strategy, 56of Diagonal Call strategy, 67of Diagonal Put strategy, 79of Guts strategy, 146of Long Box strategy, 290of Long Call Butterfly strategy, 192of Long Call Condor strategy, 201of Long Call Synthetic Straddle

strategy, 257of Long Combo strategy, 281of Long Iron Butterfly strategy, 40of Long Iron Condor strategy, 45

of Long Put Butterfly strategy, 196of Long Put Condor strategy, 206of Long Put Synthetic Straddle

strategy, 262of Long Synthetic Future strategy, 274of Modified Call Butterfly strategy, 211of Modified Put Butterfly strategy, 216of Put Ratio Backspread strategy, 227of Ratio Call Spread strategy, 232of Ratio Put Spread strategy, 236of Short Call Butterfly strategy, 151of Short Call Condor strategy, 160of Short Call Synthetic Straddle

strategy, 266of Short Call Synthetic strategy, 270of Short Combo strategy, 285of Short Guts strategy, 188of Short Iron Butterfly strategy, 169of Short Iron Condor strategy, 173of Short Put Butterfly strategy, 155of Short Put Condor strategy, 164of Short Straddle strategy, 179of Short Strangle strategy, 183of Short Synthetic Future strategy, 277of Straddle strategy, 125of Strangle strategy, 131of Strap strategy, 141of Strip strategy, 136of Synthetic Call strategy, 249of Synthetic Put strategy, 253

Eexercising options (taxation), 297exiting

Bear Call Ladder strategy, 113Bear Call spread strategy, 36Bear Put Ladder strategy, 118Bear Put spreads, 98Bull Call Ladder strategy, 103Bull Call spreads, 94Bull Put Ladder strategy, 108Bull Put spreads, 32Calendar Call strategy, 61Calendar Put strategy, 73Call Ratio Backspread strategy, 223Collar strategy, 245

Index 337

Covered Call strategy, 27Covered Put strategy, 86Covered Short Strangle strategy, 56Diagonal Call strategy, 67Diagonal Put strategy, 79–80Guts strategy, 147Long Box strategy, 290Long Call Butterfly strategy, 192Long Call Condor strategy, 202Long Call Synthetic Straddle

strategy, 258Long Combo strategy, 282Long Iron Butterfly strategy, 40Long Put Butterfly strategy, 197Long Put Condor strategy, 207Long Put Synthetic Straddle

strategy, 262Long Synthetic Future strategy, 274Modified Call Butterfly strategy, 211Modified Put Butterfly strategy, 216Put Ratio Backspread strategy, 227Ratio Call Spread strategy, 232Ratio Put Spread strategy, 237Short Call Butterfly strategy, 151Short Call Condor strategy, 160Short Call Synthetic Straddle

strategy, 266Short Call Synthetic strategy, 270Short Combo strategy, 286Short Guts strategy, 188Short Iron Butterfly strategy, 169Short Iron Condor strategy, 174Short Put Butterfly strategy, 156Short Put Condor strategy, 165Short Straddle strategy, 180Short Strangle strategy, 184Short Synthetic Future strategy, 278Straddle strategy, 126Strangle strategy, 131Strap strategy, 142Strip strategy, 136Synthetic Call strategy, 249Synthetic Put strategy, 253

expert tradersCovered Call strategy, 23


338 Index

expert traders (Contd.)Guts strategy, 143


Long Box strategy, 287exiting, 290trading, 287–291




Long Put Synthetic Straddle strategy, 258


Long Synthetic Future strategy, 271exiting, 274trading, 272–274


Modified Put Butterfly strategy, 212exiting, 216trading, 213–217

Ratio Call Spread strategy, 229exiting, 232trading, 229–233

Ratio Put Spread strategy, 233exiting, 237trading, 234–238

Short Call Synthetic Straddle strategy, 263



Short Guts strategy, 185exiting, 188trading, 185–188

Short Put Synthetic Straddle strategyexiting, 270trading, 267–271

Short Synthetic Future strategy, 275


Strap strategy, 137–138exiting, 142trading, 138–141

Strip strategy, 132–133exiting, 136trading, 133–136

expirationBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads, 97Bull Cal Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 87Covered Short Straddle strategy, 49Covered Short Strangle strategy, 54Diagonal Call strategy, 66Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 289Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Put Synthetic Straddle

strategy, 260Long Synthetic Future strategy, 273Modified Call Butterfly strategy, 210Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149

