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Options Trading Strategies

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/ of the time! they move sideways the other "/ .

BULLISH Market Strategies


Option Spread Strategy
#uy a $all %ell a *ut

Description

Reason to se

!"en to se
(ndervalued option with volatility in)reasin&.

%tron&est 'ullish option Loss limited to position. premium paid. +eutral 'ullish option position.

*rofit limited to ,i&h volatility- 'ullish premium re)eived. trendin& market. %mall de'it- 'ullish market.

#uy .erti)al #ull #uy $all / sell $all of Loss limited to $all %pread hi&her strike pri)e. de'it. %ell .erti)al #ear %ell *ut / 'uy *ut of *ut %pread lower strike pri)e.

Loss limited to strike pri)e Lar&e )redit- 'ullish differen)e less market. premium re)eived.

B#$RISH Market Strategies


Option Spread Strategy
#uy a *ut %ell a $all

Description

Reason to se

!"en to se
(ndervalued option with in)reasin& volatility. Option overvaluedmarket flat to 'earish. %mall de'it- 'earish market.

%tron&est 'earish option Loss limited to position. premium paid. +eutral 'earish option position. *rofit limited to premium re)eived.

#uy .erti)al #uy at the money *ut / Loss limited to de'it. #ear *ut %pread sell out of the money *ut. %ell .erti)al %ell $all / 'uy $all of #ull $all %pread hi&her strike pri)e.

Loss limited to strike Lar&e )redit- 'earish pri)e differen)e minus market. )redit.

%#UTR$L Market Strategies

Option Spread Strategy


%tran&le Ar'itra&e $alendar

Description

Reason to se

!"en to se
Tradin& ran&e market with volatility peakin&.

Maximum use %ell out of the money *ut / $all. of time value de)ay. #uy / sell similar options simultaneously. %ell near month- 'uy far monthsame strike pri)e. #uy at the money $all 0*ut1 / sell " out of the money $alls0*uts1 / 'uy out of the money $all 0*ut1. %ell in the money *ut / $all. %ell $alls / *uts same strike pri)e. #uy $all / sell $alls of hi&her strike pri)e.

*rofit )ertain if Any time )redit done at )redit. re)eived. +ear month time value de)ays faster. %mall de'it- tradin& ran&e market.

#utterfly

*rofit )ertain if Any time )redit done at )redit. re)eived. 3e)eive lar&e premium. Options have time premium / market in tradin& ran&e.

2uts #ox

*rofit )ertain if Any time )redit done at )redit. re)eived. Lar&e )redit / +eutral- sli&htly differen)e 'etween 'ullish. strike pri)e of option 'ou&ht / sold.

3atio $all

$onversion

#uy futures / 'uy at the money *rofit )ertain if Any time )redit *ut / sell out of the money $all. done at )redit. re)eived.

Specia& Market Sit ations

Option Spread Strategy

Description

Reason to se

!"en to se

%traddle *ur)hase #uy *ut / $all. $overed $all $overed *ut #uy future / sell $all. %ell future / sell *ut.

Options will lose time Options under-valued / value premium market likely to make a 'i& 4ui)kly. move. $olle)t premium on $alls sold. $olle)t premium of *uts sold. +eutral- sli&htly trendin& market. +eutral to sli&htly 'ullish. +eutral to sli&htly 'earish. 3e)eive )redit- option sold far out of the money.

%yntheti) futures #uy $all 0*ut1 / position. %ell *ut 0$all1.

'( Option Trading Strategies

$all 'a)kspread

Lon& *ut spread or 'ear spread %hort )om'o 0volatility down1

$all ratio spread

Lon& semi-futures 0volatility up1 Lon& semi-futures 0volatility down1 Lon& straddle Lon& stran&le Lon& &ut stran&le Lon& $all syntheti) Lon& $all semi-futures syntheti) 0volatility up1 Lon& $all semi-futures syntheti) 0volatility down1 Lon& *ut syntheti) Lon& *ut semi-futures syntheti) 0volatility up1 Lon& *ut semi-futures syntheti) 0volatility down1 Lon& underlyin&

%hort )ondor $all

Lon& $all al'atross Lon& &ut iron al'atross Lon& iron al'atross Lon& al'atross *ut Lon& 'utterflies $all Lon& 'utterflies &ut iron

%hort )ondor &ut iron %hort )ondor iron %hort )ondor *ut %hort fen)e 0volatility up1 %hort fen)e 0volatility down1 %hort $all

Lon& 'utterflies iron Lon& 'utterflies *ut Lon& $all )hristmas tree Lon& $all spread or 'ull spread 0volatility up1 Lon& $all spread or 'ull spread 0volatility down1 Lon& )om'o Lon& $all )ondor Lon& &ut iron )ondor

%hort *ut %hort *ut )hristmas tree %hort *ut spread or 'ull spread 0volatility up1 %hort *ut spread or 'ull spread 0volatility down1 %hort semi-futures 0volatility down1 %hort semi-futures 0volatility up1 %hort straddle %hort stran&le

*ut 'a)kspread *ut ratio spread %hort $all al'atross

Lon& iron )ondor Lon& )ondor *ut Lon& fen)e 0volatility up1 Lon& fen)e 0volatility down1 Lon& $all

%hort &ut iron al'atross %hort iron al'atross %hort *ut al'atross

%hort &ut stran&le %hort $all syntheti) %hort $all semi-futures syntheti) 0volatility up1 %hort $all semi-futures syntheti) 0volatility down1 %hort *ut semi-futures syntheti) 0volatility up1 %hort *ut semi-futures syntheti) 0volatility down1 %hort *ut syntheti) %hort underlyin&

%hort $all 'utterflies

%hort &ut iron 'utterflies

Lon& *ut Lon& *ut )hristmas tree Lon& *ut spread or 'ear spread 0volatility up1 Lon& *ut spread or 'ear spread 0volatility down1 Lon& semi-futures 0volatility up1

%hort iron 'utterflies %hort *ut 'utterflies %hort $all )hristmas tree %hort $all spread or 'ear spread 0volatility up1 %hort $all spread or 'ear spread 0volatility down1