Strategies

Strategies - Equity Options

Butterfly

Options are used both for hedging and for earning income. Strategies are combinations of options based on expectations of future movements of the underlying (spot), and volatilities. Risk, as for all capital markets instruments, always remains but the extent can be managed either through caps or through selling/buying back the option during the option’s life (to expiry).

Strategies can be used to build structured notes as in the costless collar.

In the following, for each of the strategies, the structure, the participant’s view and the maximum/minimum gains are listed. (fees which may or may not be required by the broker are not shown). Expiry dates are the same for all strategies. ATM = At-the-money, OTM=out-of-the-money.

Strategy	Structure	Equity View	Volatility View	Max Loss	Max Gain
1.Bull Call Spread	Buy a lower strike call and sell a higher strike call.	long	neutral	Net premium paid	higher strike less lower strike less net premium paid
2.Bull Put Spread	Buy a lower strike put and sell a higher strike put	long	neutral	Higher strike less lower strike plus net premium received	Net premium received
3.Bear Call Spread	Sell a lower strike call and buy a higher strike call	short	neutral	Higher strike less lower strike plus net premium received	Net premium received
4.Bear Put Spread	Sell a lower strike put and buy a higher strike put	short	neutral	Net premium paid	higher strike less lower strike less net premium paid
5.Long Strangle	Buy an OTM call and Buy an OTM put	neutral	Long	Net premium paid	Unlimited
6.Short Strangle	Sell an OTM call and sell an OTM put	neutral	Short	Unlimited	Net premium received
7.Long Straddle	Buy a call and buy a put at same strikes	neutral	Long	Net premium paid	Unlimited
8.Short Straddle	Sell a call and sell a put at same strikes	neutral	short	Unlimited	Net premium received
9.Negative Risk Reversal	Sell OTM call and buy OTM put	short	neutral	Unlimited	Put strike less net premium paid
10.Positive Risk Reversal	Buy OTM call and sell OTM Put	long	neutral	Put strike less net premium received	Unlimited
11.Long Call Butterfly Spread	Buy one ITM call, sell 2 ATM Calls, buy one OTM Call; strikes equidistant	neutral	Short	Net premium paid	1 ATM strike les OTM strike less net premium paid
12.Short Call Butterfly Spread	Sell one ITM call, buy 2 ATM Calls, sell one OTM Call; strikes equidistant	neutral	long	1 ATM strike less OTM strike less net premium received	Net premium received
13.Long Put Butterfly Spread	Buy one OTM Put, sell 2 ATM Puts, buy one ITM Put; strikes equidistant	neutral	short	Net premium paid	ITM strike less 1 ATM strike less net premium paid
14.Short Put Butterfly Spread	Sell one OTM put, buy 2 ATM Puts, sell one ITM Put; strikes equidistant	neutral	long	1 ATM strike less ITM strike less net premium received	Net premium received
15.Short Iron Condor	Buy one OTM Put, Sell one ATM put, Sell one OTM Call, Buy one OTM Call further above; strikes equidistant apart	neutral	short	Lower put strike less higher put strike, or, lower call strike less higher call strike; less net premium received	Net premium received
16.Long Iron Condor	Sell one OTM Put, Buy one ATM put, Buy one OTM Call, Sell one OTM Call further above; strikes equidistant apart	neutral	long	Net premium paid	Higher put strike less lower put strike, or, higher call strike less lower call strike; less net premium paid
17.Bullish Seagull	Buy a lower strike call and sell a higher strike call, Sell one OTM Put, zero premium	long	neutral	Put strike	Higher call strike less lower call strike
18.Bearish Seagull	Sell a lower strike put and buy a higher strike put, , Sell one OTM Call, zero premium	short	neutral	Unlimited	Higher put strike less lower put strike