Short Call Condor strategy, 158Short Call Synthetic Straddle strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 135Synthetic Call strategy, 248Synthetic Put strategy, 252

Ffutures

contracts, 5Long Box strategy, 287






G–HGuts (volatility strategy), 143


horizontal spreadsCalendar Call, 57

Index 339

I–JIn the Money. See ITMincome strategies, 21–22

Bear Call spread, 32exiting, 36trading, 33–36

Bear Put Ladder strategy, 115Bull Call Ladder, 100Bull Put spread, 28


Calendar Call, 57exiting, 61trading, 57–62

Calendar Put, 70exiting, 73trading, 70–75

Covered Call, 23Covered Call strategy


Covered Put, 83exiting, 86trading, 83–87

Covered Short Straddle, 46trading, 47–51

Covered Short Strangle, 51exiting, 56trading, 52–56

Diagonal Call, 63exiting, 67trading, 64–69

Diagonal Put, 76exiting, 79–80trading, 77–84

direction neutral. See direction neutralmarket outlook

Long Iron Butterfly, 37exiting, 40trading, 37–41

Long Iron Condor, 41trading, 42–45

increasing yieldCalendar Call strategy, 57–62Calendar Put strategy, 70–75Covered Put strategy, 85–88

340 Index

increasing yield (Contd.)Covered Short Straddle strategy,

46–51Covered Short Strangle strategy, 52–56Diagonal Call strategy, 64–69Diagonal Put strategy, 77–84

intermediate strategyBear Put spreads, 95Bull Call spreads, 90

intermediate tradersBear Call spread strategy, 32


Bear Put spreadsexiting, 98trading, 95–99

Bull Call spreadsexiting, 94trading, 91–94

Bull Put spread strategy, 28exiting, 32trading, 29–32

Calendar Call strategy, 57exiting, 61trading, 57–62




Long Iron Butterfly strategy, 37exiting, 40trading, 37–41

Long Iron Condor strategy, 41–45Long Put Butterfly strategy, 193


Short Call Butterfly strategy, 148exiting, 151trading, 148–151

Short Put Butterfly strategy, 152exiting, 156trading, 153–156

Straddle strategy, 121exiting, 126trading, 122–126

Strangle strategy, 127exiting, 131trading, 128–131

ITM (In the Money), 5Calendar Put strategy, 71Diagonal Call strategy, 65Diagonal Put strategy, 76Guts strategy, 146Short Guts strategy, 187

K–Lleverage

long call, 8long put, 16short put, 20

leveraged strategies, 219Call Ratio Backspread, 220


Put Ratio Backspread, 224exiting, 227trading, 225–229

Ratio Call Spread, 229exiting, 232trading, 229–233

Ratio Put Spread, 233exiting, 237trading, 234–238

liquidityBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads, 96Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 85

Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle


strategy, 260Long Synthetic Future strategy, 272Modified Call Butterfly

strategy, 209Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic Straddle



Index 341





long calls, 5selling, 8trading, 5–8



Long Iron Condor strategy, 41–45long options (taxation), 296–297Long Put Butterfly strategy, 193



Long Put Synthetic Straddle strategy, 258


long putsselling, 16trading, 13


lossBear Call Ladder strategy, 112Bear Call spread strategy, 35Bear Put Ladder strategy, 117Bear Put spreads, 98Bull Call Ladder strategy, 103Bull Call spreads, 93Bull Put Ladder strategy, 107Bull Put spread strategy, 31Calendar Call strategy, 60

342 Index

loss (Contd.)Calendar Put strategy, 73Call Ratio Backspread strategy, 223Collar strategy, 244Covered Call strategy, 27Covered Put strategy, 88Covered Short Straddle strategy, 50Covered Short Strangle strategy, 56Diagonal Call strategy, 67Diagonal Put strategy, 79Guts strategy, 146Long Box strategy, 290Long Call Butterfly strategy, 192Long Call Condor strategy, 201Long Call Synthetic Straddle


strategy, 262Long Synthetic Future strategy, 274mitigation. See mitigation of lossModified Call Butterfly strategy, 211Modified Put Butterfly strategy, 216Put Ratio Backspread strategy, 227Ratio Call Spread strategy, 232Ratio Put Spread strategy, 236risk profile charts, 1Short Call Butterfly strategy, 151Short Call Condor strategy, 160Short Call Synthetic Straddle

strategy, 266Short Call Synthetic strategy, 270Short Combo strategy, 285Short Guts strategy, 188Short Iron Butterfly strategy, 169Short Iron Condor strategy, 173Short Put Butterfly strategy, 155Short Put Condor strategy, 164Short Straddle strategy, 179Short Strangle strategy, 183Short Synthetic Future strategy, 277Straddle strategy, 125Strangle strategy, 131

