Butterfly Spreads
A butterfly is a volatility bet that the trader can implement to protect against large fluctuations, or to gain on volatility.
Author Archives: Bavan Arumugam
Strangle Spread
A Strangle is a volatility bet where you simultaneously long a put at Strike Price 2 and long a put at Strike Price 1, betting the stock price will make a big movement in either direction. This is similar to a Straddle, but the trader shorts the stocks instead of buying them (but the profit is basically the same)
Straddle
Straddles an option strategy that profits with volatility. You simultaneously buy long a call at Strike Price 1 and long a put at Strike Price 1. This creates a triangular shaped payoff and profit graph where the reward is based on the volatility of the stock – you’ll make a profit if the stock’s price makes a BIG move in either direction, but take a loss if it doesn’t move much.
Collar Spreads
A bullish collar is a protection strategy where you simultaneously buy a call at strike price 1 and sell a put at strike price 2. This strategy is for investors who has a bullish perception on the underlying asset. We can also create a “bearish” collar by simultaneously buying a put at strike price 1 and selling a call at strike price 2.
Ratio Strategy
A ratio strategy is an option strategy that is created by having X amount of call options at Strike Price 1 and shorting Y amount of call options at Strike Price 2. This strategy is used when the investor thinks the price won’t move much, but they want to get a bigger profit based on a slight movement up or down.
Box Spreads
A box spread is an option strategy that is created by combining the components of the bull spread and the bear spread. In theory, a box spread should always have a zero profit and zero loss, but some investors use them if they see that current options prices aren’t fully “priced in”. In many cases, the commissions charged for the trades needed for this spread will be greater than the profit.
Bear Spread
A bear spread is a strategy where you simultaneously buy a call option at Strike Price 1 (some amount higher than the current market rate), and sell a call option at Strike Price 2 (some amount lower than the current market right). This is used if the trader thinks the price of the stock will go down, but not by much. It limits both the risk and reward.
Bull Spreads
A bull spread is a strategy where you simultaneously buy a long call at Strike Price 1, and sell a call for Strike Price 2 (some higher amount). Use this strategy if you think that a stock’s price will go up above your Point 1, but not as high as your Point 2.
Cap
A cap is an options protection strategy where you simultaneously have a short position on a stock and a long call for the same underlying asset. Adding a long call to your open position means that you have the right to cover your short at the strike price.
Floor
A floor is an options insurance strategy where you simultaneously have a long open position on a stock and a long put for the same underlying asset. Adding a long put to your open position means that if the stock’s price starts to fall, you still have the right to sell it off at the price specified by your option.