Options Strategies

Key words: Options spreads, Combinations , Synthetic options, Bull spread, Bear spread, Butterfly, Calendar spreads, Diagonal spreads, Straddle, Strangle, Strip, Strap
Options Strategies

There are only two types of options, puts and calls, and a lot of options strategies that can be used on the market.
Nevertheless in order to find more attractive scenarios and develop complex strategies the simple but important concepts should be understood as the key factors that determine trader’s potential risks and rewards. The article is designed to help build a foundation for making options payoffs by providing a primer on a basic concept of grouping options strategies.

We divide strategies into 4 groups:

1. Simple
2. Spread
3. Combination
4. Synthetic

Each group consists of different sub strategies, for example Married Put, Collar, Butterfly and other funny names.
For simplicity reasons we will not dig into every sub strategy because they are too many and it is easy to get stuck in different payoffs.

1. Simple strategy consists of a simple call or a put option. Small investors are bombarded with different advice about options. Therefore before starting with complex payoffs a simple option technique can be very advantageous.

The four basic and well known sub strategies here are:

• Buy call
• Sell call
• Buy put
• Sell put

Call buying is the most popular bullish option strategy while long put position expresses bearishness.
We will not explore different ways to use these strategies and their payoffs in the article.
Indeed, with the reams of literature on call and put buying, is there anything new to say on the subject? Instead, we move on to the next strategy, spread.

2. Spread is a position in two or more options of the same type, i.e. it can be two puts, three calls etc.

Vertical spreads as a subgroup are characterized by different strikes:

• Bull spread

with Calls: Long call option with Strike K1, Short call option with a higher strike K2.

with Puts: Long Put with lower Strike K1, Short put with higher strike K2.

• Bear spread

with Calls: Long call with Strike K2, short call with lower strike K1.

with Puts: Long put with Strike K1, short put with lower strike K2.

• Butterfly –combination of call and bear spreads.

with Calls: Long call with Strike K1, Long call with strike K3, Short two calls with middle strike K2.

with Puts: Long Put with Strike K1, Long put with Strike K3, short two puts with an average
strike K2.

Horizontal or Calendar spreads characterized by different dates:

• Calendar spread

with Calls: Long call with a more distant expiration than short call option, the strike is the same K1.

with Puts: Long put with a more distant expiration than short put option, the strike is the same K1.

Diagonal spreads characterized by different dates and strikes:

• Diagonal spread

With calls: Long call and short call with different expiry and strikes.

With Puts: Long put and short put with different expiry and strikes.

3. Combinations are an option trading strategy that involves positions in calls and puts options simultaneously.

The most popular combinations are two and three legs combinations.
• Straddle – two legs combination that involves long call and put with the same strike and expiry.
• Strangle – two legs combination that involves long put and call with the same expiry but different strikes K1 and K2.

• Strip – three legs combination with long one call and long two puts with the same strike and expiry.
• Strap – three legs combination with long two calls and one put on the same strike and expiry.

4. Synthetic strategies involve a single option and a stock.

Synthetic options are fairly easy to understand; they can be classified as combinations as well.

• Writing Synthetic Put (Covered Call) is long stock and short call.
• Long Synthetic Put (Protective Call) is short stock and long call.

• Long Synthetic Call (Protective Put) is long stock and long put.
• Writing Synthetic Call (Covered Put) is short stock and short put.


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