Option Risk Profiles

The following charts illustrate the profit and loss profiles (diagrams) for many popular option strategies. Profiles shown in red indicate there is an unlimited risk associated with the position (either upside, downside or both) while profiles shown in blue indicate it is a limited risk position.

 

To read the profit and loss diagrams, select any stock price along the horizontal axis and then trace a vertical line to the profit and loss curve. From that point, trace a horizontal line to the vertical axis and that will show the value of the position at expiration. The profit and loss profiles simply show what your profit or loss will be for various stock prices at expiration.

It is important to understand that all profit and loss diagrams shown in this reference guide are drawn at expiration of the options; prior to expiration, the diagrams can look very different. Just because a diagram shows a profit at a particular stock price at expiration does not mean that same strategy will be profitable at that same point prior to expiration. Still, the charts are important to understand for a couple of reasons. First, they help you get a feel for each strategy and what it is trying to accomplish. Second, most option brokers provide real-time profit and loss diagrams. As long as you understand how to read a diagram, the computer will keep you up to date.

 

For each profit and loss diagram, you will find the following information:

Outlook: Tells whether the strategy is bullish or bearish. Bullish strategies make money when the underlying stock rises while bearish strategies make money when it falls.

 

Directional Risk: Describes where the risks lie. For example, if a strategy has unlimited risk if the underlying stock rises, this field will say “unlimited upside.” On many positions you may see "unlimited downside risk" meaning there is potential for unlimited losses if the stock falls. Strictly speaking, this is not unlimited risk since a stock cannot fall below zero. However, since it is extremely rare to see a stock down to a price of zero, this risk is still considered to be unlimited. In these cases, formulas will be given to calculate the true maximum loss if the stock were to trade for zero.

 

Max gain: Shows the maximum amount of money that could be made.

 

Max loss: Shows the maximum amount of money that could be lost.

 

Breakeven: Shows the stock price (or prices) where the strategy breaks even; that is the point where the investor neither makes nor loses money.

 

Synthetic option equivalent: Many strategies will show a synthetic equivalent, which is simply another way of creating the same profile.

Technical note on synthetics: The "iron" and "iron guts" (also called "gut iron") positions on many of the positions are assumed to be long (short) if the trade results in a net debit (credit), which is the most common classification. Some texts classify these positions by the "wing positions" of the profit and loss diagram, which will give the opposite answer. Neither is right or wrong; it's just that what we are calling a long "iron" you may see referred to as short in another print. For example, we refer to the "long butterfly" position as identical to the "short iron butterfly" since the short iron butterfly results in a credit. Some texts however will refer to this same profit and loss profile as a "long iron butterfly" because the "wings" are in the debit position on the profit and loss graph. 

 

 

 

 

Long Stock

 

Outlook: Bullish

 

Directional Risk: Unlimited downside.

 

Max gain: Unlimited upside.

 

Max loss: Purchase price.

 

Breakeven: Purchase price + commissions.

 

Synthetic option equivalent:

Long call + short put with equal strike prices. Example: Long $50 call + Short $50 put.

 

 

Short Stock

 

Outlook: Bearish.

 

Directional Risk: Unlimited upside.

 

Max gain: Initial credit.

 

Max loss: Unlimited upside.

 

Breakeven: Sale price – commissions.

 

Synthetic option equivalent:

Long put + short call with equal strike prices. Example: Long $50 put + Short $50 call.


Long Call

 

Outlook: Bullish.

 

Directional Risk: Limited downside.

 

Max gain: Unlimited upside.

 

Max loss: Premium (amount paid).  Occurs if stock closes below strike price at expiration.

 

Breakeven: Strike price + premium. 

Example: Buy $50 call for $5.  Breakeven = $50 + $5 = $55.

 

Synthetic option equivalent: Long stock + Long put.

 

 

Short Call

 

Outlook: Neutral to slightly bearish (or slightly bullish if credit is large enough). 

Directional Risk: Unlimited upside.

 

Max gain: Premium (initial credit).  Occurs if stock closes below strike price at expiration.

Max loss: Unlimited upside.

 

Breakeven: Strike price + premium. 

Example: Sell $50 call for $5. Breakeven is $50 + $5 = $55.

 

Synthetic option equivalent: Short stock + Short put (sell-write).  

 

 

Long Put

 

Outlook: Bearish

 

Directional Risk: Limited upside.

 

Max gain: Strike price – premium. Occurs at a stock price of zero.

Max loss: Premium (amount paid). Occurs if stock closes above strike price at expiration.

 

Breakeven: Strike price – premium.

 

Example: Buy $50 put for $5. Breakeven is $50 - $5 = $45.

Synthetic option equivalent: Short stock + Long call.



Short Put

 

Outlook: Neutral to slightly bullish (or slightly bearish if credit is large enough).

 

Directional Risk: Unlimited downside.

 

Max gain: Premium (initial credit). Occurs if stock closes above strike at expiration.

 

Max loss: Strike price – premium. Occurs at a stock price of zero.

 

Breakeven: Strike price – premium.

 

Example: Sell $50 put for $5. Breakeven = $50 - $5 = $45.

 

Synthetic equivalent: Long stock + Short call (covered call).  

 

 

 

Long Straddle

 

Position: Long call + long put with same strike and time to expiration.

 

Outlook: (1) Extremely bullish or bearish but unsure of direction or (2) Expecting an increase in implied volatility.

 

Directional Risk: None. 

 

Max gain: Unlimited upside and downside.

 

Max loss: Premiums paid for both options. Occurs if stock closes at strike price at expiration.

 

Breakeven (2 breakeven points):

Upper: Strike price + call and put premiums. Lower: Strike price - call and put premiums.

 

Example: Buy $50 call for $5.50 and $50 put for $4.50. Upper breakeven = $50 + $5.50 + $4.50 = $60. Lower breakeven is $50 - $5.50 - 4.50 = $40. 

 

Synthetic equivalents:

(1)   Long stock + double the share equivalent of puts (i.e., buy 100 shares and buy 2 put options).

 

(2)   Short stock + double the share equivalent of calls (i.e., short 100 shares and buy 2 call options).

 

(3)   Buy 1 call and short half the equivalent shares of stock (i.e., buy 1 call and short 50 shares of stock).

 

(4)   Buy one put and buy half the equivalent shares of stock (i.e., buy one put and buy 50 shares of stock).

 


Short Straddle

 

Position: Short call + short put with same strike and time to expiration.

 

Outlook: (1) Overall neutral outlook but can also be slightly bullish or slightly bearish if credit is large enough or (2) Expecting a decrease in implied volatility.

 

Directional Risk: Unlimited upside and downside. 

 

Max gain: Premiums received from both options. Occurs if stock closes at strike price at expiration.

 

Max loss: Unlimited upside and downside.

 

Breakeven (2 breakeven points):

Upper: Strike price + call and put premiums

Lower: Strike price - call and put premiums

Example: Sell $50 call for $5.50 and sell $50 put for $4.50. Upper breakeven = $50 + $5.50 + $4.50 = $60. Lower breakeven is $50 - $5.50 - $4.50 = $40. 

Synthetic equivalents:

(1)  Long stock + double the share equivalent of short calls (i.e., buy 100 shares and sell 2 call options).

 

(2)  Short stock + double the share equivalent of short puts (i.e., short 100 shares and sell 2 put options).

 

(3)  Sell 1 call and long half the equivalent shares of stock (i.e., short 1 call and long 50 shares of stock).

 

(4)  Sell 1 put and short half the equivalent shares of stock (i.e., sell 1 put and short 50 shares of stock).



Long Strip

 

Position: Buy 2 puts and buy 1 call with same strike and time to expiration.

 

Outlook: (1) Extremely bullish or bearish but favoring bearish or (2) Expecting an increase in implied volatility.

 

Directional Risk: None.

 

Max gain: Unlimited upside and downside.

 

Max loss: Premiums paid for all options.  Occurs if stock closes at strike price at expiration.

 

Breakeven (2 breakeven points):

Upper: Strike price + call and put premiums.

Lower: Strike price - half the call and put premiums.

