Options Trading Strategies ----------- CTGFutures Trade Plans 

Key Points to Remember:

• ALL options eventually lose ALL of their "time value."
• ALL "Out-Of-The-Money" options expire worthless.
• Markets only "trend" 1/3 of the time; they move sideways the other 2/3.

Spreads

A spread trading strategy involves taking simultaneous but opposing positions in two or more option contracts of the same type.

Bull Spread

These are spreads designed to profit in a bull market. The most common bull spread strategy is the vertical spread. A vertical spread always consists of one long (purchased) option and one short (sold) option where both options are of the same type (either a call or a put) and both options expire at the same time. Vertical spreads can be created using either calls or puts. Regardless of whether calls or puts are used to create the spread, a bullish vertical spread is created by purchasing the option with the lower exercise price and selling the option with the higher exercise price.

Bear Spread

These are spreads designed to profit in a bear market. The most common bear spread strategy is the vertical spread. A vertical spread always consists of one long (purchased) option and one short (sold) option where both options are of the same type (either a call or a put) and both options expire at the same time. Vertical spreads can be created using either calls or puts. Regardless of whether calls or puts are used to create the spread, a bearish vertical spread is created by selling the option with the lower exercise price and purchasing the option with the higher exercise price.

Butterfly Spread

A butterfly spread consists of options at three equally spaced exercise prices where all options are of the same type ( either all calls or all puts ) and all options expire at the same time. A long (short) butterfly spread can be created by buying (selling) one option at each of the outside exercise prices and selling (buying) two options at the inside exercise price. ( i.e., a long butterfly spread could consist of the purchase of a June 95 call and a June 105 call with the simultaneous sale of two June 100 calls ). The long butterfly strategy would lead to a profit if the price of the underlying asset remains close to the strike price at which the two calls were sold, in this case 100. The short butterfly strategy would lead to a profit if the price of the underlying asset moves far way from the exercise price at which the two calls were bought.

Calendar Spread

Also known as time spreads. The most common type of calendar spread consists of opposing positions in two options of the same type ( either both puts or both calls ) that have the same exercise price, but expire at different times. A long (short) time spread position can be created by selling (buying) a short term call option and buying (selling) a longer term call option. The investor of the long position would profit when the price of the underlying asset is close to the strike price of the short call at its expiration.

Combinations

Combinations are strategies that involve positions in both calls and puts on the same stock. Some of these combinations are named; straddles, strips, straps, and strangles. Straddle

A straddle consists of either a long call and a long put ( a long position ), or a short call and a short put ( a short position ), where both options have the same exercise price and expire at the same time. For a long position, profit is realized if there is a large move in either direction from the options exercise price.

Strips and Straps

These two strategies are variations of the straddle. A strip consists of one long call and two long puts, all with the same strike prices and expiration dates. A strap consists of two long calls and one long put, all with the same strike prices and explanation dates. A strip strategy may be used by a trader who thinks that a large stock price movement is imminent, but believes that a decrease in stock price is more likely than an increase. A strap strategy is the opposite in that the trader thinks an increase in stock price is more likely.

Strangles

A long (short) strangle position is developed by purchasing ( selling ) both a put and a call with different strike prices with the same expiration. The call strike is higher than the put strike price. A strangle is similar to a straddle in that a large move in either direction will be profitable. However, a larger move must occur with a strangle than with a straddle before a profit is realized. The benefit compared to a straddle is that the amount of loss can be reduced if the underlying asset price does not make a large move away from the option strike prices.