INTRODUCTION TO OPTIONS STRATEGIES
TABLE OF CONTENTS
1. Option Investing Considerations
2. Risk / Reward Considerations
3. Directional Strategies
4. Bullish Strategies
5. Neutral Strategies
6. Bearish Strategies
7. Yield Enhancement Strategy
8. Protection Strategy
9. Risk Reversal Strategy
10. Summary
OPTION INVESTING CONSIDERATIONS
Success with Options Trading Depends on 5 Main Factors:
Direction (Bullish / Neutral / Bearish)
Magnitude (Strong View / Moderate View)
Time Horizon (Maturity / Time Decay of Options)
Volatility Prior to Expiration (Upward Trend / Downward Trend)
Personal Risk Tolerance (Risk Adverse / Risk Seeking)
RISK / REWARD CONSIDERATIONS

DIRECTIONAL STRATEGIES

The Above Table is Not Exhaustive. It Merely Provides the Most Commonly Used Strategies.
BULLISH STRATEGIES
Long Call
Buy ATM Call
Market View: Bullish
Benefits:
● Maximum Loss Limited
●  Unlimited Upside
●  Leverage
●  Volatility Increases
Considerations:
● Time Decay
● Volatile Stock Has a High Call Option Price
●  Breakeven Level Higher than Current Stock Price
●  Volatility Deceases

BULLISH STRATEGIES
Long Call Spread
Buy ATM Call & Sell OTM Call
Market View: Moderately Bullish
Benefits:
●  Maximum Loss
Limited
●  Lower Cost
●   Lower
Breakeven Level
than Call Option
●   Volatility
Increases
Considerations:
●   Time Decay
●  Upside Limited
●  Higher Breakeven Level than Current Stock Price
●  Volatility Decreases
BULLISH STRATEGIES
Example: ATM Call vs. ATM / 125% Call Spread
Underlying Stock Assumptions
Price: $100 Dividend: 0%
Volatility: 30% Interest Rate: 6%
Option Model Output
6 Months ATM European Call Price: $9.79
6 Months 125% Strike European Call Price: $2.25
ATM / 125% Call Spread Price = $9.79 - $2.25 = $7.54
BULLISH STRATEGIES
Example: ITM, ATM and OTM Call Options
Underlying Stock Assumptions
Price: $100 Dividend: 0%
Volatility: 30% Interest Rate: 6%
Option Model Output
6 Months 5% ITM European Call Price: $12.51
6 Months ATM European Call Price: $9.79
6 Months 5% OTM Eruopean Call Price: $7.53
BULLISH STRATEGIES
Short Put
Sell ATM Put
Market View: Moderately Bullish
Benefits:
●   Time Decay
●  Profitable Even if Stock Stays Unchanged
●   Volatility Decreases
Return
Stock Price
at Maturity
Return
Stock Price
at Maturity
Considerations:
●  Upside Limited
●  Loss Unlimited
●   Volatility Increases
NETUTRAL STRATEGIES
Short Straddle
Sell ATM Call / Sell ATM Put
Market View: Neutral
Benefits:
●  Profitable in Small Range
●   Time Decay
●   Volatility Decreases
Considerations:
●  Upside Limited
●   Loss Unlimited
●  Volatility Increases
NEUTRAL STRATEGIES
Short Strangle
Sell OTM Call / Sell OTM Put
Market View: Neutral
Benefits:
●  Profitable in Larger Ranger Compared with Straddle
●  Time Decay
●   Volatility Decreases
Return
Stock Price
at Maturity
Return
Stock Price at
Maturity
Considerations:
●  Upside Limited
●  Upside Less than a Straddle
●  Loss Unlimited
●  Volatility Increases
BEARISH STRATEGIES
Short Call
Sell ATM Call
Market View: Moderately Bearish
Benefits:
●   Time Decay
●  Profitable Even if Stock Stays Unchanged
●  Volatility Decreases
Considerations:
●   Upside Limited
●  Loss Unlimited
●  Volatility Increases
BEARISH STRATEGIES
Long Put
But ATM Put
Market View: Bearish
Benefits:
●   Maximum Loss Limited
●   Leverage
Return
Stock Price at
Maturity
Return
Stock Price
at Maturity
●   High Potential Return
●   Volatility Increases
Considerations:
●   Time Decay
●  Volatile Stock Has High Put Option
Price
●  Breakeven Higher than Short Stock
●   Volatility Decreases
YIELD ENHANCHEMENT STRATEGY
“Over-Write” Strategy
Sell Call Against Long Stock Position
Objective:
Enhance Return on a Stock Given a Neutral to Slightly Bullish View
Benefits:
●  Maintains Current Ownership of Stock
●   Collects Option Premium
●  Enhances Return if Investor View is Correct
Considerations:
●  Upside Limited – Stock “Called Away” if Closes Above Strike
●   Similar Downside Risk as Stock
Return
Stock Price
at Maturity
PROTECTION STRATEGY
Protective Put
Buy Put Against Long Stock Position
Objective:
Protect Against Downside Risk of a Stock Position
Benefits:
●   Maintains Ownership of Stock
●   Participates Fully on Stock Gain
●  “Peace of Mind” if Stock Goes
Down
Considerations:
●  Pays Option Premium
●   Time Decay
●   Volatile Stock Has a High Put Option Price
Risk Reversal Strategy
Risk Reversal
“Over-Write” + Protected Put
Objective:
Reduce Downside Risk and Upside Exposure of a Stock Position
Benefits:
●   Maintains Current Ownership of Stock
●  “Peace of Mind” if Stock Goes Down
●   Pays Little or No Option Premium
Considerations:
●  Some Time Decay if Pay Option Premium
●  Upside Limited – Stock “Called Away” if Closes Above Strike
Return
Stock Price at
Maturity
SUMMARY
●  Success with Options Trading Depends on an Investor’s View on: Market Direction and its Magnitude,
Time Horizon, Volatility, and Personal Risk / Reward Tradeoff.
●  The Decision to Buy or Sell, and the Optimal Option Strategy to Employ, Must Coincide with the
Investor’s View.
●   Other Factors that Need to be Considered Include the Maturity and the Strike Price of the Option.

 

2010年05月07日

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