 

Example: If $5 is paid for all three $50 strike options, the upper breakeven will be $50 + $5 = $55 and the lower breakeven will be $50 - (1/2 * $5) = $47.50. The lower breakeven point is reduced because two put options are owned and are regaining the premiums at twice the rate of the call option.

 

Synthetic equivalents:

(1)   Long 100 shares + 3 put options.

 

(2)   Short 200 shares + 3 call options.

 

 

 

Short Strip

 

Position: Sell 2 puts and sell 1 call with same strike and time to expiration.

 

Outlook: (1) Neutral to slightly bullish or bearish but more fearful of upward move or (2) Expecting a decrease in implied volatility.

 

Directional Risk: Unlimited upside and downside.

 

Max gain: Premiums received for all options. Occurs if stock closes at strike price at expiration.

 

Max loss: Unlimited upside and downside.

 

Breakeven (2 breakeven points):

Upper: Strike price + call and put premiums

Lower: Strike price - half the call and put premiums

 

Example: if $5 is received for all three $50 strike options, the upper breakeven will be $50 + $5 = $55 and the lower breakeven will be $50 - (1/2 * $5) = $47.50. The lower breakeven is reduced because two puts are sold and therefore heading into losses at twice the rate of the call option.

 

Synthetic equivalents:

(1)  Short 100 shares + 3 short put options.

 

(2)  Long 200 shares + 3 short call options.

 

 

 

Long Strap

 

Position: Buy 2 calls and buy 1 put with same strike and time to expiration.

 

Outlook: (1) Extremely bullish or bearish but favoring bullish or (2) Expecting an increase in implied volatility.

 

Directional Risk: None.

 

Max gain: Unlimited.

 

Max loss: Premiums paid for all options.  Occurs if stock closes at strike price at expiration.

 

Breakeven (2 breakeven points):

Upper: Strike price + half the call and put premiums. Lower: Strike price - the call and put premiums.

 

Example: If $5 is paid for all three $50 strike options, the upper breakeven will be $50 + (1/2 * $5) = $52.50 and the lower breakeven will be $50 - $5 = $45. The upper breakeven is reduced because two calls are purchased and will regain the premiums at twice the rate of the put option.

 

Synthetic equivalents:

(1)  Short 100 shares + 3 call options

 

(2)  Long 200 shares + 3 put options

 

 

Short Strap

 

Position: Sell 2 calls and sell 1 put with same strike and time to expiration.

 

Outlook: (1) Neutral to slightly bullish or slightly bearish but more fearful of the downside or (2) Expecting a decrease in implied volatility.

 

Directional Risk: Unlimited upside and downside.

 

Max gain: Premiums received for all options. Occurs if stock closes at strike price at expiration.

 

Max loss: Unlimited upside and downside.

 

Breakeven (2 breakeven points):

Upper: Strike price + half the call and put premiums.

Lower: Strike price - the call and put premiums.

 

Example: If $5 is received for all three $50 strike options, the upper breakeven will be $50 + (1/2 * $5) = $52.50 and the lower breakeven will be $50 - $5 = $45. The upper breakeven is reduced because two calls are sold and will therefore head into losses at twice the rate of the put option.

 

Synthetic equivalents:

(1)  Long 100 shares + 3 short calls.

 

(2)  Short 200 shares + 3 short puts.

 

 

 Long Strangle

 

Position: Buy 1 low strike put and buy 1 high strike call. 

Outlook: (1) Extremely bullish or bearish but uncertain of direction or (2) Expecting an increase in implied volatility.

 

Directional Risk:  None. 

Max gain: Unlimited upside and downside.

 

Max loss: Premiums paid for both options.  Occurs if stock stays between strikes at expiration.

 

Breakeven (2 breakeven points):

Upper: Call strike + call and put premiums.

Lower: Put strike - call and put premiums. 

Example: If $5 total is paid for the $45 put and $50 call, the upper breakeven will be $50 + $5 = $55 and the lower breakeven will be $45 - $5 = $40. 

 

Note: The breakeven points are very different if you are trading an in-the-money strangle where the call strike is lower than the put strike (also called a "guts" strangle). If $5 is paid for a $45 call and a $50 put, the upper breakeven point is $45 + $5 = $50 and $50 - $5 = $45. 

 

The max loss will also be affected if using in-the-money strangles. The max loss, in this example, is zero since the position must be worth at least the difference in strikes at expiration. This is due to the box position, which guarantees intrinsic value. Remember, if the put strike is greater than the call strike, you must get the difference in strikes back at expiration (although bid-ask spreads may make it slightly less).

 

Synthetic equivalents:

(1)   Long 100 shares + $50 put + $45 put.

 

(2)   Short 100 shares + $45 call + $50 call.

 

 

Short Strangle

 

Position: Sell 1 low strike put and sell 1 high strike call. 

Outlook: Neutral to slightly bullish or slightly bearish.

 

Directional Risk: Unlimited upside and downside.

 

Max gain: Premiums received from both options. Occurs if stock closes between strikes at expiration.

 

Max loss: Unlimited upside and downside.

 

Breakeven: (2 breakeven points):

Upper: Call strike + call and put premiums.

Lower: Put strike - call and put premiums.

 

Example: if $5 is received for both the $45 put and $50 call, the upper breakeven will be $50 + $5 = $55 and the lower breakeven will be $45 - $5 = $40. 

 

Note: The breakeven points are very different if you are trading an in-the-money strangle where the call strike is lower than the put strike. If $5 are received for a $45 call and a $50 put, the breakeven points are $45 + $5 = $50 and $50 - $5 = $45.

 

Synthetic equivalents:

(1)  Long 100 shares + short 45 call + short 50 call.

 

(2)  Short 100 shares + short 50 put + short 45 put.

 

 

 Covered Call

 

Position: Buy stock and sell calls (equivalent contract amounts) against it. 

 

Examples: Buy 100 shares and sell 1 call option. Buy 300 shares and sell 3 calls. 

Outlook: Neutral to slightly bullish.

 

Directional Risk: Unlimited downside.

 

Max gain: (2 possible)

(1)   Time premium received from calls (occurs if call strike is less than or equal to stock purchase price). 

 

Example: Buy stock at $50 and sell the $50 call (or lower). The max gain is the time premium on the option.

 

(2)   Time premium received plus capital gain (occurs if call strike is higher than stock purchase price). 

 

Example: Buy stock at $50 and sell the $55 strike (or any strike higher than $50). The max gain is the time premium on the option plus any capital gain on the stock up to the short strike. If you buy the stock for $50 and sell the $55 call for $1, the max gain is the $1 time premium plus the $5 capital gain in the stock (paid $50 for stock and sold for $55 due to assignment of the short call). Max gain is $1 time + $5 capital gain = $6.

 

Regardless of which strike is sold, the maximum gain occurs if the stock price is greater than the strike price at expiration.

 

Max loss: Stock price less the premium received from call (net cost to purchase the stock). Occurs at a stock price of zero.

 

Breakeven: Stock price less premium received. Example: Buy stock at $50 and sell the $50 call for $5 premium. The breakeven point is $50 - $5 = $45. The time premium received acts to reduce the purchase price of the stock.

 

Synthetic equivalent: Naked put

 

 

Covered Put (Sell-Write)

 

Position: Short stock and sell puts (equivalent contract amounts) against it. Examples: Sell short 100 shares and sell 1 put. Sell short 300 shares and sell 3 put options. 

Outlook: Neutral to slightly bearish (may be slightly bullish is premium is big enough).

 

Directional Risk: Unlimited upside.

 

Max gain:

(1)   Time premium received from puts (occurs if stock price is less than or equal to the put strike at expiration).  

 

Example: Sell short at $50 and sell the $50 (or higher) strike. The max gain is the time premium on the option.

 

(2)   Time premium received plus capital gain (occurs if call strike is lower than stock short sale price). 

 

Example: Sell short stock at $50 and sell the $45 (or any strike lower than $50) strike. The max gain is the time premium on the option plus the capital gain on the short stock position. If you short stock at $50 and sell the $45 put for $1, the max gain is the $1 time premium plus the $5 capital gain of the short stock (selling at $50 and buying back at $45 due to assignment of the put). Max gain is $1 time + $5 capital gain = $6.

