LONG CALL

The trade: Buy a call with an exercise price of (A)
Market expectation: Market bullish/volatility bullish.  The more bullish the expectation, the further out-of-the-money (higher strike) the purchased call should be.  A Long Call combines limited downside exposure with high gearing in a rising market. 

Profit & loss characteristics at expiration

Profit: Unlimited in a rising market.
Loss: Limited to the initial premium.
Break-even: Reached when the underlying rises above the strike price A, by the same amount as the premium paid to establish the position.

Business rule: Buy call to open

Initial requirement: trade debit

LONG PUT

The trade: Buy a put (A)
Market expectation: Market bullish/volatility bullish.  The more bearish the expectation, the further out-of-the-money (lower strike) the purchased put should be. A Long Put combines limited upside exposure with high gearing in a falling market. 

Profit & loss characteristics at expiration:

Profit: Limited to the value of the strike price in a falling market.
Loss: Limited to the initial premium paid.
Break-even: Reached when the underlying falls below the strike price A by the same amount as the premium paid to establish the position. 

Business rule: Buy put to open

Initial requirement: trade debit

SHORT CALL

The trade: Sell a call (A)
Market expectation: Market bearish/volatility bearish.  Holder expects a gradual fall in the market and lower volatility.  The optimal strike is dependent on time decay and vega level; although, in general, the more bearish the expectation, the greater the sold option should be in-the-money (lower strike) in order to maximize premium income.  Profit is limited to the premium received and thus in the market view is more that moderately bearish, a Long Put may yield higher profits. 

Profit & loss characteristics at expiration:

Profit: Limited to the premium received from selling the call.
Loss: Unlimited in a rising market.
Break-even: reached when the underlying rises above the strike price A, by the same amount as the premium received from selling the call.

Business rule: Sell call to open

Initial requirement: 20% CMV - out of money or 10% CMV whichever is greater

SHORT PUT

The trade: Sell a put (A)
Market expectation: Market bullish/volatility bearish.  Holder expects a gradual rise in the market with lower volatility.  The optimal strike to be sold will be dependent on time decay and the vega level, although in general, the more bullish the view, the greater the sold option should be in-the-money (higher strike) in order to maximize premium income.  Profit is limited to the premium received and thus if the market view is more than moderately bullish, a long call may yield higher profits.

Profit & loss characteristics at expiration:

Profit: Limited to the premium received from selling the put.
Loss: Limited to the value of the strike price in a falling market.
Break-even: Reached when the underlying falls below the strike price A by the same amount as the premium received from selling the put.

Business rule: Sell put to open

Initial requirement: 20% CMV – out of money or 10% Strike whichever is greater

   

Covered Call

The trade: Buy underlying and sell an out of the money call (A).
Market expectation: Direction bullish/volatility bearish. A covered call is a conservative strategy which reduces the initial cost buy limits the upside potential in a rising market at the strike price.

Profit & loss characteristics at expiration:

Profit: Limited to selling at the strike price minus the initial cost of the buy-write.
Loss: Limited to the initial cost of the buy-write.
Break-even: Reached when the underlying falls to the initial cost of the buy-write.

Business rule: Buy underlying and sell call. Exercise quantity must equal the underlying quantity.

Initial requirement: 50% of stock purchase over $5/share or 100% of stock purchase under $5/share and release the trade credit of covered call.

Put Protective

The trade: Buy underlying and buy an out of the money put (A).
Market expectation: Direction bullish/volatility bullish. A married put is a bullish strategy which limits the loss of the underlying on the downside exposure.

Profit & loss characteristics at expiration:

Profit: Unlimited in a rising market.
Loss: Limited to the initial cost of the married put minus the strike price (A).
Break-even: Reached when the underlying rises up to the initial cost of the married put.

Business rule: Buy underlying and buy put. Exercise quantity must equal underlying quantity.

Initial requirement: 50% of stock purchase over $5/share or 100% of stock purchase under $5/share + trade debit of long put.

COLLAR

The trade: Buy underlying, buy an out of the money put (A) and sell an out of the money call (B) with the same expiration and the same number of contracts to cover the underlying stock.
Market expectation: Direction neutral/volatility bullish. The investor will also sell an out of the money call who is willing to sell the underlying stock at a higher price but limit the upside potential to offset the cost for purchasing the put.

Profit & loss characteristics at expiration:

Profit: Limited to the strike price of the short call (B) minus the initial cost of the collar.
Loss: Limited to the strike price of the long put (A) minus the initial cost of the collar.
Break-even: Reached when underlying is at the initial cost of the collar.

