============= Debit Spreads - Vertical Spreads ============= Bear Put Spread - You Expect a Fall in Stock Value Bear put spreads are made by purchasing one long call and writing one long call, - one long put (buying one long put) - one short put (selling one short put) at different strike prices but with the same expiration date ensuring the strike of the put you sell is below the strike price of the put you buy Maximum profit Potential profit is limited to the difference between the strike prices minus the net cost of the spread including commissions Maximum risk The maximum risk is equal to the cost of the spread including commissions. A loss of this amount is realized if the position is held to expiration and both puts expire worthless. Both puts will expire worthless if the stock price at expiration is above the strike price of the long put (higher strike). Potential position created at expiration - There are three possible outcomes at expiration. - If the stock price is at or above the higher strike price, then both puts in a bear put spread expire worthless and no stock position is created. - MAX LOSS - If the stock price is below the higher strike price but not below the lower strike price, then the long put is exercised and a short stock position is created. - NEUTRAL/GAIN/LOSS* (depends highly on the spread purchased and the current price) - If the stock price is below the lower strike price, then the long put is exercised and the short put is assigned. The result is that stock is sold at the higher strike price and purchased at the lower strike price and no stock position is created. - MAX GAIN Use this tool to calculate the maximum loss and gain: https://www.optionsprofitcalculator.com/calculator/put-spread.html Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bea r-put-spread#:~:text=A%20bear%20put%20spread%20consists,underlying%20stock%20decline s%20in%20price. https://www.investopedia.com/terms/b/bearputspread.asp Bull Call Spread - You Expect a Rise in Stock Value Bull call spreads are made by purchasing one long call and writing one long call, - one long call (buying one long call) - one short call (selling one short call) at different strike prices but with the same expiration date ensuring the strike of the call you sell is above the strike price of the call you buy Maximum profit Potential profit is limited to the difference between the strike prices minus the net cost of the spread including commissions. Maximum risk The maximum risk is equal to the cost of the spread including commissions. A loss of this amount is realized if the position is held to expiration and both calls expire worthless. Both calls will expire worthless if the stock price at expiration is below the strike price of the long call (lower strike). Potential position created at expiration -There are three possible outcomes at expiration - If the stock price is at or below the lower strike price, then both calls in a bull call spread expire worthless and no stock position is created. - MAX LOSS - If the stock price is above the lower strike price but not above the higher strike price, then the long call is exercised and a long stock position is created. - NEUTRAL/GAIN/LOSS* (depends highly on the spread purchased and the current price) - If the stock price is above the higher strike price, then the long call is exercised and the short call is assigned. The result is that stock is purchased at the lower strike price and sold at the higher strike price and no stock position is created. - MAX GAIN Use this tool to calculate the maximum loss and gain: https://www.optionsprofitcalculator.com/calculator/call-spread.html Other Resources: https://www.investopedia.com/terms/d/debitspread.asp#:~:text=A%20debit%20spread%2C%20 or%20a,debit%20to%20the%20trading%20account. https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bullcall-spread ============= Credit Spreads - Vertical Spread ============= Bear Call Spread - You Expect a Decline In Stock Value The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade. <- The credit received for writing the contracts - commission Bear call spreads are made by purchasing one long call and writing one long call, - one long call (buying one long call) - one short call (selling one long call) at different strike prices but with the same expiration date ensuring the strike of the call you purchased is above the strike of the call you sell. Maximum profit Potential profit is limited to the premium minus commissions, and this profit is realized if the stock price is at or below the strike price of the short call (lower strike) at expiration and both calls expire worthless. Maximum risk The maximum risk is equal to the difference between the strike prices minus the net credit received including commissions. Potential position created at expiration - There are three possible outcomes at expiration - If the stock price is at or below the lower strike price, then both calls in a bear call spread expire worthless and no stock position is created. - MAX GAIN - If the stock price is above the lower strike price but not above the higher strike price, then the short call is assigned and a short stock position is created. - NEUTRAL/GAIN/LOSS* (depends highly on the spread purchased and the current price) - If the stock price is above the higher strike price, then the short call is assigned and the long call is exercised. The result is that stock is sold at the lower strike price and purchased at the higher strike price and the result is no stock position. - MAX LOSS Use this tool to calculate the maximum loss and gain: https://www.optionsprofitcalculator.com/calculator/call-spread.html Other Resources: https://www.investopedia.com/terms/b/bearcallspread.asp#:~:text=A%20bear%20call%20sprea d%2C%20or,price%20of%20the%20underlying%20asset.