 

Regardless of which strike is sold, the maximum gain occurs if the stock price is less than the strike price at expiration.

 

Max loss: Unlimited upside

 

Breakeven:

Short sale price plus put option premium received. 

 

Example: Sell stock short at $50 and sell the $50 put for $5 premium. The breakeven point is $50 + $5 = $55. The premium from the put acts to raise the selling price of the stock.

 

Synthetic equivalent: Naked call.

 

 

 

Bull Spread

 

Position (Usually done with either all calls or all puts):

 

Calls (debit spread): Buy a low strike call and sell a higher strike call.

 

Example: Buy $50 call and sell a $55 call.

 

Puts (credit spread): Sell a high strike put and buy a lower strike put. 

 

Example: Sell $55 put and buy $50 put.

 

(Whether using calls or puts, you are always buying the low strike and selling the high strike.)

 

Outlook:

Neutral to moderately bullish depending on how constructed.

 

Directional Risk: Limited downside.

 

Max gain:

Calls: Difference in strike prices less debit.

 

Example: Buy $50 call and sell $55 call for net debit of $3. Max gain is ($55 - $50) - $3 = $2.

 

Puts: Credit received

Example: Sell $55 put and buy a $50 put for a net credit of $2. Max gain is $2.

 

Regardless of whether call or puts are used, the max gain occurs if the stock price is greater than the higher strike price at expiration.

 

Max loss:

Calls: Premium paid.

 

Example: Buy $50 call and sell a $55 call a net debit of $3. Max loss is $3.

 

Puts: Difference in strikes less premium received. Example: Sell $55 put and buy $50 put for credit of $2.  Max loss is ($55 - $50) - $2 = $3.

 

Whether using calls or puts, the max loss occurs if the stock price is below the lower strike price at expiration.

Breakeven:

Calls: Long call strike plus debit. 

 

Example: Buy $50 call and sell $55 call for net debit of $3. Long call strike = $50 + $3 debit = $53 breakeven.

 

Puts: High strike put less premium received. Example: Sell $55 put and buy $50 put for credit of $3.  Breakeven = $55 - $3 = $52.

 

Synthetic equivalent:

Long stock + short high strike call + long low strike price put.

Example: Long stock at $50 + Short $55 call + Long $45 put

(Also called collar, risk conversion, split-price conversion, range forward, or funnel.)

 

 

Bear Spread

 

Position (usually done with either all calls or all puts):

 

Calls (credit spread): Sell a low strike call and buy a higher strike call. 

 

Example: Sell the $45 call and buy a $50 call.

 

Puts: (debit spread): Buy high strike put and sell a lower strike put.

 

Example: Buy $50 put and sell $45 put.

 

Outlook:

Neutral to moderately bearish depending on how constructed.

 

Directional Risk: Limited upside.

 

Max gain: 

Calls: Credit received.

Example: Sell the $50 call and buy the $55 call for a net credit of $2. Max gain is $2.

 

Puts: Difference in strike prices less debit. 

Example: Buy $55 put and sell $50 put for net debit of $3. Max gain is ($55 - $50) - $3 = $2.

 

Max loss:

Calls: Difference in strikes less premium received. 

Example: Sell $45 call and buy $50 call for credit of $2. Max loss is ($50 - $45) - $3 = $3.

 

Puts: Premium paid

Example: Buy $55 put and sell $50 put for net debit of $3. Max loss is $3.

 

Whether using calls or puts, the max loss occurs if the stock price is greater than the higher strike at expiration.

Breakeven:

Calls: Short call strike plus premium received. Example: Sell $45 call and buy $50 call for net credit of $2.  Breakeven = $45 + $2 = $47.

 

Puts: High strike put less premium received. 

Example: Buy $50 put and sell $45 put for debit of $3. Breakeven = $50 - $3 = $47.

 

Synthetic equivalent: Short stock + long high strike call + short lower strike put. 

 

Example:  Short stock + Long $50 call + Short $45 put.

(Also called a risk reversal or split-price reversal).

 

 

Long Butterfly Spread

 

Position (usually done with either all calls or all puts):

 

Calls or Puts: Buy 1 low strike option, sell 2 medium strikes, and buy 1 high strike. All strikes should be equally spaced with same time to expiration.

 

Example: Buy 1 $45 call, sell 2 $50 calls, buy 1 $55 call. Or, buy 1 $45 put, sell 2 $50 puts, buy 1 $55 put.

 

Outlook: (1) Neutral but can be slightly bullish or slightly bearish depending on how constructed or (2) Expecting a rise in the skew curve.

 

Directional Risk: Limited upside and downside.

 

Max gain: Difference in middle strikes and one of the end strikes (also called the "wings") less premium paid. Occurs if stock price equals center strike price at expiration.

 

Example: Buy 1 $45 call, sell 2 $50 calls, and buy 1 $55 call for net debit of $1. Max gain is ($50 - $45) - $1 = $4. Can also be found by ($55 - $50) - $1 = $4.

 

Max loss: Premium paid. Occurs if stock closes above or below outer strikes (also called the “wings”) at expiration.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Buy 1 $45 call, sell 2 $50 calls, and buy 1 $55 call for net debit of $1. Lower breakeven is $45 + $1 = $46 and upper is $55 - $1 = $54.

 

Synthetic equivalents (numerous, but most common are):

 

(1)  Long $45 put + short $50 put + short $50 call + long $55 call (also called a "short iron butterfly").  The butterfly can also be viewed as a short straddle + long strangle or the combination of a bull spread + a bear spread.

 

(2)  Long $45 call + short $50 call + short $50 put + long $55 put (also called an "short iron guts butterfly"). Can also be viewed as a bull spread + bear spread. 

 

 

Short Butterfly Spread

 

Position (usually done with either all calls or all puts):

 

Calls or Puts: Sell 1 low strike option, buy 2 medium strikes, and sell 1 high strike. All strikes should be equally spaced with same time to expiration.

 

Example: Sell 1 $45 call, buy 2 $50 calls, and sell 1 $55 call. Or, sell 1 $45 put, buy 2 $50 puts, sell 1 $55 put.

 

Outlook: (1) Moderately bullish or bearish or (2) Expecting a fall in the skew curve

 

Directional Risk: None.

 

Max gain: Premium received. Occurs if the stock price is less than the lower strike or greater than the highest strike at expiration.

 

Max loss: Difference in middle strikes and end strikes (also called the "wings") less premium paid. Occurs if stock closes at center strike price at expiration.

 

Example: Sell 1 $45 call, buy 2 $50 calls, and sell 1 $55 call for net credit of $1. Max loss is ($50 - $45) - $1 = $4. Can also be found by ($55 - $50) - $1 = $4.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Buy 1 $45 call, sell 2 $50 calls, and buy 1 $55 call for net credit of $1. Lower breakeven is $45 + $1 = $46 and upper is $55 - $1 = $54.

 

Synthetic equivalents (numerous, but most common are):

 

(1)  Short $45 put + long $50 put + long $50 call + short $55 call (also called a "long iron butterfly").  The iron butterfly can also be viewed as a long straddle + short strangle or the combination of a bull spread + a bear spread.

 

(2)  Short $45 call + long $50 call + long $50 put + short $55 put (also called a "long iron guts butterfly"). Can also be viewed as a bull spread + bear spread. 

 

 

Long Condor Spread

 

Position (usually done with either all calls or all puts):

 

Calls or Puts: Buy 1 low strike option, sell 2 successively higher strikes, and buy 1 at an even higher strike. All strikes should be equally spaced with same time to expiration.

 

Example: Buy 1 $45 call, sell 1 $50 calls, sell 1 $55 call, and buy 1 $60 call. Or, buy 1 $45 put, sell 1 $50 put, sell 1 $55 put, and buy 1 $60 put.

 

Outlook: Neutral to slightly bullish or bearish depending on how constructed or (2) Expecting a rise in the skew curve.

 

Directional Risk:  None.

 

Max gain: Difference in two middle strikes (or any two successive strikes) less premium paid. Occurs if stock closes between middle strike prices at expiration.

