Options strategies

Question 0

Long Put

Answer 0

Buying the right to Sell

Only way to safely short a stock with high short interest.

Losses limited to premium paid for the option but benefit from falling price.

Question 1

Long Call

Answer 1

Buying the right to Buy

Limits capital at risk to premium paid for option

Question 2

Short Call (Call writing)

Answer 2

Selling the right to Buy.
Unlimited downside if price rises.
Gains capped to premium received.

Question 3

Short a Put (Put writing)

Answer 3

Selling the right to sell (you have to buy)

1) Used to generate income (premium)
2) Used to get long a stock at a lower than current price & save money by getting a premium on the way in.

Question 4

Long a Call Spread (vertical spread)

Answer 4

Buy lower strike Call & Sell higher strike Call

Buy lower strike where analysis says your trigger should be.
Sell strike price at resistance
OR at a point to reduce cost to an acceptable level.

Question 5

Long a Put Spread (vertical spread)

Answer 5

Buy higher strike Put & Sell lower strike Put

Buy higher strike where analysis says your trigger should be.
Sell strike price at resistance
OR at a point to reduce cost to an acceptable level.

Question 6

Short a Call Spread

Answer 6

Sell a lower strike Call & Buy a higher strike Call

Maximum gain is the profit difference of the 2 transactions.
Losses capped at difference between spreads less the premium paid.

Question 7

Short a Put Spread

Answer 7

Sell a higher strike Put & Buy a lower strike Put.

Maximum gain is the profit difference of the 2 transactions.
Losses capped at difference between spreads less the premium paid.

Question 8

Long a Ratio Call Spread

Answer 8

Similar to Long a Call Spread but x2 (or more) of higher strike Calls.

Can be constructed for zero cash.
If already own the stock double the upside, no additional risk, but capped gains.

Question 9

Long a Ratio Put Spread

Answer 9

Similar to long a Put Spread but Sell x2 (or more) lower strike Puts.

Used to make the entry point cheaper or as a possible entry point to own the stock at lower than current price.

If price falls below the lower strike you will be Put the stock.
So you will be Buying above current market price but below where the price was when you sold the option.

Question 10

Long a Calendar

Answer 10

Short the front month & Long the back month. (Same Strike).

Buying time
Think stock will rise but not too fast.
Lowers cost of buying an outer month Call.
Perfect scenario - strike closes just under Short at expiry, leaving time value on the long, can then either
Sell long call for a profit or
Hold looking for price appreciation.

Question 11

Short a Calendar

Answer 11

Long the front month & Short the back month. (Same Strike).

Generates a credit, but gives protection against big price move.
Short Put Calendar most useful tool on the Short side!

Question 12

Long a Diagonal

Answer 12

Calendar with differing Strikes.

Long = sell a lower near month Call, buy a higher far month Call.

Question 13

Short a Diagonal

Answer 13

Calendar with differing Strikes.

Short = Sell a higher near month Put, buy a lower far month Put.

Question 14

Long or Short a Butterfly

Answer 14

Three different Strikes equidistant from each other 190/200/210

Long Call = Buy outer Calls (190 & 210) & Sell 2 x middle Calls (200).

Long Put = Buying outer Puts & Selling 2x middle Puts.

Question 15

Long or Short a Straddle

Answer 15

Buy Long & Short at same price

Used if think may be a big move but not sure which direction.
Set up costs twice as much as just doing a Long or Short

Question 16

Long or Short a Strangle

Answer 16

Put & Call at different Strikes but same expiry.

Same effect as a double Calendar or double Diagonal.
Generated income if price keeps within certain bounds.

Question 17

Long an Iron Condor

Answer 17

Buy Call spread and Put Spread for same expiry.

Question 18

Long a Risk Reversal

Answer 18

Buy Call & Sell Put, usually for same expiry.