Strap strategy, 141Strip strategy, 136Synthetic Call strategy, 249Synthetic Put strategy, 253

Mmarket outlook

Bear Call Ladder strategy, 110Bear Call spread strategy, 33Bear Put Ladder strategy, 115Bear Put spreads, 96Bull Call Ladder strategy, 100Bull Call spreads, 91Bull Put Ladder strategy, 105Bull Put spread strategy, 29Calendar Call strategy, 58, 71Call Ratio Backspread strategy, 220Collar strategy, 242Covered Call strategy, 24Covered Put strategy, 86Covered Short Straddle

strategy, 48Covered Short Strangle

strategy, 53Diagonal Call strategy, 65Diagonal Put strategy, 77Guts strategy, 144Long Box strategy, 288Long Call Butterfly strategy, 189Long Call Condor strategy, 199Long Call Synthetic Straddle


strategy, 259Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 213Put Ratio Backspread strategy, 225Ratio Call Spread strategy, 230Ratio Put Spread strategy, 234Short Call Butterfly strategy, 149

Short Call Condor strategy, 158Short Call Synthetic Straddle strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 283Short Guts strategy, 185Short Iron Butterfly strategy, 167Short Iron Condor strategy, 171Short Put Butterfly strategy, 153Short Put Condor strategy, 162Short Put strategy, 17Short Straddle strategy, 177Short Strangle strategy, 181Short Synthetic Future strategy, 275Straddle strategy, 123Strangle strategy, 128Strap strategy, 139Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251

married puts. See Covered Put strategymitigation of loss

Bear Call Ladder strategy, 113Bear Call spread strategy, 36Bear Put spreads, 98Bull Call Ladder strategy, 103Bull Call spread strategy, 94Bull Put Ladder strategy, 108Bull Put spread strategy, 32Calendar Call strategy, 61Calendar Put strategy, 73Call Ratio Backspread strategy, 223Collar strategy, 245Covered Call strategy, 27Covered Put strategy, 87Covered Short Straddle strategy, 50Covered Short Strangle strategy, 56Diagonal Call strategy, 67Diagonal Put strategy, 79Guts strategy, 147Long Box strategy, 290Long Call Butterfly strategy, 192Long Call Condor strategy, 202Long Call Synthetic Straddle

strategy, 258Long Combo strategy, 282Long Iron Butterfly strategy, 40Long Iron Condor strategy, 45

Index 343

Long Put Butterfly strategy, 197Long Put Condor strategy, 207Long Put Synthetic Straddle strategy, 262Long Synthetic Future strategy, 274Modified Call Butterfly strategy, 211Modified Put Butterfly strategy, 216Put Ratio Backspread strategy, 228Ratio Call Spread strategy, 232Ratio Put Spread strategy, 237Short Call Butterfly strategy, 151Short Call Condor strategy, 160Short Call Synthetic Straddle

strategy, 266Short Call Synthetic strategy, 270Short Combo strategy, 286Short Guts strategy, 188Short Iron Butterfly strategy, 169Short Iron Condor strategy, 174Short Put Butterfly strategy, 156Short Put Condor, 165Short Straddle strategy, 180Short Strangle strategy, 184Short Synthetic Future strategy, 278Straddle strategy, 126Strangle strategy, 131Strap strategy, 142Strip strategy, 136Synthetic Call strategy, 249Synthetic Put strategy, 253


Modified Put Butterfly strategy, 212exiting, 216trading, 213–217

Nnaked calls, trading, 9–10naked puts, trading, 16–19net credit transactions

Bear Call Ladder strategy, 110Bear Call spread strategy, 34Bull Put Ladder strategy, 105Bull Put spread strategy, 29Call Ratio Backspread strategy, 221Covered Put strategy, 86