 

Example: Buy 1 $45 call, sell 1 $50 call, sell 1 $55 call, and buy 1 $60 call for net debit of $1. Max gain is ($55 - $50) - $1 = $4. 

 

Max loss:  Premium paid.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Buy 1 $45 call, sell 1 $50 call, sell 1 $55 call, and buy 1 $60 call for net debit of $1. Lower breakeven is $45 + $1 = $46 and upper is $60 - $1 = $59.

 

Synthetic equivalents (numerous, but most common are):

 

(1)   Long $45 put + short $50 put + short $55 call + long $60 call (also called a "short iron condor").  The iron condor can also be viewed as a long strangle + short strangle or the combination of a bull spread + a bear spread.

 

(2)   Long $45 call + short $50 call + short $55 put + long $60 put (also called an "short iron guts condor"). Can also be viewed as a bull spread + bear spread. 

 

 

 

 

Short Condor Spread

 

Position (usually done with either all calls or all puts).

 

Calls or Puts: Sell 1 low strike option, buy 2 successively higher strikes, and sell 1 higher strike. All strikes should be equally spaced with same time to expiration.

 

Example: Sell 1 $45 call, buy 1 $50 call, buy 1 $55 call, and sell 1 $60 call. 

 

Or, sell 1 $45 put, buy 1 $50 put, buy 1 $55 put, and sell 1 $60 put.

 

Outlook: Moderately bullish or bearish depending on how constructed or (2) Expecting a fall in the skew curve.

 

Directional Risk: None.

 

Max gain: Premium received. Occurs if the stock price is less than the lowest strike or greater than the highest strike at expiration.

 

Max loss: Difference in two successive strikes less premium received. Occurs if the stock price is between the two middle strikes at expiration.

 

Example: Sell 1 $45 call, buy 1 $50 call, buy 1 $55 call, and sell 1 $60 call for net credit of $1. Max gain is ($55 - $50) - $1 = $4. 

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example:  Sell 1 $45 call, buy 1 $50 call, buy 1 $55 call, and sell 1 $60 call for net credit of $1. Max gain is ($55 - $50) - $1 = $4.

 

Lower breakeven is $45 + $1 = $46 and upper is $60 - $1 = $59.

 

Synthetic equivalents (numerous, but most common are):

 

(1)   Long $45 put + short $50 put + short $55 call + long $60 call (also called a "long iron condor").  The iron condor can also be viewed as a long strangle + short strangle or the combination of a bull spread + a bear spread.

 

(2)   Long $45 call + short $50 call + short $55 put + long $60 put (also called an "long iron guts condor"). Can also be viewed as a bull spread + bear spread. 


 

 

Long Albatross Spread

 

Position (usually done with either all calls or all puts).

 

Calls or Puts: Buy 1 low strike option, sell 1 higher strike, skip a strike and sell the next higher strike, and buy 1 higher strike. All strikes should be equally spaced with same time to expiration.

 

Example: Buy 1 $45 call, sell 1 $50 calls, sell 1 $60 call, and buy 1 $65 call. Or, buy 1 $45 put, sell 1 $50 put, sell 1 $60 put, and buy 1 $65 put.

 

Outlook: Neutral to moderately bullish or bearish depending on how constructed.

 

Directional Risk: Limited upside and downside.

 

Max gain: Difference in first two (or last two strikes) less premium paid. Occurs if stock price is less than the lowest strike or greater than the highest strike at expiration.

 

Example: Buy 1 $45 call, sell 1 $50 call, sell 1 $60 call, and buy 1 $65 call for net debit of $1. Max gain is ($50 - $45) - $1 = $4. 

 

Max loss: Premium paid.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Buy 1 $45 call, sell 1 $50 call, sell 1 $60 call, and buy 1 $65 call for net debit of $1. Lower breakeven is $45 + $1 = $46 and upper is $65 - $1 = $64.

 

Synthetic equivalents (numerous, but most common are):

(1)   Long $45 put + short $50 put + short $60 call + long $65 call (also called a "short iron albatross"). 

(2)   Long $45 call + short $50 call + short $60 put + long $65 put (also called an "short iron guts albatross").   

 

 

 

Short Albatross Spread

 

Position (usually done with either all calls or all puts).

 

Calls or Puts: Sell 1 low strike option, buy 1 higher strike, skip a strike and buy the next higher strike, and sell 1 higher strike. All strikes should be equally spaced with same time to expiration.

 

Example: Sell 1 $45 call, buy 1 $50 calls, buy 1 $60 call, and sell 1 $65 call. Or, sell 1 $45 put, buy 1 $50 put, buy 1 $60 put, and sell 1 $65 put.

 

Outlook: (1) Extremely bullish or bearish or (2) Expecting a fall in the skew curve.

 

Directional Risk: None.

 

Max gain: Credit received.

 

Max loss: Difference in two lowest (or two highest) strikes less premium. Occurs if the stock price is between the two center strikes at expiration.

 

Example: Sell 1 $45 call, buy 1 $50 calls, buy 1 $60 call, and sell 1 $65 call for credit of $1. Max loss is ($50 - $45) - $1 = $4.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Sell 1 $45 call, buy 1 $50 calls, buy 1 $60 call, and sell 1 $65 call. Lower breakeven is $45 + $1 = $46 and upper is $65 - $1 = $64.

 

Synthetic equivalents (numerous, but most common are):

 

(1)   Short $45 put + long $50 put + long $60 call + short $65 call (also called a "long iron albatross"). 

 

(2)   Short $45 call + long $50 call + long $60 put + short $65 put (also called a "long iron guts albatross").   

 

 

 

Long Pterodactyl Spread

 

Position (usually done with either all calls or all puts).

 

Calls or Puts: Buy 1 low strike option, sell 1 higher strike, skip two strikes and sell the next higher strike, and buy 1 higher strike. All strikes should be equally spaced with same time to expiration.

 

Example: Buy 1 $45 call, sell 1 $50 calls, sell 1 $65 call, and buy 1 $70 call. Or, buy 1 $45 put, sell 1 $50 put, sell 1 $65 put, and buy 1 $70 put.

 

Outlook: (1) Neutral to moderately bullish or slightly bearish depending on how constructed or (2) Expecting a rise in skew curve.

 

Directional Risk: Limited upside and downside.

 

Max gain: Difference in two lowest strikes (or two highest strikes) less the premium paid. Occurs if the stock price is between the two center strikes at expiration. Example: Buy 1 $45 call, sell 1 $50 calls, sell 1 $65 call, and buy 1 $70 call for net debit of $1. Max gain is ($50 - $45) - $1 = $4.

 

Max loss: Premium paid. Occurs if the stock price is less than the lowest strike or greater than the highest strike at expiration.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Buy 1 $45 call, sell 1 $50 call, sell 1 $65 call, and buy 1 $70 call for net debit of $1. Lower breakeven is $45 + $1 = $46 and upper is $70 - $1 = $69.

 

Synthetic equivalents (numerous, but most common are):

(1)  Long $45 put + short $50 put + short $65 call + long $70 call (also called a "short iron pterodactyl"). 

 

(2)  Long $45 call + short $50 call + short $65 put + long $70 put (also called a "short iron guts pterodactyl").   

 

 

 

Short Pterodactyl Spread

 

Position: (usually done with either all calls or all puts):

 

Calls or Puts: Sell 1 low strike option, buy 1 higher strike, skip two strikes and buy the next higher strike, and sell 1 higher strike.  All strikes should be equally spaced with same time to expiration.

 

Example: Sell 1 $45 call, buy 1 $50 call, buy 1 $65 call, and sell 1 $70 call. Or, sell 1 $45 put, buy 1 $50 put, buy 1 $65 put, and sell 1 $70 put.

 

Outlook: (1) Extremely bullish or bearish or (2) Expecting a rise in the skew curve

 

Directional Risk: None.

 

Max gain: Premium received. Occurs if the stock price is less than the lowest strike or above the highest strike at expiration.

