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Long Straddle how Buy a put (A), buy call at same strike. when Market neutral/volatility bullish. With the underlying at A and an unknown directional move or increase in volatility is anticipated. Profit Unlimited for an increase or decrease in the underlying. Loss Limited to the premium paid in establishing the position. Will be greatest if the underlying is at strike A, at expiry. Even Reached if the underlying rises or falls from strike A by the same amount as the premium cost of establishing the position. Long Strangle how Buy a put (A), buy a call at higher strike (B). when Market neutral/volatility bullish. The holder expects a major movement in the market but is unsure as to its direction. A larger directional move is needed than a straddle in order to yield a profit but if the market stagnates, losses will be less. Profit The profit potential is unlimited although a substantial directional movement is necessary to yield a profit for both a rise or fall in the underlying. Loss Occurs if the market is static; limited to the premium paid in establishing the position. Even Occurs if the market rises above the higher strike price at B by an amount equal to the cost of establishing the position, or if the market falls below the lower strike price at A by the amount equal to the cost of establishing the position. Long Guts how Buy a call (A), buy put at higher strike (B). when Market neutral/volatility bullish. The market is at, or about the A-B range and a large directional move in the underlying is anticipated. Position has characteristics comparable to an in-the-money strangle. Profit Unlimited in a rising or falling market. A substantial directional movement is required however. Loss Limited to the initial premium paid less the difference between A and B; occurs if the underlying remains within the range A-B. Even Reached if the underlying rises above the higher strike price B by the amount equal to the cost of establishing the position less A-B, or if the underlying falls below the lower strike price A by the amount equal to the cost of establishing the position less A-B. Long Butterfly how Buy put (or call) A, sell two puts (or calls) at higher strike B, buy put (or call) at an even higher strike C. when Direction neutral/volatility bearish. In this case, the holder expects the underlying to remain around strike B, or it is felt that there will be a fall in implied volatility. Position is less risky than selling straddles or strangles as there is a limited downside exposure. Profit Maximum profit limited to the difference in strikes between A and B minus the net cost of establishing the position. Maximised at mid strike B (assuming A-B and B-C are equal). Loss Maximum loss limited to the net cost of the position for either a rise or a fall in the underlying. Even Reached when the underlying is higher than A or lower than C by the cost of establishing the position. Long Condor how Buy put (call) at A; sell put (call) at two higher strikes B, C; buy put (call) at yet higher strike D. when Direction neutral/volatility bearish. A Long Condor allows for a greater degree of volatility and hence a wider band of profit potential than a Long Butterfly. Profit Maximised where the underlying settles between the two strike prices B and C, but will decline as the market rises, or falls beyond these strikes. Loss Occurs if the underlying rises towards strike D or falls towards strike A. Will be limited to the cost of establishing the position for either a rise or a fall in the underlying. Even Lower break-even point reached when underlying reaches the lower strike price A plus the cost of establishing the spread, and the higher break-even when the underlying reaches the level of the higher strike D minus the cost of establishing the spread. Long Iron Butterfly how Buy Straddle, sell Strangle with strike prices above and below the strike price of the Straddle, i.e. Sell a put (A), buy a put and a call at higher strike (B), sell a call at an even higher strike (C). when Direction neutral/volatility bullish. Holder expects a market move in either direction. The position will also benefit from an increase in volatility. Profit Limited; maximised where the underlying rises to strike C or falls to strike A. Loss Limited to the net debit in establishing the position, greatest if underlying is at B. Even Reached when underlying is above or below strike price B by the same amount as the initial debit. Long Iron Condor how Buy strangle, sell strangle with strike prices outside those of the bought strangle, i.e. sell a put (A), buy a put at higher strike (B), buy a call at even higher strike (C), sell a call at even higher strike (D) when Direction neutral/volatility bullish. Holder expects the market to move significantly, or volatility to rise, but the direction is uncertain. A Long Iron Condor will require a larger directional movement than an Iron Butterfly in order to yield a profit. Profit Limited and will occur if the market moves to or above the highest strike (D) or to or below the lowest strike (A). Loss Maximum losses are limited and will occur if the market remains at or between the strikes B and C. Even Lower break-even reached when underlying falls below strike price B by the amount of the premium paid. Upper break-even reached when underlying rises above strike price C by the amount of premium paid. Long Volatility Trade how Buy puts and buy underlying or buy calls and sell underlying to give zero net delta. The position is dynamic in that as the underlying moves and the delta changes, additional futures must be bought or sold to maintain delta neutrality. For stock contingent trades, the underlying leg will comprise the underlying shares rather than the