344 Index

net credit transactions (Contd.)Long Call Synthetic Straddle

strategy, 256Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 225Ratio Call Spread strategy, 230Ratio Put Spread strategy, 234Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic strategy, 268Short Combo strategy, 283Short Guts strategy, 186Short Put Butterfly strategy, 153Short Put Condor strategy, 162Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Synthetic Put strategy, 251

net debit transactionsBear Call Ladder strategy, 110Bear Put Ladder strategy, 115Bear Put spreads, 96Bull Call Ladder strategy, 101Bull Call spreads, 91Bull Put Ladder strategy, 105Calendar Call strategy, 58Calendar Put strategy, 71Collar strategy, 242Covered Call strategy, 25Covered Short Straddle strategy, 48Covered Short Strangle strategy, 53Diagonal Call strategy, 65Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 199Long Combo strategy, 279Long Put Butterfly strategy, 194Long Put Condor strategy, 204Long Put Synthetic Straddle strategy, 260Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Short Call Synthetic Straddle

strategy, 264

Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Straddle strategy, 123Strangle strategy, 129Strap strategy, 139Strip strategy, 134Synthetic Call strategy, 247

neutral (direction) market outlookLong Iron Butterfly strategy, 38Long Iron Condor strategy, 42

neutral market outlookLong Call Synthetic Straddle

strategy, 255Long Put Synthetic Straddle

strategy, 259neutral to bearish market outlook

Bear Call spread strategy, 33Covered Put strategy, 86Ratio Call Spread strategy, 230Strip strategy, 134

neutral to bullish market outlookBull Put spread strategy, 29Calendar Call strategy, 58, 71Covered Call strategy, 24Ratio Put Spread strategy, 234Strap strategy, 139

novice tradersCovered Call strategy, 23


Synthetic Call strategy, 246exiting, 249trading, 246–250

Synthetic Put strategy, 250exiting, 253trading, 251–254

OOffsetting Positions (taxation), 298OTM (Out of the Money), 5

Bear Call Ladder strategy, 111Bear Put spreads, 97Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 29

Calendar Call strategy, 59Covered Call strategy, 25Covered Put strategy, 84–87Covered Short Strangle strategy, 52–54Diagonal Call strategy, 65Diagonal Put strategy, 76Long Iron Butterfly strategy, 37Long Iron Condor strategy, 42Short Strangle strategy, 184

outlook. See market outlook

Pprices

decline in short call strategy, 10rise in long call strategy, 6strike. See strike price

profile charts (risk), 1profit

Bear Call Ladder strategy, 112Bear Call spread strategy, 35Bear Put Ladder strategy, 117Bear Put spreads, 98Bull Call Ladder strategy, 102Bull Call spreads, 93Bull Put Ladder strategy, 107Bull Put spread strategy, 31Calendar Call strategy, 60Calendar Put strategy, 72Call Ratio Backspread strategy, 222Collar strategy, 244Covered Call strategy, 26Covered Put strategy, 87Covered Short Straddle strategy, 50Covered Short Strangle strategy, 55Diagonal Call strategy, 67Diagonal Put strategy, 79Guts strategy, 146Long Box strategy, 290Long Call Butterfly strategy, 192Long Call Condor strategy, 201Long Call Synthetic Straddle

strategy, 257Long Combo strategy, 281Long Iron Butterfly strategy, 40Long Iron Condor strategy, 44Long Put Butterfly strategy, 196

Index 345

Long Put Condor strategy, 206Long Put Synthetic Straddle

strategy, 261Long Synthetic Future strategy, 274Modified Call Butterfly strategy, 211Modified Put Butterfly strategy, 215Put Ratio Backspread strategy, 227Ratio Call Spread strategy, 232Ratio Put Spread strategy, 236risk profile charts, 1Short Call Butterfly strategy, 151Short Call Condor strategy, 160Short Call Synthetic Straddle

strategy, 265Short Call Synthetic strategy, 270Short Combo strategy, 285Short Guts strategy, 187Short Iron Butterfly strategy, 169Short Iron Condor strategy, 173Short Put Butterfly strategy, 155Short Put Condor strategy, 164Short Straddle strategy, 179Short Strangle strategy, 183Short Synthetic Future strategy, 277sideways strategies. See sideways

strategiesStraddle strategy, 125Strangle strategy, 130Strap strategy, 141Strip strategy, 136Synthetic Call strategy, 249Synthetic Put strategy, 253