 

Max loss: Difference in two lowest strikes (or two highest strikes) less premium received. Occurs if the stock price is between the two center strikes at expiration. Example: Sell 1 $45 call, buy 1 $50 calls, buy 1 $65 call, and sell 1 $70 call for net credit of $1. Max loss is ($50 - $45) - $1 = $4.

 

Breakeven (2 breakeven points):

Lower: Low strike + premium

Upper: High strike - premium

 

Example: Sell 1 $45 call, buy 1 $50 call, buy 1 $65 call, and sell 1 $70 call for net credit of $1. Lower breakeven is $45 + $1 = $46 and upper is $70 - $1 = $69.

 

Synthetic equivalents (numerous, but most common are):

(1)   Short $45 put + long $50 put + long $65 call + short $70 call (also called a "long iron pterodactyl"). 

(2)   Short $45 call + long $50 call + long $65 put + short $70 put (also called a "long iron guts pterodactyl").  
 

 

Call Backspread (Long Call Ratio Spread)

 

Position:  Short low strike call and long more contracts of a higher strike call.

 

Example: Short 1 $45 call and long 2 $50 calls. The more long positions, the higher the slope of the profit and loss diagram as shown in the chart. The diagram shows the effects of buying 2x, 3x and 4x the amount of calls over the short position.

 

Outlook: Extremely bullish but also fearful of a downside move.

 

Directional Risk: Limited downside if debit spread (none if credit spread).

 

Max gain: Unlimited.

 

Max loss: Per spread, the maximum loss is the difference in strikes + the debit amount (or minus the credit if trade executed for a credit). Occurs if the stock price equals the strike price of the long calls.

 

Example: Sell $45 call for $7 and buy 2 $50 calls for $5. This is one spread of selling one call and buying two calls, which results in a net debit of $3. This is because $7 was received but $10 was spent (2 long calls at $5). The max loss is ($50 - $45) - $3 = $8. 

 

Breakeven (2 possible breakeven points):

If trade executed for a debit there is one breakeven point:

 

Long call strike + 1/(R-1) * max loss; where R is the ratio of long calls to short calls (R must be 2 or greater). 

 

Example 1: Sell $45 call for $7 and buy 2 $50 calls for $5 for net debit of $3. This is one -1 x 2 spread (one call sold and two purchased). The ratio (R) is 2 since twice as many calls are purchased. Since the max loss is $8, the breakeven point is $50 + 1/(2-1) * $8 = $58.

 

Example 2: Sell $45 call for $7 and buy 3 $50 calls for $5. This results in a net debit of +$7 - $15 = $8.  The max loss is $13 and the ratio is 3 (three times as many calls purchased). The breakeven is $50 + 1/(3-1) * $13 = $56.50.

 

If trade executed for a credit, there will be two breakeven points: 

 

Lower: Short strike plus credit.

Upper: Same calculation is used as for debit spread

 

Example: Sell $45 call for $7 and buy 2 $50 calls for $3 for net credit of $1. Max loss is $4 so lower breakeven will be $45 + $1 = $46.

 

The formula for the lower breakeven will not change regardless of the number of long calls purchased.  This is because the slope of the profit and loss chart is only affected to the right (upper breakeven) of the long strike as shown in the profit and loss diagram above. 

 

Synthetic equivalents (numerous, but most common are):

 

(1)  Long 200 shares + short lower strike call + 2 higher strike puts. 

Example: Long 200 shares + Short $45 call + 2 Long $50 puts

 

(2)  Short 100 shares + 2 high strike calls + short lower strike put. 

Example: Short 100 shares + 2 $50 calls + short $45 put.

 

 

Short Call Ratio Spread

 

Position: Long low strike price call and short more contracts of a higher strike call.

 

Example: Buy 1 $45 call and short 2 $50 calls. The more short positions, the steeper the slope of the profit and loss as shown in the diagram. The diagram shows the effects of selling 2x, 3x and 4x the amount of calls over the long position.

 

Outlook: Slightly bullish but fearful of downturn.

 

Directional Risk: Unlimited upside. Limited downside if debit spread (none if credit spread).

 

Max gain: Limited. Occurs if the stock price equals the strike of the short calls at expiration. The max gain is the difference in strikes less the debit paid (or plus the credit received).

 

Example: Buy 1 $45 call for $3 and sell 2 $50 calls for $2. This is one (1 x -2) spreads for a net credit of $1 (paid $3 and received $4). The max gain is $50 - $45 + $1 = $6.

 

Max loss: Unlimited upside. 

Breakeven (2 possible breakeven points):

If trade executed for a credit, there is one breakeven point: Short call strike + 1/(R-1) * max gain; where R is the ratio of short calls to long calls (R must be greater than 2).  

 

Example: Buy 1 $45 call for $3 and sell 2 $50 calls for $2. There are twice as many calls sold so R = 2.  Because the max gain is $6, the breakeven is $50 + 1/(2-1) * $6 = $56.

 

Example 2: Buy 1 $45 call for $3 and sell 3 $50 calls for $2 for a net credit of $3. R = 3 so breakeven is $50 + 1/(3-1) * $8 = $54.

 

If trade executed for a debit there will be two breakeven points: 

 

Lower: Strike of the short call + debit

Upper: Same calculation is used as for credit spread

 

Example: Buy 1 $45 call for $3 and sell 2 $50 calls for $1 for net debit of $1. Lower breakeven is $45 + $1 = $46.

 

The formula for the lower breakeven will not change regardless of the number of short calls. This is because the slope of the profit and loss chart is only affected to the right (upper breakeven) of the short strike as shown in the profit and loss diagram above. 

 

Synthetic equivalents (numerous, but most common are):

 

(1)  Long 100 shares + low strike put + short 2 higher strike calls. Example: Long 100 shares + $45 put + short 2 $50 calls.

 

(2)  Short 200 shares + short 2 higher strike puts + long lower strike call. Example: Short 200 shares + short 2 $50 puts + long $45 call.

 

(3)  Short 100 shares + short 2 higher strike puts + long lower strike put. Example: Short 100 shares + short 2 $50 puts + $45 put.
 

 

Put Backspread (Long Put Ratio Spread)

 

Position:  Short a high strike put and long more contracts of a lower strike put.

 

Example: Sell 1 $50 put and buy 2 $45 puts. The more long positions, the steeper the slope of the profit and loss as shown in the diagram. The diagram shows the effects of buying 2x, 3x and 4x the amount of puts over the short position.

 

Outlook: Extremely bearish but fearful of an upward move.

 

Directional Risk: Limited upside if debit spread (none if credit spread).

 

Max gain: Strike price of the long less debit (or plus credit). Occurs at a stock price of zero. Example: Sell $50 put for $3 and buy 2 $45 puts for $2 each for net debit of $1(received $3 and paid $4). Max gain is $45 - $1 = $44.

 

Max loss: Limited. Occurs if the stock price equals the strike of the long position at expiration.

Max loss is difference in strikes plus the debit amount (or less the credit amount). 

 

Example: Sell $50 put for $3 and buy 2 $45 puts for $2 each. This is one (-1x2) spread for a net debit of $1 (received $3 and paid $4). The max loss is ($50 - $45) - $1 = $6. 

 

Example 2: Sell $50 put for $3 and buy 2 $45 puts for $1. This results in a net credit of $1. Max loss is now ($50- $45) - $1 = $4.

 

Breakeven (2 possible breakeven points):

If trade executed for a debit, there is one breakeven point: Long put strike - 1/(R-1) * max loss; where R is the ratio of long puts to short puts (R must be greater than or equal to 2). 

 

Example: Sell 1 $50 put for $3 and buy 2 $45 puts for $2 for net debit of $1. There are twice as many puts purchased so R = 2. Because the max loss is $6, the breakeven is $45 - 1/(2-1) * $6 = $39.

 

If trade executed for a credit, there will be two breakeven points: 

 

Lower: Same calculation is used as for debit spread

Upper: Short strike - credit

 

Example: Sell 1 $50 put for $5 and buy 2 $45 puts for $2 for net credit of $1. Upper breakeven is $45 - $1 = $44.

 

The formula for the upper breakeven will not change regardless of the number of long puts purchased. This is because the slope of the profit and loss chart is only affected to the left (lower breakeven) of the short strike as shown in the profit and loss diagram above. 