Business rule: Buy underlying, sell call and buy put. Exercise quantity of each option must equal the underlying quantity.

Initial requirement: 50% of stock purchase over $5/share or 100% of stock purchase under $5/share, release the trade credit of covered call + trade debit of long put

BULL CALL SPREAD

The trade: Buy a call (A), sell call at higher strike (B)
Market expectation: Market bullish/volatility neutral.  The spread has the advantage of being cheaper to establish than the purchase of a single call, as the premium received from the sold call reduces the overall cost.  The spread offers a limited profit potential if the underlying rises and a limited loss if the underlying falls.

Profit & loss characteristics at expiration:

Profit: Limited to the difference between the two strikes minus net premium cost.  Maximum profit occurs where the underlying rises to the level of the higher strike B or above.
Loss: Limited to any initial premium paid in establishing the position.  Maximum loss occurs where the underlying falls to the level of the lower strike A or below.
Break-even: Reached when the underlying is above strike A by the same amount as the net cost of establishing the position.

Business rule: Buy call and sell the same number of call at higher strike price of the same month and underlying

Initial requirement: Net debit of trades

BEAR CALL SPREAD

The trade: Sell call (A), buy call at higher strike (B)
Market expectation: Market bearish/volatility neutral.  The Short Call at A aims to take advantage of a bearish market and the premium gained affords some upside protection with a Long Call at B.  The spread offers a limited profit if the underlying falls and a limited loss exposure if the underlying rises.

Profit & loss characteristics at expiration:

Profit: Limited to the net premium credit.  Maximum profit occurs where underlying falls to the level of the lower strike A or below.
Loss: Limited to the difference between the two strikes minus the net credit received in establishing the position.  Maximum loss occurs where the underlying rises to the level of the higher strike B or above. 
Break-even: Reached when the underlying is above strike price A by the same amount as the net credit of establishing the position. 

Business rule: Buy call and sell the same number of call at lower strike price of the same month and underlying. 

 Initial requirement: exposure – net credit of trades

BULL PUT SPREAD

The trade: Sell a put (B), buy put at lower strike (A).
Market expectation: Market bullish/volatility neutral.  The Short Put at B aims to take advantage of a bullish market and the premium gained affords some downside protection with a Long Put at A.  The spread offers a limited profit potential if the underlying rises and limited loss if the underlying falls.

Profit & loss characteristics at expiration:

Profit: Limited to the net premium credit.  Maximum profit occurs where underlying rises to the level of the higher strike B or above. 
Loss: Maximum loss occurs where the underlying falls to the level of the lower strike A or below.
Break-even: Reached when the underlying is below strike B by the same amount as the net credit of establishing the position. 

Business rule:  Buy put and sell the same number of put at higher strike price of the same month and underlying

Initial requirement: exposure – net credit of trades

BEAR PUT SPREAD

The trade: Buy a put (B), sell put at lower strike (A).
Market expectation: Market bearish/volatility neutral.  The spread has the advantage of being cheaper to establish than the purchase of a single put, as the premium received from the sold put reduces the overall cost.  The spread offers a limited loss exposure if the underlying rises, and a limited profit if the underlying falls.

Profit & loss characteristics at expiration:

Profit: Limited to the difference between the two strikes minus net premium cost.  Maximum profit occurs where underlying falls to the level of the lower strike A or below.
Loss:  Limited to the initial premium paid in establishing the position.  Maximum loss occurs where the underlying rises to the level of the higher strike B or above.
Break-even:  Reached when the underlying is below strike price B by the same amount as the net cost of establishing the position.

Business rule: Buy put and sell the same number of put at lower strike price of the same month and underlying.
Initial requirement: net debit of trades

 

 Calendar Spread  

This is a time value trade (involving the sale and purchase of options with different expiration months) and as such cannot be adequately plotted in terms of its risk/reward profile.

The trade: Sell near put (call), buy far put (call) at same strike.
Market expectation: Direction neutral/volatility bullish. The near term option decays faster than the longer dated option, therefore the trade benefits from an increase in volatility.

Profit & loss characteristics at expiration (of near term option):

The potential profit in a time value trade is derived from the time decay characteristics of options. The near, written put (call) will decay at a rate faster than that of the far, purchased put(call) as it approaches expiration and it is this differential in the rate of time decay which may yield a profit. Assuming the options are at-the-money expire worthless and the purchased option, although not possessing intrinsic value, will hold timevalue. As the initial position is established at a loss (because the far option will command a higher premium), to yield a profit, the time value of the long option after the expiry of the short dated option must be such that its value is greater than the initial cost of establishing the position.