putsBear Put Ladder strategy, 114


Bear Put spread strategy, 32Bear Put spreads



Bull Put spread strategy, 28–32

346 Index

puts (Contd.)buying, 4Calendar Put strategy, 70



Covered Put strategy, 84exiting, 88trading, 84–88




longselling, 16trading, 13




Long Iron Condor strategy, 41–45Long Put Butterfly strategy, 193



Long Put Synthetic Straddle strategy,258



married (taxation), 299Modified Put Butterfly strategy, 212




shortbuying, 20trading, 16–19

Short Call Synthetic Straddle strategyexiting, 270trading, 267–271


Short Iron Butterfly strategy, 166Short Put Butterfly strategy, 152


Short Put Condor strategy, 161exiting, 165trading, 162–165


strike price. See strike priceSynthetic Put strategy, 250


writing, 4

Q–Rqualified status of Covered Calls

(taxation), 299

ratio backspreads. See backspreadsRatio Call Spread strategy, 229



rationalefor Bear Call Ladder strategy, 110for Bear Call spread strategy, 33for Bear Put Ladder strategy, 115for Bear Put spreads, 96for Bull Call Ladder strategy, 100

for Bull Call spreads, 91for Bull Put Ladder strategy, 105for Bull Put spread strategy, 29for Calendar Call strategy, 58for Calendar Put strategy, 71for Call Ratio Backspread strategy, 221for Collar strategy, 242for Covered Call strategy, 24–25for Covered Put strategy, 86for Covered Short Straddle strategy, 48for Covered Short Strangle strategy, 53for Diagonal Call strategy, 65for Diagonal Put strategy, 77for Guts strategy, 144for Long Box strategy, 288for Long Call Butterfly strategy, 190for Long Call Condor strategy, 199for Long Call Synthetic Straddle

strategy, 255for Long Combo strategy, 279for Long Iron Butterfly strategy, 38for Long Iron Condor strategy, 42for Long Put Butterfly strategy, 194for Long Put Condor strategy, 204for Long Put Synthetic Straddle

strategy, 260for Long Synthetic Future strategy, 272for Modified Call Butterfly strategy, 209for Modified Put Butterfly strategy, 214for Put Ratio Backspread strategy, 225for Ratio Call Spread strategy, 230for Ratio Put Spread strategy, 234for Short Call Butterfly strategy, 149for Short Call Condor strategy, 158for Short Call Synthetic Straddle

strategy, 264for Short Call Synthetic strategy, 268for Short Combo strategy, 283for Short Guts strategy, 186for Short Iron Butterfly strategy, 167for Short Iron Condor strategy, 171for Short Put Butterfly strategy, 153for Short Put Condor strategy, 162for short put strategy, 17for Short Straddle strategy, 178for Short Strangle strategy, 182for Short Synthetic Future strategy, 275for Straddle strategy, 123

Index 347

for Strangle strategy, 128for Strap strategy, 139for Strip strategy, 134for Synthetic Call strategy, 247for Synthetic Put strategy, 251

rewardBear Call strategy, 34Bull Put strategy, 30Calendar Call strategy, 58Calendar Put strategy, 71Covered Call strategy, 25Covered Put strategy, 86Covered Short Straddle strategy, 48Covered Short Strangle strategy, 53Diagonal Call strategy, 65Diagonal Put strategy, 77Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43

riskBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads, 97Bull Call Ladder strategy, 102Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 58Calendar Put strategy, 71Call Ratio Backspread strategy, 222Collar strategy, 243Covered Call strategy, 25–26Covered Put strategy, 86Covered Short Straddle strategy, 48–49Covered Short Strangle strategy, 53Diagonal Call strategy, 65Diagonal Put strategy, 77Guts strategy, 145Long Box strategy, 289Long Call Butterfly strategy, 191Long Call Condor strategy, 200Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Long Iron Butterfly strategy, 38–39Long Iron Condor strategy, 43–44Long Put Butterfly strategy, 195Long Put Condor strategy, 205

348 Index

risk (Contd.)Long Put Synthetic Straddle

strategy, 261Long Synthetic Future strategy, 273Modified Call Butterfly strategy, 210Modified Put Butterfly strategy, 215profile charts, 1profile lines, 2Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 231Ratio Put Spread strategy, 235Short Call Butterfly strategy, 150Short Call Condor strategy, 159Short Call Synthetic Straddle


Rule of the Opposites, 3

Sselection

of optionsBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads, 97Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71

Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 87Covered Short Straddle strategy, 49Covered Short Strangle strategy, 54Diagonal Call strategy, 66Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 289Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle




of stockBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads strategy, 96Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 86Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle



strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172

Index 349

Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251

selling. See also mitigation of loss; tradingBull Put spreads, 32long calls, 8long puts, 16

Short Call Butterfly (volatility strategy), 148


Short Call Condor (volatility strategy), 157exiting, 160trading, 157–161

Short Call Synthetic Straddle strategy, 263exiting, 266trading, 263–266



Short Guts strategy, 185exiting, 188trading, 185–188

Short Iron Butterfly (volatility strategy), 166


Short Iron Condor (volatility strategy), 170


short options (taxation), 297Short Put Butterfly (volatility

strategy), 152exiting, 156trading, 153–156

350 Index

Short Put Condor (volatility strategy), 161exiting, 165trading, 162–165

Short Put Synthetic Straddle strategyexiting, 270trading, 267–271

short putsbuying, 20trading, 16–19

Short Straddle strategy, 177exiting, 180trading, 178–180

Short Strangle strategy, 180exiting, 184trading, 181–184


shorting stocks (taxation), 295sideways strategies, 175

Long Call Butterfly, 189exiting, 192trading, 189–193

Long Call Condor, 198exiting, 202trading, 198–202

Long Put Butterfly, 193exiting, 197trading, 194–197

Long Put Condor, 203exiting, 207trading, 203–207

Modified Call Butterfly, 208exiting, 211trading, 208–212

Modified Put Butterfly, 212exiting, 216trading, 213–217

Short Guts, 185exiting, 188trading, 185–188

Short Straddle, 177exiting, 180trading, 178–180

Short Strangle, 180exiting, 184trading, 181–184

simple capital gains taxation, 294spreads

Bear Call, 32exiting, 36trading, 33–36

Bull Put, 28exiting, 32trading, 29–32

horizontal, 69leveraged strategy, 219

Call Ratio Backspread, 220–224Put Ratio Backspread, 224–229Ratio Call Spread, 229–233Ratio Put Spread, 233–238

Long Iron Butterflyexiting, 40trading, 37–41

Long Iron Condor, 41–45vertical, 89

Bear Put, 95. See also Bear Put spreadsBull Call, 90. See also Bull Call spreads

stocksBear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spread strategy, 96Bull Call Ladder strategy, 101Bull Call spread strategy, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 86Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Long Iron Butterfly strategy, 38

Long Iron Condor strategy, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Put Synthetic Straddle

strategy, 260Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 214prices, 9. See also pricesPut Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic Straddle

strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163short put strategy, 18Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276sideways strategies, 175Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251taxation on

shorting stocks, 295simple capital gains, 294wash sales, 295

Straddle (volatility strategy), 121exiting, 126trading, 122–126

Strangle (volatility strategy), 127exiting, 131trading, 128–131

Strap (volatility strategy), 137–138exiting, 142trading, 138–141

Index 351

strategiesanalysis of, 3basic, 1calls, 5income, 21–22

Bear Call spread, 32Bull Put spread, 28Calendar Call, 57Calendar Put, 70Covered Called, 23Covered Put, 84Covered Short Straddle, 46Covered Short Strangle, 51Diagonal Call, 63Diagonal Put, 76Long Iron Butterfly, 37Long Iron Condor, 41

long callsselling, 8trading, 5–8

long putsselling, 16trading, 13


short putsbuying, 20trading, 16–19

strike priceBear Call Ladder strategy, 111Bear Call spread strategy, 34Bear Put Ladder strategy, 116Bear Put spreads, 97Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put Ladder strategy, 106Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 243Covered Call strategy, 25Covered Put strategy, 87Covered Short Straddle strategy, 49Covered Short Strangle strategy, 54Diagonal Call strategy, 66

352 Index

strike price (Contd.)Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 289Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle



strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163short put strategy, 18Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 135Synthetic Call strategy, 248Synthetic Put strategy, 252