futures contract. when Market neutral/volatility bullish. This position is a pure trade on volatility such that an increase in implied volatility will benefit the holder. Profit Dependent on an increase in implied volatility as well as any profits from the future hedge and hedge rebalancing. Loss Limited to the costs of establishing the position plus any loss in rebalancing the hedge. Even (i) For a long put, long futures position, if the price of the underlying increases, break-even is obtained where the gain in the value of the futures position (less the initial premium and less the rebalancing cost) is equal to zero. If price falls, break-even is obtained where the loss on the futures position (less the intrinsic value of the put, plus/minus the rebalancing cost) is equal to zero. (ii) For a long call, short futures position, if the underlying price increases, break-even is obtained where the gain in the call (less the loss in the future, plus/minus the rebalancing cost) is equal to zero. If price falls, break-even is obtained where the gain on the futures (minus the loss on the call, plus/minus the re-balancing cost) is equal to zero. Conversion/Reversal how Conversion: Sell call, buy put at same strike, buy underlying. Reversal: Buy call, sell put at same strike, sell underlying. when Direction neutral/volatility neutral. A Conversion or Reversal is a 'locked trade' and hence its value is wholly independent of the price of the underlying. The options position in a Conversion will create a synthetic short underlying and potential profit/loss will result from any pricing differential between this and the long underlying position. The options position within a Reversal will create a synthetic long underlying and so profit/loss realised will be fixed to the difference between the price of the short underlying and the long synthetic underlying. Profit If the pricing differential can be exploited, a profit will occur. The extent of the mis-pricing between the underlying and synthetic underlying positions will translate into the level of profit realised. Loss N/A Even N/A Short Straddle how Sell a put (A), sell call at same strike. when Market neutral/volatility bearish. With the underlying at A and a period of low or decreasing volatility is anticipated, and the underlying is not expected to move dramatically. Profit Limited to the credit received from establishing the position. Highest if the market settles at A. Loss Unlimited for both an increase or decrease in the underlying. Even Reached if the underlying rises or falls from strike A by the same amount as the premium received from establishing the position. Short Strangle how Sell a put (A), sell call at higher strike (B). when Direction neutral/volatility bearish. The holder expects low volatility and no major directional move. More cautious than a straddle as profit potential spans a larger range although maximum potential profits will be lower. Profit Limited to the premium received. Will be highest if the underlying remains within the market level A-B. Loss Unlimited for a sharp move in the underlying in either direction. Even reached if the underlying falls below strike A or rises above strike B by the same amount as the premium received in establishing the position. Short Guts how Sell a call (A), sell a put at higher strike (B). when Direction neutral/volatility bearish. In this case the underlying is at, or about the A-B range and is expected to remain within this band. Profit Limited to the net premium received less the difference between A and B; occurs if the underlying remains within the range A-B. Loss Unlimited in a rising or falling market. A substantial directional movement is required however. Even Reached if the underlying falls below the lower strike price A by the amount equal to the premium received from establishing the position less A-B, or if the underlying rises above strike price B by the amount equal to the premium received from establishing the position less A-B. Short Butterfly how Sell put (or call) A, buy two puts (or calls) B, sell put (or call) C. when Market neutral/volatility bullish. In this case the holder expects a directional move in the underlying, or a rise in implied volatility. Profit Maximum profit is the net credit received in establishing the position and will occur if there is a sufficient directional move of the underlying, in either direction. Loss Limited to the difference in strikes between A and B, minus the net credit in establishing the position. Even Reached when the underlying is higher than A or lower than C by the credit received from establishing the position. Short Condor how Sell put (call) at A; buy put (call) at two higher strikes B, C; sell put (call) at yet higher strike D. when Direction neutral/volatility bullish. Holder expects the market to move significantly, or volatility to rise, but the direction is uncertain. A Short Condor will require a larger directional move than a butterfly in order to yield a profit. Profit Limited and will occur if the market moves above the highest strike (D) or below the lower strike at A. Loss Maximum losses are limited and will occur if the market remains between the exercise prices B and C. Even Lower break even reached when underlying reaches the lower strike price A plus the net credit received from establishing the position, and the higher breakeven when the underlying reaches the level of the higher strike price D minus the credit received from establishing the position. Short Iron Butterfly how Sell Straddle, buy Strangle with strike prices above and below the strike price of the Straddle, i.e. Buy put (A), sell put and call at higher strike (B), buy call at equally higher strike (C). when Direction neutral/volatility bearish. If the underlying