 

Synthetic equivalents (numerous, but most common are):

 

(1)   Long 100 shares + short high strike call + long 2 lower strike puts. Example: Long 100 shares + short $50 call + long 2 $45 puts.

 

(2)   Short 200 shares + long 2 low strike calls + short high strike put. Example: Short 200 shares + 2 $45 calls + short $50 put.

 

(3)   Short 100 shares + 2 low strike calls + short high strike call. 

Example: Short 100 shares + 2 $45 calls + short $50 call.

 

 

Short Put Ratio Spread

 

Position:  Long a high strike put and short more contracts of a lower strike put.

 

Example: Buy 1 $50 put and sell 2 $45 puts. The more short positions, the steeper the slope of the profit and loss, as shown in the diagram. The diagram shows the effects of selling 2x, 3x and 4x the amount of puts over the long position.

 

Outlook: Neutral to slightly bearish but fearful of upward move.

 

Directional Risk: Unlimited downside

 

Max gain:  Limited. Occurs if the stock price equals the strike of the short puts at expiration. Max gain is difference in strike less debit (or plus credit).

 

Max loss: 

Max loss is difference in strikes plus the debit amount (or less the credit amount). 

 

Example: Buy $50 put for $3 and sell 2 $45 puts for $1. This results in a net debit of $1. Max loss is $45 + $1 = $46.

 

Breakeven (2 possible breakeven points):

If trade executed for a credit, there is one breakeven point: Short put strike - 1/(R-1) * max gain; where R is the ratio of short puts to long puts (R must be 2 or greater). Example: Buy 1 $50 put for $3 and sell 2 $45 puts for $2 for net credit of $1. There are twice as many puts purchased so R = 2. Because the max gain is $6, the breakeven is $45 - 1/(2-1) * $6 = $39.

 

If trade executed for a debit, there will be two breakeven points: 

 

Lower: Same calculation is used as for credit spread

Upper: Long strike - debit

 

Example: Buy 1 $50 put for $3 and sell 2 $45 puts for $1 for net debit of $1. Upper breakeven is $50 - $1 = $49.

 

The formula for the upper breakeven will not change regardless of the number of short puts. This is because the slope of the profit and loss chart is only affected to the left (lower breakeven) of the short strike as shown in the profit and loss diagram above. 

 

Synthetic equivalents (numerous, but most common are):

 

(1)   Long 100 shares + long high strike call + short 2 lower strike calls. Example: Long 100 shares + $50 call + short 2 $45 calls.

 

(2)   Long 200 shares + short 2 low strike calls + higher strike put. Example: Long 200 shares + short 2 $45 calls + $50 put.

 

(3)   Long 100 shares + short 2 low strike calls + long higher strike call. Example: Long 100 shares + short 2 $45 calls + $50 call.

 

 

Long Calendar Spread

 

Position:  (Can be initiated with either either calls or puts). 

 

Long a far month contract and short a shorter-term contract with equal strike prices.

 

Example:  Buy 1 March $50 call and sell 1 $50 January call. 

 

Outlook: Neutral

 

Directional Risk: Limited upside and downside.

 

Max gain: Limited – assuming the positions are closed together at expiration of short strike. Occurs if stock closes at strike price of near-term contract at expiration. Difficult to say exactly what the max gain will be as the position is an attempt to exploit time decay and other factors will move as well.

 

Max loss: Limited to the net debit. Occurs if: (1) Stock closes below strike through both option expirations or (2) If stock makes a large move up or down prior to expiration of near-term strike.

 

Example: Buy March $50 call for $8 and sell a January $50 call for $5 for net debit of $3. If stock is at or below $50 through January expiration the short call expires worthless. If the investor continues to hold the long position and the stock closes at or below $50 for March expiration, the trader loses the $3 as both options expired worthless.

 

Another scenario may happen: If the trader initiates the position and the stock makes a large move upward prior to January expiration, then both options will converge on intrinsic values and lose nearly all of their time premiums. The same is true if the stock collapses. In either case, the trader may lose the entire net debit. 

 

Of course, if the stock collapses during the short-term contract and the position is nearly worthless, one choice for the trader is to close out the short and hold onto the long hoping for a rebound. The trader does not have this choice if the stock makes a large move upward since the short position will exercise and the trader will usually cover with the long position.

 

Breakeven:

Strike price + net debit.

Example: Long March $50 call and short January $50 call for net debit of $5. At January expiration, breakeven will be $50 + $5 = $55.

 


Short Calendar Spread

 

Position:  (Can be initiated with either calls or both puts). 

 

Buy a short-term contract and sell a longer-term contract with equal strike prices. 

Example:  Buy a January $50 call and sell a March $50 call.

 

Outlook: Very bullish or bearish

 

Directional Risk:  None

 

Max gain: Limited to net credit (usually slightly less). Occurs if stock closes well above or well below the strike at expiration of the near-term contract.

 

Max loss: Difficult to say exactly what the max loss will be as the position is an attempt to exploit time decay and other factors will move as well. Once the long position expires (short-term contract), the volatility (and skew) will dictate the price of the short position, which determines the potential loss. 

Example: Buy March January $50 call for $5 and sell a March $50 call for $3 for net credit of $3. If stock is well above the strike at January expiration, both options are virtually worthless (although there may be a small amount of time value on the short position) and the trader keeps the initial credit after closing the positions. A similar situation happens if the stock is well above the strike at January expiration.

 

Another scenario may happen: The stock may close at exactly the strike and January expiration. In this case, the long call is worthless and the trader must buy back the short call to close out the position.  However, there is no way to determine what the market will be asking for this contract and thus no sure way to determine what the loss, if any, will be.

 

Breakeven:

For the reason stated in the paragraph above, it is impossible to say where the breakeven points will be.  

 

 

 

Long Call Christmas Tree

 

Position:  Short 1 lower strike call and long 1 contract of a higher strike call and long 1 more call at an even higher strike. 

Example: Sell $50 call and buy $55 call and buy $60 call.

 

Outlook: Extremely bullish but fearful of a downward fall.

 

Directional Risk: Limited downside if debit spread (none if credit spread).

 

Max gain: Unlimited upside.

 

Max loss: Limited. Occurs if stock closes between strikes of two long positions at expiration. 

 

If executed for credit: Max loss is difference between short strike and first long strike minus credit.

 

Example: Sell $50 call for $4 and buy $55 call for $2 and buy $60 call for $1 for net credit of $1. Max loss is ($55 - $50) - $1 = $4.

 

If executed for debit: Max loss is difference between short strike and first long strike plus debit.

 

Example 2: Sell $50 call for $4 and buy $55 call for $3 and buy $60 call for $2 for net debit of $1. Max loss is ($55 - $50) + $1 = $6.

 

Breakeven (2 possible breakeven points):

If trade executed for a debit, there is one breakeven point: Highest strike plus max loss. 

 

Example: Sell $50 call for $4 and buy $55 call for $3 and buy $60 call for $2 for net debit of $1. Max loss is $6 so breakeven will be $60 + $6 = $66. 

 

If executed for a credit there will be two breakeven points:

 

Upper breakeven is same as for debit.

Lower breakeven will be the short strike + credit. 

 

Example: Sell $50 call for $4 and buy $55 call for $2 and buy $60 call for $1 for net credit of $1. Lower breakeven will be $50 + $1 = $51.

 

Synthetic equivalents (numerous, but most common are): 

 

(1)   Short 100 shares + short low strike put + long middle strike call + long high strike call. Example:  Short 100 shares + short $50 put + long $55 call + long $60 call.

 

(2)   Short low strike put + long middle strike put + long high strike call. Example: Short $50 put + long $55 put + long $60 call

 

(3)   Long 100 shares + low strike put + long lower strike put + short lower strike put. 

Example: Long 100 shares + long $50 put + long $45 put + short $40 put.




Short Call Christmas Tree

 

Position: Long low strike call and short 1 higher strike call and short 1 call at an even higher strike. 

Example: Buy 1 $50 call, sell 1 $55 call and sell 1 $60 call.