&text=The%20maximum%20profit%2 0to%20be,received%20when%20initiating%20the%20trade. https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bea r-call-spread#:~:text=If%20the%20stock%20price%20is%20above%20the%20higher%20strike %20price,result%20is%20no%20stock%20position. Bull put spread - You expect an increase in value The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade. <- The credit received for writing the contracts - commission Bull put spreads are made by purchasing one long call and writing one long call, - one long put (buying one long put) - one short put (selling one short put) at different strike prices but with the same expiration date ensuring the strike of the put you sell is above the strike price of the put you buy Maximum profit Potential profit is limited to the premium received minus commissions, and this profit is realized if the stock price is at or above the strike price of the short put (higher strike) at expiration and both puts expire worthless. Maximum risk The maximum risk is equal to the difference between the strike prices minus the net credit received including commissions. Potential position created at expiration There are three possible outcomes at expiration. - If the stock price is at or above the higher strike price, then both puts in a bull put spread expire worthless and no stock position is created. - MAX GAIN - If the stock price is below the higher strike price but not below the lower strike price, then the short put is assigned and a long stock position is created. - NEUTRAL/GAIN/LOSS* (depends highly on the spread purchased and the current price) - If the stock price is below the lower strike price,t hen the short put is assigned and the long put is exercised. The result is that stock is purchased at the higher strike price and sold at the lower strike price and the result is no stock position. - MAX LOSS Use this tool to calculate the maximum loss and gain: https://www.optionsprofitcalculator.com/calculator/put-spread.html Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bullput-spread FAQ Why would I want to make a vertical spread trade? - Limit risk on the downside - Pay less than naked calls - lets you play big ticker stocks $AMZN, $TSLA … - Reduce the effects of IV crush and theta decay What do I give up? - Limit upside - Depending on your broker, assigned shares may be sold of a slight loss Terms Credit Spread: A trading strategy where contracts are written and purchased at different strike prices at the same date. The maximum profit is limited by the credit received for selling the contract and the loss is limited by the spread (difference in strike prices between the contracts written and purchased). Being Assigned: Being assigned means that an option you sold has been exercised and now you are assigned shares equivalent to the amount you sold for in a contract. Usually your broker will sell the shares for you at market value if you do not have the funds to cover the cost of the shares. This can create an unknown risk of gain or loss depending on stock price movement.ROBINHOOD MAY SHOW YOUR BUYING POWER AS A MASSIVELY NEGATIVE NUMBER DURING AFTER HOURS ****DO NOT PANIC**** YOU WILL RECEIVE THE SHARES AND YOU WILL BE ABLE TO SELL THEM OR THEY WILL BE SOLD FOR YOU. Arbitrage: Free Money! (but not really) the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. (will be explained further with different spread strategies) Strangles ============= Straddles ============= Long Straddle A long straddle consists of one long call and one long put. Both options have the same underlying stock, the same strike price and the same expiration date. - Buy on long call - Buy on long put Maximum profit Profit potential is unlimited on the upside, because the stock price can rise indefinitely. On the downside, profit potential is substantial, because the stock price can fall to zero. Maximum risk Potential loss is limited to the total cost of the straddle plus commissions, and a loss of this amount is realized if the position is held to expiration and both options expire worthless. Both options will expire worthless if the stock price is exactly equal to the strike price at expiration. Impact of time The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion, or time decay. Since long straddles consist of two long options, the sensitivity to time erosion is higher than for single-option positions. Long straddles tend to lose money rapidly as time passes and the stock price does not change. Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long -straddle https://www.optionseducation.org/strategies/all-strategies/long-straddle#:~:text=A%20long%20s traddle%20is%20a,move%20either%20up%20or%20down. Why would you buy a long straddle: A long straddle works well if you think a stock will experience high volatility but you are unsure which direction it will move. You can capture profits on both down swings and upswings so long as the stock continues to fluctuate Short Straddle A short straddle consists of one short call and one short put. Both options have the same underlying stock, the same strike price and the same expiration date. A short straddle is established for a net credit (or net receipt) and profits if the underlying stock trades in a narrow range between the break-even points. - Short a call option (sell a call) - Short a put option (sell a put) Selling a put and a call at the same strike and same expiration Maximum profit Profit potential is limited to the total premiums received less commissions. The maximum profit is earned if the short straddle is held to expiration, the stock