is at, or about strike B and is expected to remain at this level, or it is felt that volatility will fall. Profit Limited to the net credit in establishing the position. Maximised when the underlying is at B. Loss Limited loss occurs if there is a directional move in the market. Maximised at the lower strike A, and the higher strike C. Even Reached when underlying is above or below strike price B by the same amount as the net credit in establishing the position. Short Iron Condor how Sell strangle, buy strangle with strike prices outside those of the sold strangle, i.e. buy a put (A), sell a put at higher strike (B), sell a call at even higher strike (C), buy a call a even higher strike (D). when Direction neutral/volatility bearish. A Short Iron Condor allows for a greater degree of volatility and hence a wider band of profit potential than a Short Iron Butterfly. Profit Maximised where the underlying remains at or within the exercise prices B and C, but will decline as the market rises or falls beyond these strikes. Will be limited to the net premium received for the trade. Loss Losses are limited, and will occur if the underlying rises to or above strike D or falls to or below strike A. Even Lower break-even reached when underlying falls below strike price B by the amount of the premium received. Upper break-even reached when underlying rises above strike price C by the amount of premium received. Short Call Strip how Sell call at strike A, sell calls at higher strike prices. Between 3 and 8 strikes may be used in total, with one call option sold at each. In the graph above, a 4-option strip is shown. All call options must be for the same expiry month. when Direction neutral or bearish/volatility bearish. Profit Limited to the initial premium received. Loss Unlimited in a rising market. Even There will be a single break-even position, but the position in relation to the strikes will depend on the strike prices involved and the premium paid. Short Put Strip how Sell put at strike A, sell puts at lower strike prices. Between 3 and 8 strikes may be used in total, with one put option sold at each. In the graph above, a 4-option strip is shown. All put options must be for the same expiry month. when Direction neutral or bullish/volatility bearish. Profit Limited to the initial premium received. Loss Unlimited in a falling market. Even There will be a single break-even position, but the position in relation to the strikes will depend on the strike prices involved and the premium paid. Short Two by One Ratio Call Spread how Buy a call (A), sell 2 calls at higher strike (B). when Market neutral/volatility bearish. Holder expects that the market will not rally but will settle around point B. Position usually established by buying an at or close to-the-money call, and selling two out-of-the-money calls such that although it is a net short position, it may be established at a small cost (as in the above example). Depending on the strikes chosen, the position could also be established at break-even or at a small credit. Profit Greatest profit occurs at higher strike B which is the difference between strikes B-A plus (minus) net credit (debit). Loss Unlimited if underlying rallies. At A or below, loss limited to net cost. Even Lower break-even reached when the underlying exceeds the lower strike option A, by the same amount as the net cost of the position (if initial position established at a net credit, there is no lower break-even point). Higher break-even point reached when intrinsic value of option A, plus (minus) the net credit (debit) from establishing the position, is equal to the combined intrinsic value of the two higher strike options B. Short Two by One Ratio Put Spread how Buy a put (B), sell two puts at lower strike (A). when Market neutral/volatility bearish. Holder expects market to settle around strike A, and feels that the market will not fall below A. Usually established by buying an at -the-money or close-to at-the-money put (B) and selling two out-of-the-money puts (A) such that it is established at a small cost. Depending on the strikes chosen, the position could also be established at break-even or at a small premium credit. Profit Greatest at A, it is the difference between strikes A-B plus (minus) net credit (debit). Loss Unlimited in a falling market. At B or above, loss limited to net cost. Even Lower break-even point is reached when the combined intrinsic value of the options at A equals the intrinsic value of option B, plus (minus) the net credit (debit) from establishing the position. Higher break-even point reached when intrinsic value of option B, is equal to the debit from establishing the position. Short Straddle versus Call how Sell call (A), sell put at same strike (A), buy call at any strike (B) - the long call will generally be at a higher strike than the straddle. The profile is similar to that of a short straddle, but loss in a rising market is limited by the long call. when Market neutral/volatility bearish. Profit Limited in a static market. Loss Limited in a rising market. Unlimited in a falling market. Even Reached when underlying moves in either direction from A by the amount of premium received. Short Straddle versus Put how Sell call (B), sell put at same strike, buy put at any strike (A) generally the long put will be at a strike lower than the straddle (A). This spread offers similar exposure to the short straddle, but the long put limits risk in a falling market. when Market neutral/volatility bearish. Profit Limited in a static market. Loss Limited in a falling market. Unlimited in a rising market. Even Reached when the underlying moves in either direction from B by the amount of premium received. Short Volatility Trade how Sell puts and sell underlying or sell calls