Business rule: Buy call (put) and sell the same number of near term call (put) of the same underlying at the same strike price.

Initial requirement: net debit of trades

Diagonal Calendar Spread

This is a time value trade (involving the sale and purchase of options with different expiration months) and as such cannot be adequately plotted in terms of its risk/reward profile.

The trade: Sell near put (call), buy far put (call) at a different strike.
Market expectation: Expected to profit from time-decay differential and an increase in volatility. In addition, the position is suitable for a directional view on the underlying, e.g. sell Sep 99.00 call and buy Dec 101.00 call, giving a reduced cost calendar spread trade.

Profit & loss characteristics at expiration (of near option):

The profitability of the trade depends upon the differing time decay characteristics of the near, sold put (call) and the far, purchased put (call). The difference between this trade and that of a Calendar spread is that a diagonal spread involves options with different strike prices. As with a Calendar spread, the maximum loss will occur if the near, sold call (put) moves in-the-money and is exercised, followed by a fall (rise) in the market rendering the purchased call (put) worthless on expiration.

Business rule: Buy call (put) and sell the same number of near term call (put) of the same underlying at a different strike price.

Initial requirement: exposure (if any) + or - net trade debt or

LONG COMBO

The trade: Buy a call (B), sell put at lower strike (A).
Market expectation: Market bullish/volatility neutral. The risk/ reward profile is similar to that of a long future except that there is a plateau (A-B) in which there is no change in profit/loss. The plateau makes this a more suitable trade than a long future if volatility expectations are uncertain.

Profit & loss characteristics at expiration:

Profit: Unlimited in a rising market. 
Loss: Limited in a falling market to the value of the strike price A.
Break-even: Depending on the strikes chosen, establishing the position may yield a small premium cost or credit. If the position is created at a cost, break-even will occur where the market rises above point B by this amount. If the position is established at a credit, the break-even point will occur if the market faills below point A by the same amount. 

Business rule:  Buy a call sell the same number of put at a lower strike price of the same underlying.

Initial requirement: Named put requirement +/- net debit or credit of trade.

SHORT COMBO

The trade: Sell a call (B), buy a put at lower strike (A).
Market expectation: Market bearish/volatility neutral. The risk/reward profile is similar to that of a short future except that there is a plateau (A-B) over which there will be no change in profit/loss. The plateau makes this a more suitable trade than a short future if volatility expectations are uncertain.

Profit & loss characteristics at expiration:

Profit: Limited in a fallling market to the value of the strike price A. 
Loss: Unlimited in a rising market.
Break-even: Depending on the strikes chosen, the position may yield a small premium cost or credit. If the position is extablished at a net cost, break-even will occur where the market falls below point A by the same amount. If the position is extablished at a credit, break-even will occur where the market rises above point B by the same amount. 

Business rule: Sell a call buy the same number of put at a lower strike price of the same underlying

Initial requirement: Naked call requirement +/– net debit or credit of trade.

SYNTHETIC LONG STOCK

The trade: Buy call, sell put at same strike (generally the at-the-money strike).
Market expectation: Market bullish/volatility neutral.

Profit & loss characteristics at expiration:

Profit: Unlimited in a rising market. 
Loss: Limited to the value of the strike price in a falling market.
Break-even: If the position is opened at a net debit, break-even is reached when the underlying rises above the strike price of the strategy by the net amount of premium paid. If the position is created at a net credit, break-even occurs when the underlying falls below the strike price by the net premium received . 

Business rule: Buy a call and sell a put at the same strike price and underlying.

Initial requirement: Naked put requirement +/– net debit or credit of trade.

SYNTHETIC SHORT STOCK

The trade: Buy put, sell call at same strike (generally the at-the-money strike).
Market expectation: Market bearish/volatility neutral.

Profit & loss characteristics at expiration:

Profit: Limited to the value of the strike price in a falling market.
Loss: Unlimited in a rising market.
Break-even: If the position is opened at a net debit, break-even is reached when the underlying falls below the strike price of the strategy by the net amount of premium paid. If the position is created at a net credit, break-even occurs when the underlying rises above the strike price by the net premium received . 

Business rule: Buy a put and sell a call at the same strike price and underlying.

Initial requirement: Naked call requirement +/– net debit or credit of trade.

LONG STRADDLE

The trade: Buy a put (A), buy call at same strike.
Market expectation: Market neutral/volatility bullish. With the underlying at A and an unknown directional move or increase in volatility is anticipated.

