5 - Option Strategies

Question 1

What is a trading strategy?

Answer 1

Is a portfolio of positions with reference to an underlying asset that will comprise one or more of the following elements:
» Positions in the Underlying Asset itself
» Options positions on the Underlying Asset
» Cash (risk-free investment)

Question 2

What are the two principal types of spreads?

Answer 2

1. Vertical Spreads
   Have different Strike Prices but the same Maturity
2. Horizontal (Calendar) Spreads
   Have different Maturity dates but the same Strike Prices

Question 3

What is a spread?

Answer 3

Is a portfolio of either PUT Options or call Options. Spreads do not require/involve purchasing the Underlying

Question 4

Name 3 simple (vanilla) types of vertical spreads

Answer 4

» Bull Spreads
» Bear Spreads
» Butterfly Spreads

Question 5

Does the long put or short put have a lower strike price?

Answer 5

The long put has a lower strike price

Question 6

What are butterfly spreads?

Answer 6

Butterfly spreads (Calls) involve the use of Calls with three
different strike prices for which : K1 < K2 < K3
» K1 and K3 these are the wings of the spread
» If K1 → K2 = K2 → K3 This is known as a “Symmetric”
case. For a symmetric butterfly
the strike prices can be anything
as long as K1 < K2 < K3 and the
price differences are even

Question 7

What is k2?

Answer 7

This is the ‘body’ of the spread
and comprises two Short Call
trades at a strike price of K2

Question 8

What is k1 and k3?

Answer 8

These are the wings of the spread
and comprise two long Call trades,
one at K1 and one at K3

Question 9

What are condor spreads?

Answer 9

K1 < K2 < K3 < K4
» K1 and K4 These are the wings of the
spread
» K1 → K2 This represents the spread of
prices at which the maximal
return will be attained for this
trading strategy.
Condor spreads do not need to be symmetric