Options Strategies

Long Guts - Overview

The long guts option strategy is a volatility trade that is created when the trader believes that there will be a sharp move up, or down in the underlying.  This options strategy involves buying an equal amount of ITM calls and puts, which have the same expiration date.  This strategy is a limited risk, unlimited return, direction neutral strategy requiring a net debit to initiate the position.  The long guts is very similar to the straddle

What is a Call Ratio Backspread?

A call ratio backspread is a good strategy if you have a strong conviction that the security you are buying options on will have a strong upside move.  Basically, the call ratio backspread is inverse to the call ratio spread in that you are shorting ITM call/s and buying OTM calls.  This options strategy calls for a greater number of OTM calls than ITM calls, all of the same expiration month and underlying security.  This strategy is a low risk, unlimited reward strategy that has the expectation of str

What is a Call Ratio spread?

A Call Ratio Spread is an options strategy for traders who believe that the stock go sideways to down until expiration of the option.  The strategy consists of buying 1 in the money call and selling 2 out of the money calls on the same underlying security and expiration date.  The only thing that will be different is the strike price of the options.  Additionally, the ratio of options we suggested above is only for example purposes; it could be 2 Long / 3 Short or any ratio that the investor chooses.  The objective is to put the trade on as a credit transaction. 

What is a Covered Call?

Buying a stock long and shorting a call option of the same underlying security is a common options strategy known as the covered call. The idea behind this strategy is to provide the seller of the option with some income over the short term. Remember, from our introduction to options that selling calls would result in a net debit to your account. The strategy calls for short term(1 or 2 months till expiration) call options that are out of the money (have an exercise price higher than that of current stock price).

Covered Calls Risk Characteristics

The covered call strategy has the same risk profile as the short put option.

covered-call-risk-characteristics

What is the Condor Option Spread?

The condor spread, is very similar to the butterfly option strategy in that it is a low risk, low reward options strategy that profits when the underlying asset has very small percentage changes from entry till expiration. The key difference between the two strategies is in the number of options utilized in each. The condor spread employs the use of four equidistant options as opposed to the three options involved with the butterfly spread. The condor has a wider profitable zone but achieves a lower profit.

What is a Collar Option Strategy?

The option collar is designed to provide an extremely low risk strategy to trading stocks. While they may not produce the largest returns, you will not suffer large draw downs either. In fact, if you set the collar up correctly, you may even be able to create a risk-free trade scenario. A collar strategy is a long term strategy that employs the use of LEAP options. The collar can be created by going long the stock, long the LEAP puts near the strike price, and then selling LEAP calls that are out of the money.

What is the Butterfly Option Spread?

The butterfly spread is put together to create a low risk, low reward options strategy and is designed to take advantage of a market or stock that is range bound.  The butterfly can be created using call or put options.  The strategy is termed "butterfly" due to the shape of the risk characteristics graph you see below; notice the two wings and then the larger body.  The butterfly spread is constructed through buying 1 long ITM call, shorting 2 ATM calls, and buying 1 long OTM call.  The ratio between the 3 options should be 1:2:1 and the distance between the strike prices of the long options should be equidistant from the short call strike.  For

What is a Bull Put Spread?

As the name suggests, the bull put spread is a bullish options strategy and consists of one long and one short put. The bull put spread buys an OTM put option and sells ITM put options and therefore results in a net credit transaction. Since the bull put spread is a credit transaction, it can be used as a monthly income strategy as opposed to its bull call spread counterpart which is a net debit transaction. Another key difference between the two is the volatility structure of puts and calls. Typically, call will have better spreads than puts and provide better reward to risk opportunities. In general, bull put spreads are used to generate short term income.

What is a Bull Call Spread?

As the name suggest, a bull call spread is an option strategy designed to work when the prevailing trend is higher.  The bull call spread does a great job of allowing you to take part in a bullish move by reducing your risk and breakeven points while at the same time, providing great returns.  The bullish call spread can be created by buying lower strike calls and selling, or shorting, the same number of higher strike calls with the same expiration.  It will cap your profit potential but limit your downside at the same time if the stock does not go up as you expected.