and buy underlying to give zero net delta. The position is dynamic in that as the underlying moves and the delta changes, additional futures must be bought or sold to maintain delta neutrality. For stock contingent trades, the underlying leg will comprise the underlying shares rather than the futures contract. when Market neutral/volatility bearish. The position is a trade on volatility such that a decrease in implied volatility will benefit the holder. Profit Limited to the credit received from the sold options and any profit on rebalancing the hedge. Loss The more implied volatility rises, the greater will be the potential losses. Even (i) For a short put, short futures position, if the underlying price increases, break-even is obtained where the initial premium on the put, minus the loss on the futures, plus/minus the rebalancing cost, is equal to zero. If price falls, the gain on the futures position, minus the loss on the put, plus/minus the rebalancing cost is equal to zero. (ii) For a short call, long futures position, if the underlying price rises, break-even is obtained where the gain on the futures, minus the loss on the call, plus/minus the rebalancing cost, is equal to zero. If price falls, break-even is obtained where the call premium, minus the loss on the futures, plus/minus the rebalancing cost, is equal to zero. Long Straddle Calendar Spread not plottable how Sell Straddle in near month, buy Straddle in far month at same strike. when The near Straddle decays faster than the longer dated Straddle. The trade benefits from an increase in volatility. Profit The potential profit in this trade arises as a result of the differing rates of time decay between the two straddles. Maximum profit will be realised if the sold straddle expires worthless and after this expiry, increased volatility or a directional move increases the value of the purchased straddle. Maximum loss will occur if the sold straddle is exercised and reduced volatility subsequently occurs, driving the purchased straddle into loss. Long Jelly Roll not plottable how Buy put, sell call at same strike price in near expiry month, sell put, buy call at same strike in far expiry month (the strike price in the far expiry need not be equal to the strike price in the near expiry). when Direction neutral/volatility neutral. This trade consists of a short synthetic underlying in the near month and a long synthetic underlying in the far month. The holder will benefit if the differential between the futures prices of the two expiries (or the cost of carry differential in the case of premium up front options) widens. Profit The potential profit of this trade is restricted as it arises from a widening of the futures price differential of the expiry months in question. After the expiry of the near term options, the holder is left with a long synthetic underlying position. The holder will therefore benefit from a rising market after the first expiry, and will be adversely affected by a falling market after the first expiry. Long Box not plottable how Buy a call and sell a put, buy a put and sell a call and at a higher strike. All four options should have the same expiry date. when Direction neutral/volatility neutral. This is a 'locked trade', and hence its value is wholly independent of the price of the underlying. Where the synthetic long underlying price at one strike is trading at a lower price than the synthetic short underlying at the higher strike, such that the differential may be exploited. Profit If the pricing differential can be exploited, a profit will occur, the extent of the mis-pricing translating into the level of profit realised. The Box is regularly used by traders to close out positions near expiry. Generally traded at par (zero) for options on futures, and at the net cost of carry for index and equity options. Can be problematic if all positions are not closed out at exactly the same time. Long Calendar Spread not plottable how Sell near put (call), buy far put (call) at same strike. when Direction neutral/volatility bullish. The near term option decays faster than the longer dated option, therefore the trade benefits from an increase in volatility. Long Straddle Strip not plottable how Buy between two and four straddles. Each straddle must be in a separate expiry month. This strategy is not available for individual equity options or commodity options. when A long straddle strip gives the holder an increased exposure to an increase in volatility. Long Diagonal Straddle Calendar Spread not plottable how Sell Straddle in near month, buy Straddle in far month at different strike. when Profit from time decay differential, benefit from an increase in volatility, and/or benefit from a directional movement in the underlying (as the position involves straddles of different strikes, it is suitable for a directional view). Long Diagonal Calendar Spread not plottable how Sell near put (call), buy far put (call) at a different strike. when Expected to profit from time-decay differential and an increase in volatility. In addition, the position is suitable for a directional view on the underlying, e.g. sell Sep 99.00 call and buy Dec 101.00 call, giving a reduced cost calendar spread trade. The profitability of the trade depends upon the differing time decay characteristics of the near, sold put (call) and the far, purchased put (call). The difference between this trade and that of a Calendar spread is that a diagonal spread involves options with different strike prices. As with a Calendar spread, the maximum loss will occur if the near, sold call (put) moves in-the-money and is exercised, followed by a fall (rise) in the market rendering the purchased call (put) worthless on expiry.

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