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Option Strategies

The document summarizes various option strategies including long calls, short calls, long puts, short puts, long straddles, and short straddles. For each strategy, it outlines the view, implementation, potential upside, downside risk, and comments. For example, a long call strategy is bullish and involves buying call options. Upside is unlimited while downside is limited to the premium paid.

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ROBIN SINGH
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436 views7 pages

Option Strategies

The document summarizes various option strategies including long calls, short calls, long puts, short puts, long straddles, and short straddles. For each strategy, it outlines the view, implementation, potential upside, downside risk, and comments. For example, a long call strategy is bullish and involves buying call options. Upside is unlimited while downside is limited to the premium paid.

Uploaded by

ROBIN SINGH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Long Call

• Strategy: Buy a Call Option


• Strategy View (Bullish):Investor thinks that the market will rise significantly in the short-term. .
• Strategy Implementation: Call options are bought with a strike price of a. The more bullish the investor is, the higher the strike price
should be.
• Upside Potential: Profit potential is unlimited and rises as the market rises.
• Downside Risk: Limited to the premium paid - incurred if the market at expiry is at, or below, the strike a
• Comment: If the market does little then the value of the position will decrease as the option time value falls.
Short Call
• Strategy: Sell a Call Option.
• Strategy View (Bearish):Investor is certain that the market will not rise and is unsure/unconcerned whether it will fall.
• Strategy Implementation: Call option is sold with a strike price of a. If the investor is very certain of his view then at-the-money
options should be sold, if less certain, then out-of-the-money ones should be sold.
• Upside Potential: Limited to the premium received - received if the market at expiry is at, or below, the option strike.
• Downside Risk: Unlimited. Losses on the position will worsen as the market rises. [If the investor likes the idea of the strategy, but
not the downside risk, they might be interested in a bear spread].
• Comment: If the market does little, and time passes, this helps as the short position gains when the time value erodes
Long put
• Strategy: Buy a Put Option
• Strategy View (Bearish):Investor thinks that the market will fall significantly in the short-term.
• Strategy Implementation: Put option is bought with a strike price of a. The more bearish the investor is, the lower the strike price
should be.
• Upside Potential: Profit potential is unlimited (well, not really unlimited of course as the market can not fall below zero).
• Downside Risk: Limited to the premium paid - incurred if at expiry the market is at or above the strike a.
• Comment: If the market does little then the value of the position will decrease as the option time value falls.
Short Put
• Strategy: Sell a Put Option
• Strategy View (Bullish):Investor is certain that the market will not go down, but unsure about whether it will rise.
• Strategy Implementation: Put options are sold with a strike price a. If an investor is very bullish, then in-the-money puts would be
sold
• Upside Potential: Profit potential is limited to the premium received. The more the option is in-the-money, the greater the
premium received.
• Downside Risk: Loss is almost unlimited ("almost"!). High risk strategy. Potential huge losses incurred if the market crashes.
• Comment: If the market does little, and time passes, this helps as the short position gains when the time value erodes.
Long Straddle
• Strategy: Buy a call option and a put option with the same strike prices.
• Strategy View (Neutral):Investor thinks that the market will be very volatile in the short-term.
• Strategy Implementation: Call option and put option are bought with the same strike price a - usually at-the-money.
• Upside Potential: Unlimited Breakeven Point at Expiry Lower point is the strike minus the two premiums paid, and the upper is the
strike plus the two premiums.
• Downside Risk: Limited to the two premiums paid. [If the investor would like to decrease the premium paid, a buy strangle might
be interesting]

• Comment: Position loses value with passage of time as time value decreases on options .
Short straddle
• Strategy: Sell a call option and put option with the same strike price.
• Strategy View (Neutral):Investor is certain that the market will not be very volatile (will neither go up nor down very much).
• Strategy Implementation: A call option and a put option are sold with the same strike price a.
• Upside Potential: Limited to the two premiums received - will be realized if market at expiry is exactly at the strike price level
• Downside Risk: Unlimited - should the market fall or rise greatly.
• Comment: If the market does little then the value of the position will benefit as the short positions gain when the option time value
falls.

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