3. Equity Options Flashcards
Debit Spreads
Long 1 ABC June 40 Call @ 4-
Short 1 ABC June 50 Call @ 2+ = a Net Debit of -2
Profit from the Debit Spreads comes when I Widen by more than the Original Debit.
Debit Spread Notes:
- Maximum loss potential is the NET DEBIT IN THE PREMIUMS, if the options expire.
- Maximum profit potential is the DIFFERENCE BETWEEN the two strike prices minus the net debit.
- Debit spreads must WIDEN by more than the net debit to be profitable.
Equity Option Defined
If you were to: and the option is EXERCISED, you will:
- BUY A CALL > BUY the stock.
- SELL A CALL > SELL the stock.
- BUY A PUT > SELL the stock.
- SELL A PUT > BUY the stock
Credit Spread Facts
- Maximum profit potential is the NET CREDIT IN THE PREMIUMS, if the options expire.
- Maximum loss potential is the DIFFERENCE BETWEEN the two strike pries less the net credit in the premiums.
- Credit spreads must NARROW or expire to be profitable.
Spread Option
A Long and Short position in two Call Contracts
Different expiration months and/or different striking prices
Three Spread types
1) Calendar/Horizontal/Time Spread (different expiration months)
2) Vertical Spread (different striking prices
Bull Spread - Buy w/lower striking price, Sell w/higher striking price
Bear Spread - Buy w/higher striking price & Sell w/lower striking px
3) Diagonal Spread (different exercise prices AND different expiration months
Debit Spread
Long 1 ABC June 40 Call @ 4-
Short 1 ABC June 50 Call @ 2+ = a Net Debit of -2
Profit from the Debit Spreads comes when I Widen by more than the Original Debit.
Options Straddle
Straddle writers don’t know if the market will rise or fall, they are straddling the fence)
Equal number of PUTS and CALLS, both long or both short on the same stock, with same expiration month, same exercise price.
Long 1 ABC June 40 Call @ 5 and
Long 1 ABC June 40 Put @ 4