Strip (volatility strategy), 132–133exiting, 136trading, 133–136

Synthetic Call strategy, 246exiting, 249trading, 246–250

synthetic calls (taxation), 299Synthetic Put strategy, 250


synthetic strategy, 239–240Collar, 240


Long Box, 287exiting, 290trading, 287–291

Long Call Synthetic Straddle, 254exiting, 258trading, 255–258

Long Combo, 279exiting, 282trading, 279–282

Long Put Synthetic Straddle, 258exiting, 262trading, 259–263

Long Synthetic Future, 271exiting, 274trading, 272–274

Short Call Synthetic Straddle, 263exiting, 266trading, 263–266

Short Combo, 283exiting, 286trading, 283–286

Short Put Synthetic Straddleexiting, 270trading, 267–271

Short Synthetic Future, 275exiting, 278trading, 275–278

Synthetic Call, 246exiting, 249trading, 246–250

Synthetic Put, 250exiting, 253trading, 251–254

Ttaxation

on optionsCovered Calls, 299–301long options, 296–297

short options, 297synthetic calls, 299

on stocksshorting stocks, 295simple capital gains, 294wash sales, 295

time decayBear Call spread strategy, 34Bear Put Ladder strategy, 115Bear Put spread strategy, 96Bull Call Ladder strategy, 101Bull Call spread strategy, 91Bull Put Ladder strategy, 105Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Call Ratio Backspread strategy, 221Collar strategy, 242Covered Call strategy, 25Covered Put strategy, 86Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 77Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 199Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic Straddle

strategy, 264Short Call Synthetic strategy, 268Short Combo strategy, 284Short Guts strategy, 186

Index 353

Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251

time period of tradeBear Call Ladder strategy, 111Bull Put Ladder strategy, 105Call Ratio Backspread strategy, 221Collar strategy, 243Long Call Butterfly strategy, 190Long Call Condor strategy, 200Long Call Synthetic Straddle

strategy, 256Long Combo strategy, 280Modified Call Butterfly strategy, 209Modified Put Butterfly strategy, 214Put Ratio Backspread strategy, 226Ratio Call Spread strategy, 230Short Call Condor strategy, 158Short Call Synthetic Straddle

strategy, 264Short Guts strategy, 186Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Short Put Butterfly strategy, 154Short Put Condor strategy, 163Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276

time period to tradeBear Call spread strategy, 34Bear Put Ladder strategy, 115Bear Put spreads, 96Bull Call Ladder strategy, 101Bull Call spreads, 92Bull Put spread strategy, 30Calendar Call strategy, 59Calendar Put strategy, 71Covered Call strategy, 25

354 Index

time period to trade (Contd.)Covered Put strategy, 85Covered Short Straddle strategy, 48Covered Short Strangle strategy, 54Diagonal Call strategy, 65Diagonal Put strategy, 77Guts strategy, 145Long Box strategy, 288Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Long Put Butterfly strategy, 195Long Put Condor strategy, 205Long Put Synthetic Straddle

strategy, 260Long Synthetic Future strategy, 272Ratio Put Spread strategy, 235Short Call Butterfly strategy, 149Short Call Synthetic strategy, 268Short Combo strategy, 284short put strategy, 18Straddle strategy, 124Strangle strategy, 129Strap strategy, 140Strip strategy, 134Synthetic Call strategy, 247Synthetic Put strategy, 251

tradingBear Call Ladder strategy, 109–113Bear Call spread strategy, 33–36Bear Put Ladder strategy, 114–118Bear Put spreads, 95–99Bull Call Ladder strategy, 100–103Bull Call spread strategy, 91–94Bull Put Ladder strategy, 104–108Bull Put spread strategy, 29–32Calendar Call strategy, 57–62Calendar Put strategy, 70–75Call Ratio Backspread strategy, 220–224Collar strategy, 241–245Covered Call strategy, 23–28Covered Put strategy, 84–88Covered Short Straddle, 47–51Covered Short Strangle, 52–56Diagonal Call strategy, 64–69Diagonal Put strategy, 77–84Guts strategy, 144–147Long Box strategy, 287–291

Long Call Butterfly strategy, 189–193Long Call Condor strategy, 198–202Long Call Synthetic Straddle strategy,

255–258long calls, 5–8Long Combo strategy, 279–282Long Iron Butterfly, 37–41Long Iron Condor, 42–45Long Put Butterfly strategy, 194–197Long Put Condor strategy, 203–207Long Put Synthetic Straddle strategy,

259–263long puts, 13Long Synthetic Future strategy, 272–274Modified Call Butterfly strategy,