 

Outlook: Neutral but fearful of downturn.

 

Directional Risk: Unlimited upside.

 

Max gain: Limited. Max gain is difference in long and first short strike plus credit (or minus debit). Occurs if stock closes between two short strikes at expiration.

 

Example: Buy $50 call for $4, sell $55 call for $3 and sell $60 call for $2 for net credit of $1. Max gain is $55 - $50 + 1 = $6.

 

Example 2: Buy $50 call for $4, sell $55 call for $2 and sell $60 call for $1 for net debit of $1. Max gain is $55 - $50 - $1 = $4.  

Max loss: Unlimited upside. 

 

Breakeven (2 possible breakeven points):

If trade executed for a credit, there is one breakeven point: Highest strike plus max gain. 

 

Example: Buy $50 call for $4, sell $55 call for $3 and sell $60 call for $2 for net credit of $1. Max gain is $6. Breakeven is $60 + $6 = $66.

 

If trade executed for a debit, there are two breakeven points: 

Upper: Same as for credit

Lower: Long strike plus debit

 

Buy $50 call for $4, sell $55 call for $2 and sell $60 call for $1 for net debit of $1.

Lower breakeven will be $50 + $1 = $51.

 

Synthetic equivalents (numerous, but most common are): 

 

 

(1)   Long 100 shares + low strike put + short middle strike call + short high strike call. 

 

Example:  Long 100 shares + $50 put + short $55 call + short $60 call.

 

(2)   Short 100 shares +long low strike call + short middle strike put + short high strike call. 

 

Example:  Short 100 shares + long $50 call + short $55 put + short $60 call.

 

(3)   Short 100 shares + low strike call + short middle strike call + short high strike put.

 

Example:  Short 100 shares + $50 call + short $55 call + short $60 put.


 

Long Put Christmas Tree

 

Position:  Short 1 high strike put and long 1 contract of a lower strike put and long 1 more put at an even lower strike.  

Example: Sell $60 put and buy $55 put and buy $50 put.

 

Outlook: Extremely bearish but fearful of an upward move.

 

Directional Risk: Limited upside if executed for debit (none if executed for credit).

 

Max gain: Lowest strike put minus max loss.

 

Max loss: Limited. Occurs if stock closes between strikes of two long positions at expiration. 

 

If executed for debit: Max loss is difference between short strike and first long strike plus debit.

 

Example: Sell $60 put for $4 and buy $55 put for $3 and buy $50 put for $2 for net debit of $1. Max loss is ($60 - $55) + $1 = $6.

 

If executed for credit: Max loss is difference between short strike and first long strike minus credit.

 

Example: Sell $60 put for $4 and buy $55 put for $2 and buy $50 put for $1 for net credit of $1. Max loss is ($60 - $55) - $1 = $4.

 

Breakeven (2 possible breakeven points):

If trade executed for a debit, there is one breakeven point: 

Breakeven = Lowest strike minus max loss. 

 

Example: Sell $60 put for $4 and buy $55 put for $3 and buy $50 put for $2 for net debit of $1. Max loss is $6 so breakeven will be $50 - $6 = $44.

 

If executed for a credit there will be two breakeven points:

 

Lower breakeven is same as for debit.

Upper breakeven will be the short strike minus the credit. 

 

Example: Sell $60 put for $4 and buy $55 put for $2 and buy $50 put for $1 for net credit of $1. Upper breakeven = $60 - $1 = $59.

Synthetic equivalents (numerous, but most common are):

 

(1)   Long 100 shares + short high strike call + long mid strike put + long low strike put. Example: Long 100 shares + short $60 call + long $55 put + long $50 put.

 

(2)   Short 100 shares + long low strike call + long mid strike call +short high strike call. Example: Short 100 shares + long $50 call + long $55 call + short $60 call.

 

 

Short Put Christmas Tree

 

Position: Long high strike put and short a lower strike put and short a put at an even lower strike. 

Example: Buy 1 $60 put, sell 1 $55 put and sell 1 $50 put.

 

Outlook: Neutral to slightly bearish but fearful of an upward move.

 

Directional Risk: Unlimited downside.

 

Max gain: Limited. Max gain is difference in long and first short strike plus credit (or minus debit). Occurs if stock closes between two short strikes at expiration.

 

Example: Buy $60 put for $4, sell $55 put for $3 and sell $50 put for $2 for net credit of $1. Max gain is $60 - $55 + 1 = $6.

 

Example 2: Buy $60 put for $4, sell $55 put for $2 and sell $50 put for $1 for net debit of $1. Max gain is $60 - $55 - $1 = $4.  

Max loss:  Low strike put minus max gain. Occurs at a stock price of zero.

 

Breakeven (2 possible breakeven points):

If trade executed for a credit, there is one breakeven point: 

Breakeven = Low strike minus max gain. 

 

Example: Buy $60 put for $4, sell $55 put for $3 and sell $50 put for $2 for net credit of $1. Max gain is $6. Breakeven is $50 - $6 = $44.

 

If trade executed for a debit, there are two breakeven points: 

Lower: Same as for credit

Upper: Long strike minus debit

 

Example: Buy $60 put for $4, sell $55 put for $2 and sell $50 put for $1 for net debit of $1. Upper breakeven = $60 - $1 = $59.

 

Synthetic equivalents (numerous, but most common are): 

 

(1)   Long 100 shares + short low strike call + short mid strike call + long high strike call. 

 

Example:  Long 100 shares + short $50 call + short $55 call + $60 call.

 

(2)   Short 100 shares + short low strike call + short mid strike put + long high strike call. 

 

Example:  Short 100 shares + short $50 put + short $55 put + long $60 call  

 

 

Long Semifuture

 

Position:  Long high strike call and short a lower strike put. 

Example: Buy 1 $50 call and sell a $45 put.

 

Outlook: Very bullish. The sale of the put reduces the cost of the call but also exposes the trader to unlimited downside risk.

 

Directional Risk: Unlimited downside.

 

Max gain: Unlimited. 

 

Max loss: Put strike plus debit (or minus credit). Occurs at a stock price of zero. Example: Buy $50 call for $3 and sell $45 put for $2 for net debit of $1. Max loss is $45 + $1 = $46.

 

Example 2: Buy $50 call for $2 and sell $45 put for $3 for net credit of $1. Max loss is $45 - $1 = $44.

 

Breakeven (2 possible breakeven points):

If trade executed for a credit: 

Breakeven = Put strike minus credit. 

 

Example: Buy $50 call for $2 and sell $45 put for $3 for net credit of $1. Breakeven = $45 - $1 = $44.

 

If trade executed for a debit:

Breakeven = Call strike + debit

 

Example 2: Buy $50 call for $3 and sell $45 put for $2 for net debit of $1.

Breakeven = $50 + $1 = $51.

 

Synthetic equivalents (numerous, but most common are): 

 

(1)   Long 100 shares + short low strike call + high strike call. 

 

Example:  Long 100 shares + Short $45 call + $50 call

 

(2)   Long 100 shares + short low strike put + high strike put. 

 

Example:  Long 100 shares + Short $45 put + $50 put.

 

(3)   Long 200 shares + short low strike call + high strike put. 

 

Example:  Long 200 shares + Short $45 call + $50 put. 

 

 

 

Short Semifuture

 

Position:  Long low strike put and short a higher strike call. 

Example: Buy 1 $45 put and sell a $50 call.

 

Outlook: Extremely bearish. The sale of the call reduces the cost of the put but also exposes the trader to unlimited upside risk.

 

Directional Risk: Unlimited upside.

 

Max gain: Put strike minus debit (or plus credit). Occurs at a stock price of zero.

 

Example: Buy $45 put for $3 and sell $50 call for $2 for net debit of $1. Max gain is $45 - $1 = $44.

 

Example 2: Buy $45 put for $2 and sell $50 call for $3 for net credit of $1. Max gain is $45 + $1 = $46.

 

Max loss: Unlimited upside. 

 

Breakeven (2 possible breakeven points):

If trade executed for a credit: 

Breakeven = Call strike plus credit.

 

Buy $45 put for $2 and sell $50 call for $3 for net credit of $1. Breakeven = $50 + $1 = $51.