Profit & loss characteristics at expiration:

Profit: Unlimited for an increase but limited for a decrease in the underlying to the value of the strike price A.
Loss: Limited to the premium paid in establishing the position. Will be greatest if the underlying is at strike A, at expiration.
Break-even: Reached if the underlying rises or falls from strike A by the same amount as the premium cost of establishing the position. 

Business rule: Buy a call and same number of put at the same strike price of the same underlying.

Initial requirement: net debit of trades

SHORT STRADDLE

The trade: Sell a put (A), sell call at same strike.
Market expectation: Market neutral/volatility bearish. With the underlying at A and a period of low or decreasing volatility is anticipated, and the underlying is not expected to move dramatically.

Profit & loss characteristics at expiration:

Profit: Limited to the credit received from establishing the position. Highest if the market settles at A.
Loss: Unlimited in an increase but limited to the value of the strike price A in a decrease in the underlying.
Break-even: Reached if the underlying rises or falls from strike A by the same amount as the premium received from establishing the position. 

Business rule: Sell a call and the same number of put at the same strike with the same underlying.

Initial requirement: naked call or put requirement whichever is greater

LONG STRANGLE

The trade: Buy a put (A), buy call at higher strike (B).
Market expectation: Market neutral/volatility bullish. The holder expects a major movement in the market but is unsure as to its direction. A larger directional move is needed than a straddle in order to yield a profit but if the market stagnates, losses will be less.

Profit & loss characteristics at expiration:

Profit: The profit potential is unlimited although a substantial directional movement is necessary to yield a profit for both a rise or fall in the underlying.
Loss: Occurs if the market is static; limited to the premium paid in establishing the position.
Break-even: Occurs if the market rises above the higher strike price at B by an amount equal to the cost establishing the position, or if the market falls below the lower strike price at A by the amount equal to the cost of establishing the position. 

Business rule: Buy a call and same number of put at a lower price of the same underlying.

Initial requirement: net debit of trades.

SHORT STRANGLE

The trade: Sell a put (A), sell call at higher strike (B).
Market expectation: Direction neutral/volatility bearish. The holder expects low volatility and no major directional move. More cautious than a straddle as profit potential spans a larger range although maximum potential profits will be lower.

Profit & loss characteristics at expiration:

Profit: Limited to the premium received. Will be highest if the underlying remains within the market level A-B.
Loss: Unlimited for a sharp move in the underlying in a rising market and limited to the value of the strike price A in a falling market.
Break-even: reached if the underlying falls below strike A or rises above strike B by the same amount as the premium received in establishing the position. 

Business rule: Sell a call and same number of put at a lower strike price of the same underlying.

Initial requirement: naked call or put requirement whichever is greater.

LONG BUTTERFLY

The trade: Buy put (or call) A, sell two puts (or calls) at higher strike B, buy put (or call) at an even higher strike C.
Market expectation: Direction neutral/volatility bearish. In this case, the holder expects the underlying to remain around strike B, or it is felt that there will be a fall in implied volatility. Position is less risky than selling straddles or strangles as there is a limited downside exposure.

Profit & loss characteristics at expiration:

Profit: Maximum profit limited to the difference in strikes between A and B minus the net cost of establishing the position. Maximized at mid strike B (assuming A-B and B-C are equal).
Loss: Maximum loss limited to the net cost of the position for either a rise or a fall in the underlying.
Break-even: Reached when the underlying is higher than A or lower than C by the cost of establishing the position. 

Business rule: Buy a call (put), sell 2 calls (puts) at a higher strike price and buy a call (put) at even higher strike price. They must be of same month and underlying. Strike prices must be equidistant from each other. Exercise quantity and contracts net to zero.

Initial requirement: net debit of trades

SHORT BUTTERFLY

The trade: Sell put (or call) A, buy two puts (or calls) B, sell put (or call) C.
Market expectation: Market neutral/volatility bullish. In this case the holder expects a directional move in the underlying, or a rise in implied volatility.

Profit & loss characteristics at expiration:

Profit: Maximum profit is the net credit received in establishing the position and will occur if there is a sufficient directional move of the underlying, in either direction.
Loss: Limited to the difference in strikes between A and B, minus the net credit in establishing the position.
Break-even: Reached when the underlying is higher than A or lower than C by the credit received from establishing the position. 

Business rule: Sell a call (put), buy 2 calls (puts) at a higher strike price and sell a call (put) at even higher strike price. They must be of same month and underlying. Strike prices must be equidistant from each other. Exercise quantity and contracts net to zero.

Initial requirement: exposure on credit spread -- net credit of trades