price closes exactly at the strike price and both options expire worthless. Maximum risk Potential loss is unlimited on the upside, because the stock price can rise indefinitely. On the downside, potential loss is substantial, because the stock price can fall to zero. Why would you buy a short straddle: A short straddle works well if you believe the value of the underlying security will not change until expiration. THIS IS A MUCH HIGHER RISK TRADE AS VOLATILITY CAN GREATLY INCREASE RISK OF ASSIGNMENT Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/shor t-straddle https://www.investopedia.com/terms/s/shortstraddle.asp#:~:text=A%20short%20straddle%20is %20an,lives%20of%20the%20options%20contracts. ============= Strangles ============= Long Strangle A long strangle consists of one long call with a higher strike price and one long put with a lower strike. Both options have the same underlying stock and the same expiration date, but they have different strike prices. A long strangle is established for a net debit (or net cost) and profits if the underlying stock rises above the upper break-even point or falls below the lower break-even point. - Buy a long call option (at a higher strike price) - Buy a long put option (at a lower strike price) Both options are purchased at different strikes. This strategy is profitable if a stock is volatile and makes large swings either up or down Maximum profit Profit potential is unlimited on the upside, because the stock price can rise indefinitely. On the downside, profit potential is substantial, because the stock price can fall to zero. Maximum risk Potential loss is limited to the total cost of the strangle plus commissions, and a loss of this amount is realized if the position is held to expiration and both options expire worthless. Both options will expire worthless if the stock price is equal to or between the strike prices at expiration. - Theta Decay and IV crush can greatly diminish the value of a position Why would you buy a long strangle : A long strangle is used when you believe a stock will be very volatile and swing either up or down (or both) meaning you can capture upside gains and down swing gains without having to time your bets. You also hedge against your positions so risk is reduced on volatile stocks. Theta decay, IV crush and stagnant trading are the enemy to this position Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long -strangle#:~:text=A%20long%20%E2%80%93%20or%20purchased%20%E2%80%93%20stran gle,introductions%20and%20before%20FDA%20announcements. https://www.theoptionsguide.com/long-strangle.aspx#:~:text=The%20long%20strangle%2C%20 also%20known,underlying%20stock%20and%20expiration%20date. Short Strangle A short strangle consists of one short call with a higher strike price and one short put with a lower strike. Both options have the same underlying stock and the same expiration date, but they have different strike prices. A short strangle is established for a net credit (or net receipt) and profits if the underlying stock trades in a narrow range between the break-even points. Profit potential is limited to the total premiums received less commissions. - Sell a short call option (at a higher strike price) - Sell a short put option (at a lower strike price) Short strangles tend to make money rapidly as time passes and the stock price does not change. Maximum profit Profit potential is limited to the total premiums received less commissions. The maximum profit is earned if the short strangle is held to expiration, the stock price closes at or between the strike prices and both options expire worthless. Maximum risk Potential loss is unlimited on the upside, because the stock price can rise indefinitely. On the downside, potential loss is substantial, because the stock price can fall to zero. - SELLING NAKED CALLS/PUTS HAS INFINITE RISK Why would you buy a short strangle : A short strangle is best placed if you believe a stock will stagnant and not change over time. Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/shor t-strangle https://www.optionsplaybook.com/option-strategies/short-strangle/’ Covered Strangle - THREE LEG STRATEGY A covered strangle position is created by buying (or owning) stock and selling both an out-of-the-money call and an out-of-the-money put. The call and put have the same expiration date. The maximum profit is realized if the stock price is at or above the strike price of the short call at expiration. Profit potential is limited and loss potential is substantial and leveraged if the stock price falls. Below the strike price of the put, losses are $2.00 per share for each $1.00 decline in stock price, because both the long stock and the short put lose as the stock price declines. - Buy 100 shares of the underlying equity - Sell a call at a higher strike than the cost of the underlying equity - Sell a put at a lower strike thant the cost of the underlying equity The short put is covered by cash or not covered but the long call is covered and limits upside loss Maximum profit Profit potential is limited to the total premiums received plus upper strike price minus stock price. Maximum risk Potential loss is substantial and leveraged if the stock price falls. Below the lower strike price at expiration, losses are $2.00 per share for each $1.00 decline in stock price, because both the long stock and the short put lose as the stock price declines. Why would you buy a covered strangle : A covered strangle is best placed if you believe a stock will stagnant and not change over time AND the underlying positions are limited on upside and downside risk. Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/cov ered-strangle https://www.projectoption.com/covered-strangle/ ============= Iron Condor ============= AN IRON CONDOR IS A FOUR LEGGED TRADE Short Iron Condor The iron condor is a combination of two vertical spreads—a bear call spread and a bull put spread. This strategy has four different options contracts, each with the same expiration date and different exercise prices. - Sell an out-of-the-money call - Buying a further out-of-the-money call - Sell an out-of-the-money put - Buying a further out-of-the-money put Maximum profit The maximum profit potential is equal to the net credit received less commissions, and this profit is realized if the stock price is equal to or between the strike prices of the short options at expiration. In this outcome, all options expire worthless and the net credit is kept as income. Maximum risk The maximum risk is equal to the difference between the strike prices of the bull put spread (or bear call spread) minus the net credit received. There are two possible outcomes in which the maximum loss is realized. - If the stock price is below the lowest strike price at expiration, then the calls expire worthless, but both puts are in the money. With both puts in the money, the bull put spread reaches its maximum value and maximum loss. - if the stock price is above the highest strike price at expiration, then the puts expire worthless, but both calls are in the money. Consequently, the bear call spread reaches its maximum value and maximum loss. A short iron condor spread is the strategy of choice when the forecast is for stock price action between the center strike prices of the spread, because it profits from time decay. Why would you buy a Short Iron Condor Like the short strangle, A short iron condor is purchased when you believe a stock will be neutrally traded. “A short iron condor spread is the strategy of choice when the forecast is for stock price action between the center strike prices of the spread, because it profits from time decay.” Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/shor t-iron-condor-spread https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/IronCondorButterflies_We binar.pdf ←REALLY GOOD Long Iron Condor A long iron condor spread is a four-part strategy consisting of a bear put spread and a bull call spread in which the strike price of the long put is lower than the strike price of the long call. All options have the same expiration date. - Sell short put out of the money - Buy long put even further out of the money - Buy long call out of the money - Sell long call even further out of the money Maximum profit The maximum profit potential is the maximum value of the bear put spread (or the bull call spread) less the net debit paid for the position. There are two possible outcomes in which the maximum profit is realized. - If the stock price is below the lowest strike price at expiration, then the calls expire worthless, but both puts are in the money. With both puts in the money, the bear put spread reaches its maximum value and maximum profit. - if the stock price is above the highest strike price at expiration, then the puts expire worthless, but both calls are in the money. Consequently, the bull call spread reaches its maximum value and maximum profit. Maximum risk The maximum risk is the debit paid for the strategy plus commissions. A loss of this amount is realized if the stock price is equal to or between the strike prices of the long options on the expiration date, in which case all options expire worthless. Why would you buy a Long Iron Condor A long Iron Condor is profitable when a stock swings wildly positive or negative so you capture upside and downside movement. Other Resources: https://www.projectoption.com/long-iron-condor/ ============= Butterfly ============= Long Call Butterfly A long butterfly spread with calls is a three-part strategy that is created by buying one call at a lower strike price, selling two calls with a higher strike price and buying one call with an even higher strike price. All calls have the same expiration date, and the strike prices are equidistant.***** - Buy 1 long call - lower strike / equidistant strike price - Sell 2 short calls - mid strike / equidistant strike price - Buy 1 long call - higher strike / equidistant strike price Maximum profit The maximum profit potential is equal to the difference between the lowest and middle strike prices less the net cost of the position including commissions, and this profit is realized if the stock price is equal to the strike price of the short calls (center strike) at expiration. Maximum risk The maximum risk is the net cost of the strategy including commissions, and there are two possible outcomes in which a loss of this amount is realized. If the stock price is below the lowest strike price at expiration, then all calls expire worthless and the full cost of the strategy including commissions is lost. Also, if the stock price is above the highest strike price at expiration, then all calls are in the money and the butterfly spread position has a net value of zero at expiration. As a result, the full cost of the position including commissions is lost. Why would I buy a Long Call Butterfly: A long butterfly spread with calls is the strategy of choice when the forecast is for stock price action near the center strike price of the spread, because long butterfly spreads profit from time decay. However, unlike a short straddle or short strangle, the potential risk of a long butterfly spread is limited.’ Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long -butterfly-spread-calls https://www.investopedia.com/terms/b/butterflyspread.asp#:~:text=A%20butterfly%20spread%2 0is%20an,move%20prior%20to%20option%20expiration. Short Butterfly Call A short butterfly spread with calls is a three-part strategy that is created by selling one call at a lower strike price, buying two calls with a higher strike price and selling one call with an even higher strike price. All calls have the same expiration date, and the strike prices are equidistant. In the example above, one 95 Call is sold, two 100 Calls are purchased and one 105 Call is sold. This strategy is established for a net credit, and both the potential profit and maximum risk are limited. - Sell 1 short call - lower strike / equidistant strike price - Buy 2 long calls - mid strike / equidistant strike price - Sell 1 short call - higher strike / equidistant strike price Maximum profit The maximum profit potential is the net credit received less commissions, and there are two possible outcomes in which a profit of this amount is realized. If the stock price is below the lowest strike price at expiration, then all calls expire worthless and the net credit is kept as income. Also, if the stock price is above the highest strike price at expiration, then all calls are in the money and the butterfly spread position has a net value of zero. As a result, the net credit less commissions is kept as income. Maximum risk The maximum risk is equal to the difference between the lowest and center strike prices less the net credit received minus commissions, and a loss of this amount is realized if the stock price is equal to the strike price of the short calls (center strike) at expiration. Why would I buy a Short Call Butterfly A short butterfly spread with calls is the strategy of choice when the forecast is for a stock price move outside the range of the highest and lowest strike prices. Unlike a long straddle or long strangle, however, the profit potential of a short butterfly spread is limited. Also, the commissions for a butterfly spread are higher than for a straddle or strangle. The tradeoff is that a short butterfly spread has breakeven points much closer to the current stock price than a comparable long straddle or long strangle. Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/shor t-butterfly-spread-calls https://www.investopedia.com/terms/b/butterflyspread.asp#:~:text=A%20butterfly%20spread%2 0is%20an,move%20prior%20to%20option%20expiration. Long Butterfly Put A long butterfly spread with puts is a three-part strategy that is created by buying one put at a higher strike price, selling two puts with a lower strike price and buying one put with an even lower strike price. All puts have the same expiration date, and the strike prices are equidistant. - Buy 1 long put lower strike / equidistant strike price - Sell 2 short puts mid strike / equidistant strike price - Buy 1 long put higher strike / equidistant strike price Maximum profit The maximum profit is equal to the difference between the highest and center strike prices less the net cost of the position including commissions, and this profit is realized if the stock price is equal to the strike price of the short puts (center strike) at expiration. Maximum risk The maximum risk is the net cost of the strategy including commissions, and there are two possible outcomes in which a loss of this amount is realized. If the stock price is above the highest strike price at expiration, then all puts expire worthless and the full cost of the strategy including commissions is lost. Also, if the stock price is below the lowest strike price at expiration, then all puts are in the money and the butterfly spread position has a net value of zero at expiration. As a result, the full cost of the position including commissions is lost. Why would I buy a Short Put Butterfly A long butterfly spread with puts is the strategy of choice when the forecast is for stock price action near the center strike price of the spread, because long butterfly spreads profit from time decay Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long -butterfly-spread-puts https://www.optionsplaybook.com/option-strategies/long-put-butterfly-spread/ Short Butterfly Put A short butterfly spread with puts is a three-part strategy that is created by selling one put at a higher strike price, buying two puts with a lower strike price and selling one put with an even lower strike price. All puts have the same expiration date, and the strike prices are equidistant. - Sell 1 short put - lower strike / equidistant strike price - Buy 2 long puts - mid strike / equidistant strike price - Sell 1 short put - higher strike / equidistant strike price Maximum profit The maximum profit potential is the net credit received less commissions, and there are two possible outcomes in which a profit of this amount is realized. If the stock price is above the highest strike price at expiration, then all puts expire worthless and the net credit is kept as income. Also, if the stock price is below the lowest strike price at expiration, then all puts are in the money and the butterfly spread position has a net value of zero. As a result, the net credit less commissions is kept as income. Maximum risk The maximum risk is equal to the difference between the center and lowest strike prices less the net credit received minus commissions, and a loss of this amount is realized if the stock price is equal to the center strike price (long puts) at expiration. Why would I buy a short butterfly put: The forecast is for high volatility. A stock price moves outside the range of the strike prices of the butterfly. Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/shor t-butterfly-spread-puts ============= Box Spreads ============= Long Box Spread The box spread, or long box, is a common arbitrage strategy that involves buying a bull call spread together with the corresponding bear put spread, with both vertical spreads having the same strike prices and expiration dates. The long box is used when the spreads are underpriced in relation to their expiration values. - Buy 1 ITM Long Call - Sell 1 OTM Short Call - Buy 1 ITM Long Put - Sell 1 OTM Short Put Limited Risk-free Profit Essentially, the arbitrager is simply buying and selling equivalent spreads and as long as the price paid for the box is significantly below the combined expiration value of the spreads, a riskless profit can be locked in immediately. Expiration Value of Box = Higher Strike Price - Lower Strike Price Risk-free Profit = Expiration Value of Box - Net Premium Paid EARLY ASSIGNMENT If the underlying stock moves significantly while the box spread is open there is an unknown chance of early assignment. Early assignment means that one of the legs of the short options is exercised and you are assigned shares, this can lead to an unknown amount of loss because it is dependent on the underlying value of the stock. Early assignment can destroy your portfolio if you do not have enough equity to cover the margin requirement and your broker is forced to close the entirety of your position for a significant loss. DO NOT OVER LEVERAGE YOUR ACCOUNT PLEASE READ*** Other Resources: https://seekingalpha.com/instablog/922162-thomsett/1449211-the-box-spread-limited-profit-andloss-or-questionable-strategy https://www.warriortrading.com/box-spread-definition-day-trading-terminology/ https://www.investopedia.com/terms/b/boxspread.asp Short Box Spread The short box is an arbitrage strategy that involves selling a bull call spread together with the corresponding bear put spread with the same strike prices and expiration dates. The short box is a strategy that is used when the spreads are overpriced with respect to their combined expiration value. - Sell 1 ITM Short Call - Buy 1 OTM Long Call - Sell 1 ITM Short Put - Buy 1 OTM Long Put Limited Risk-free Profit Basically, with the short box, the arbitrager is just buying and selling equivalent spreads and as long as the net premium obtained for selling the two spreads is significantly higher than the combined expiration value of the spreads, a risk-free profit can be captured upon entering the trade. Expiration Value of Box = Higher Strike Price - Lower Strike Price Risk-free Profit = Net Premium Received - Expiration Value of Box EARLY ASSIGNMENT If the underlying stock moves significantly while the box spread is open there is an unknown chance of early assignment. Early assignment means that one of the legs of the short options is exercised and you are assigned shares, this can lead to an unknown amount of loss because it is dependent on the underlying value of the stock. Early assignment can destroy your portfolio if you do not have enough equity to cover the margin requirement and your Why Would I Buy A Short Spread? The short box strategy should be used when the component spreads are overpriced in relation to their expiration values. In most cases, the trader has to hold the position till expiry to gain the benefits of the price difference. Other Resources: https://www.adigitalblogger.com/option-strategy/short-box/ ABSOLUTELY READ THIS***** https://www.chittorgarh.com/compare-options-trading-strategies/box-spread-arbitrage-vs-short-b ox-arbitrage/23/24/ ============= Other Strategies ============= Long Combo A long combo is the combination of selling an ATM or OTM put along with purchasing a OTM long Call to maximize gains and reduce risk along with the capital requirement due to the premium earned from selling the short put - Buy Long Call (OTM) - Sell Short Put (ATM /OTM) This is an extremely bullish strategy designed to reduce risk of theta decay while opening a large bullish position Max Gains Unlimited Max Loss Premium paid for the long contract and the difference, if assigned, of the strike of the short put and the current price. In case of assignment, you can sell covered calls above the strike that the shares were assigned in order to earn back the value lost. Why Would I Buy A Long Combo? A long combo works well if you want to maximize a bullish position with reduced risk and less initial capital Protective Put A protective put position is created by buying (or owning) stock and buying put options on a share-for-share basis. - Buy 100 shares stock at X-Price Buy 1 XYZ X-Price long put Maximum profit Potential profit is unlimited. Maximum risk Risk is limited to an amount equal to stock price minus strike price plus put price plus commissions. Why Would I Buy A Protective Put? If you believe a position will be profitable in a long term but will experience a short term down turn Collar A collar position is created by buying stock and by simultaneously buying protective puts and selling covered calls on a share-for-share basis. - Buy 100 shares of stock at X-Price - Sell a OTM short call at a higher strike - Buy a OTM long put at a lower strike Maximum profit Potential profit is limited because of the covered call. If selling the call and buying the put were transacted for a net debit (or net cost), then the maximum profit would be the strike price of the call minus the stock price and the net debit and commissions. The maximum profit is achieved at expiration if the stock price is at or above the strike price of the covered call. Maximum risk Potential risk is limited because of the protective put. Why Would I Buy A Collar: A collar helps limit risk while also capturing upside on a neutral/bullish position as the premium earned from the call sold will offset the premium burned from buying a long put Other Resources: https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/coll ar