208–212Modified Put Butterfly strategy,

213–217Put Ratio Backspread strategy, 225–229Ratio Call Spread strategy, 229–233Ratio Put Spread strategy, 234–238risk profile charts, 1Short Call Butterfly strategy, 148–151Short Call Condor strategy, 157–161Short Call Synthetic Straddle strategy,

263–266Short Call Synthetic strategy, 267–271short calls, 9–10Short Combo strategy, 283–286Short Guts strategy, 185–188Short Iron Butterfly strategy, 166–169Short Iron Condor strategy, 171–174Short Put Butterfly strategy, 153–156Short Put Condor strategy, 162–165short puts, 16–19Short Straddle strategy, 178–180Short Strangle strategy, 181–184Short Synthetic Future strategy, 275–278Straddle strategy, 122–126Strangle strategy, 128–131Strap strategy, 138–141Strip strategy, 133–136Synthetic Call strategy, 246–250Synthetic Put strategy, 251–254

Trading Planlong call strategy, 5short call strategy, 9

transactionsnet credit

Bear Call Ladder strategy, 110Bear Call spread strategy, 34Bull Put Ladder strategy, 105Bull Put spread strategy, 29Call Ratio Backspread strategy, 221Covered Put strategy, 86Long Call Synthetic Straddle

strategy, 256Long Iron Butterfly strategy, 38Long Iron Condor strategy, 43Modified Put Butterfly

strategy, 214Put Ratio Backspread strategy, 225Ratio Call Spread strategy, 230Ratio Put Spread strategy, 234Short Call Butterfly strategy, 149Short Call Condor strategy, 158Short Call Synthetic strategy, 268Short Combo strategy, 283Short Guts strategy, 186Short Put Butterfly strategy, 153Short Put Condor strategy, 162Short Straddle strategy, 178Short Strangle strategy, 182Short Synthetic Future strategy, 276Synthetic Put strategy, 251

net debitBear Call Ladder strategy, 110Bear Put Ladder strategy, 115Bear Put spreads, 96Bull Call Ladder strategy, 101Bull Call spreads, 91Bull Put Ladder strategy, 105Calendar Call strategy, 58Calendar Put strategy, 71Collar strategy, 242Covered Call strategy, 25Covered Short Straddle strategy, 48Covered Short Strangle strategy, 53Diagonal Call strategy, 65Diagonal Put strategy, 78Guts strategy, 145Long Box strategy, 288Long Call Butterfly strategy, 190Long Call Condor strategy, 199

Index 355

Long Combo strategy, 279Long Put Butterfly strategy, 194Long Put Condor strategy, 204Long Put Synthetic Straddle

strategy, 260Long Synthetic Future strategy, 272Modified Call Butterfly strategy, 209Short Call Synthetic Straddle

strategy, 264Short Iron Butterfly strategy, 167Short Iron Condor strategy, 172Straddle strategy, 123Strangle strategy, 129Strap strategy, 139Strip strategy, 134Synthetic Call strategy, 247

U–Vuncapped rewards, 6. See also rewarduncapped risk. See also risk

long put strategy, 14short call strategy, 10

vertical spreads, 89Bear Call Ladder strategy, 99, 109


Bear Put, 95exiting, 98trading, 95–99


Bull Call, 90exiting, 94trading, 91–94

Bull Call Ladder strategyexiting, 103trading, 100–103


volatility strategy, 119–120Guts, 143


356 Index

volatility strategy (Contd.)Short Call Butterfly, 148


Short Call Condor, 157exiting, 160trading, 157–161

Short Iron Butterfly, 166exiting, 169trading, 166–169

Short Iron Condor, 170exiting, 174trading, 171–174

Short Put Butterfly, 152exiting, 156trading, 153–156

Short Put Condor, 161exiting, 165trading, 162–165

Straddle, 121exiting, 126trading, 122–126

Strangle, 127exiting, 131trading, 128–131

Strap, 137–138exiting, 142trading, 138–141

Strip, 132–133exiting, 136trading, 133–136

W–Zwash sales (taxation), 295writing

calls, 4puts, 4

X axis ( creation of risk profile charts), 2

Y axis (creation of risk profile charts), 1yields

Calendar Call strategy, 57–62Calendar Put strategy, 70–75Covered Put strategy, 84–88Covered Short Straddle strategy,

46–51Covered Short Strangle strategy, 52–56Diagonal Call strategy, 64–69Diagonal Put strategy, 77–84

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The Bible of Options Strategies -...

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