 

If trade executed for a debit:

Breakeven = Put strike - debit

 

Example: Buy $50 call for $3 and sell $45 put for $2 for net debit of $1.

Breakeven = $45 - $1 = $44.

 

Synthetic equivalents (numerous, but most common are): 

 

(1)   Short 100 shares + low strike call + short higher strike call. Example: Short 100 shares + $45 call + Short $50 call.

 

(2)   Short 100 shares + short high strike put + lower strike put. Example: Short 100 shares + Short $50 put + $45 put

 

(3)   Short 200 shares + low strike call + short higher strike put. Example: Short 200 shares + $45 call + Short $50 put.

 

 

 

Long Wrangle

Position:  Long call backspread and long put backspread. 

Example: Sell 1 $50 call and buy 2 $55 calls (call backspread) and sell 1 $55 put and buy 2 $50 puts (put backspread).

 

Outlook: (1) Extremely bullish or bearish but uncertain of direction or (2) Expecting an increase in implied volatility.

 

Directional Risk: None.

 

Max gain: Unlimited upside and downside. 

 

Max loss:  Net debit + difference in strikes. Occurs if stock closes between the strikes at expiration.

 

Example: Sell 1 $50 call for $3 and buy 2 $55 calls for $2 and sell 1 $55 put for $3 and buy 2 $50 puts for $2. This results in a net debit of $2. The difference in strikes is $55 - $50 = $5. The max loss is therefore $5 + $2 = $7. The reason we must add the difference in strikes to our max loss is because the positions we are selling (sell one $50 call and sell one $55 put in this example) create a box position (put strike is higher than the call strike) and so is guaranteed to always be worth the difference in strikes. Because this position is sold, we must pay for it at expiration.

 

Breakeven (2 breakeven points):

Lower = Low strike minus max loss

Upper = High strike plus max loss

 

Example: Sell 1 $50 call for $3 and buy 2 $55 calls for $2 and sell 1 $55 put for $3 and buy 2 $50 puts for $2. Lower breakeven is $50 - $7 = $43. Upper breakeven is $55 + $7 = $62.

Synthetic equivalents (numerous, but most common are): 

 

(1)   Long high strike call and long low strike put (strangle). Example: Long $55 call and long $50 put.

 

(2)    100 shares + low strike put + higher strike put. Example: Long 100 shares + $50 put + $55 put.

 

(3)   Short 100 shares + low strike call + higher strike call. Example: Short 100 shares + $50 call + $55 call

 

Note:  The wrangle is exactly the same as a strangle from a profit and loss standpoint. The difference in the two positions is the way they lose value from time decay. The wrangle is much less sensitive to time decay due to the short positions in the center; effectively, the trader is selling the more valuable call and put options (low and high strikes respectively) and using those proceeds to finance the long positions. This is a strategy primarily used by market makers to reduce the effects of time decay. For most investors, this strategy is too commission intensive; however, it can be used as a subsequent hedge by completing it with either call or put backspreads. For example, if you are long a call backspread, at a later time you could hedge by "legging into" the wrangle and purchasing a put backspread thereby creating a strangle.

 

 

 

Short Wrangle

Position:  Short call ratio spread and short put ratio spread. 

Example: Buy 1 $50 call and sell 2 $55 calls (short call ratio spread) and buy 1 $55 put and sell 2 $50 puts (short put ratio spread).

 

Outlook: Neutral to slightly bullish or bearish.

 

Directional Risk: Unlimited in both directions.

 

Max gain: Initial credit + difference in strikes. Occurs if stock closes between strikes at expiration.

 

Example: Buy 1 $50 call for $3 and sell 2 $55 calls for $2 and buy 1 $55 put for $3 and sell 2 $50 puts for $2. This results in a net credit of $2. The difference in strike is $55 - $50 = $5. The max gain is therefore $5 + $2 = $7.

 

Max loss:  Unlimited upside and downside.

 

Breakeven (2 breakeven points):

Lower = Low strike minus max gain

Upper = High strike plus max gain

 

Example: Buy 1 $50 call for $3 and sell 2 $55 calls for $2 and buy 1 $55 put for $3 and sell 2 $50 puts for $2. Net credit is $2 and difference in strikes is $5 so lower breakeven is $50 - $7 = $43 and upper breakeven is $55 + $7 = $62.

 

Synthetic equivalents (numerous, but most common are): 

 

(1)   Short low strike put and short high strike call (short strangle). 

 

Example: Short $50 put and short $55 call.

 

(2)   Long 100 shares + short low strike call + short high strike call.

 

Example: Long 100 shares + short $50 call + short $55 call.

 

(3)  Short 100 shares + short low strike put + short high strike put.

 

Example:  Short 100 shares + short $50 put + short $55 put

 

 

Long Cartwheel

 

Position:  Long call backspread and short put ratio spread. 

Example: Sell 1 $45 call and buy 2 $50 calls (call backspread) and buy 1 $50 put and sell 2 $45 puts (short put ratio spread). Usually established for slight debit or credit.

 

Outlook: Extremely bullish to slightly bearish.

 

Directional Risk: Unlimited downside.

 

Max gain: Unlimited at extreme upside (above upper breakeven). Max gain at low strike (upper peak) = Difference in strikes + credit (or minus debit).

 

Max loss:  Unlimited at extreme downside (below lower breakeven). Max loss at high strike (lower peak) = Credit - difference in strikes (or debit + difference in strikes).

 

Breakeven (3 breakeven points):

Lower = Low strike - max gain at low strike

Middle = Low strike + 1/2 max gain at low strike

Upper = High strike plus max loss at high strike

 

Example: Sell 1 $45 call and buy 2 $50 calls (call backspread) and buy 1 $50 put and sell 2 $45 puts (short put ratio spread) for net debit of $1:

 

Max gain at low strike = $5 - $1 = $4. 

Max loss at high strike = $1 + $5 = $6.

Lower breakeven = $45 - $4 = $41.

Middle breakeven = $45 + $2 = $47.

Upper breakeven = $50 + $6 = $56.

 

Synthetic equivalents (numerous but rarely used) 

 

(1)  Long 100 shares + short 3 low strike calls + 3 higher strike calls. Example: Long 100 shares + short 3 $45 calls + 3 $50 calls

(2)  Long 100 shares + short 3 low strike puts + 3 higher strike puts. Example: Long 100 shares + short 3 $45 puts + 3 $50 puts. 

 

 

 

Short Cartwheel

 

Position:  Long put backspread and short call ratio spread. 

Example: Sell 1 $50 put and buy 2 $45 puts (put backspread) and buy 1 $45 call and sell 2 $50 calls (short call ratio spread). Usually established for slight debit or credit.

 

Outlook: Extremely bearish to slightly bullish.

 

Directional Risk: Unlimited upside.

 

Max gain: Unlimited at extreme downside. Occurs at a stock price of zero. Max gain at high strike (upper peak) = Difference in strikes + credit (or minus debit).

 

Max loss:  Unlimited at extreme upside (above upper breakeven). Max loss at low strike (lower peak) = Credit - difference in strikes (or debit + difference in strikes).

 

Breakeven (3 breakeven points):

Lower= Low strike - max loss at low strike

Middle = Low strike + 1/2 max loss at low strike

Upper= High strike plus max gain at high strike

 

Sell 1 $45 put and buy 2 $50 puts (put backspread) and buy 1 $45 call and sell 2 $50 calls (short call ratio spread) for net credit of $1.

 

Max loss at low strike = $1 - $5 = $4. 

Max gain at high strike = $5 + $1 = $6.

Lower breakeven = $45 - $4 = $41.

Middle breakeven = $45 + $2 = $47.

Upper breakeven = $50 + $6 = $56.

 

Synthetic equivalents (numerous but rarely used) 

 

(1)  Short 100 shares + long 3 low strike calls + 3 short higher strike calls. Example: Short 100 shares + 3 $45 calls + 3 short $50 calls

(2)  Short 100 shares + long 3 low strike puts + 3 short higher strike puts. Example: Short 100 shares + 3 $45 puts + 3 short $50 puts.

 

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