Strategy Lab

What’s the difference between a strangle and a straddle? The answer is a butterfly. If option strategies and relationships like these are puzzling then there’s one thing you need – education in the fundamental option relationships. And Strategy Lab is your place for solutions!
This is your one-stop workshop for 12-weeks of serious strategy dissection. We’ll take a detailed look at eight of the most popular option strategies and show you everything from the science of construction to the art of the morph – creating a different strategy from an existing one.
The lab begins with an introduction to profit and loss diagrams along with the basics of margin trading. We’ll cover all the mysterious terms you’ve seen on your broker’s platform including “margin cash available” and “buying power” as well as the Special Memorandum Account (SMA) that is the driving force behind these financial innovations.
Armed with this valuable information, we then start by understanding the profit and loss profile for long and short stock positions – the two most popular investing strategies. This is a crucial starting point because the fundamental risks and rewards they create are the ones that option strategies alter. Options allow you to bend and shape these long and short stock profiles into various other forms thus eliminating or hedging the most serious risk for you at the time. Why you should select one strategy over another is the art side of options trading. Strategy Lab shows the science behind the decision. 

During the twelve-week course, you’ll master the following concepts and strategies:

1. Profit and loss diagrams & hedging
2. Synthetic option positions
3. Margin trading basics
4. Long & short stock
5. Long calls & Long puts
6. Covered call
7. Vertical spreads
8. Straddles & strangles
9. Butterfly spreads
10. Condors
11. Calendar spreads
12. Diagonal spreads
Within each of these strategies, you’ll also learn how to alter (morph) the various strategies into new ones by unleashing your newfound knowledge of synthetics. For example, assume you have 200 shares of stock and buy two $50 puts. This hedges your downside risk by creating a “synthetic” call option. Your profit and loss diagram would change from a straight line to that of the center picture in the diagram below: 

From that center profile, you can again change the risk-reward profile by creating any number of new profiles as market conditions change. Eight examples are shown in the above diagram. For instance, let’s assume you wanted to increase your profit, on a limited basis, if the stock price falls. That’s easy. You can sell one $45 call and your profit and loss diagram shifts from the center to diagram #1.

What if you wanted to close or “flatten” the position? Most investors would sell the shares along with the puts but that requires two commissions and two bid-ask spreads. There is an easier way. You could accomplish the same thing by selling two $50 calls thus changing your profit and loss curve from the center picture to diagram #2.
If you wanted to profit on the downside, you could buy two $45 puts thus creating a “strangle” and changing from the center diagram to diagram #3.
If you wanted to increase the downside profit at the expense of increasing the upside risk, you could create a ratio spread shown in diagram #4 by selling four $55 calls.
You could also sell two $50/$55 vertical call spreads and lock in some profits at the expense of increasing your upside breakeven point as shown in diagram #5. This is an interesting morph since it leaves you with the identical diagram as the center position but puts cash in your account. So not only can options be used to alter the risk profiles but they can also turn unrealized gains into cash while maintaining the same profile. Try doing that with stock.
If you turned bearish, you could shift from the center position to diagram #6 by selling two $45 calls and creating a bear spread.
On the other hand, if you were still bullish but wanted to collect cash you could sell two $55 calls and create a limited risk, limited reward bull spread shown in diagram #7. Selling two $45 puts creates a semi-future as shown in diagram #8. You get the idea. The possibilities are endless, the power unimaginable, and the results rewarding.
Of course, any of these alterations do not come for free. There are tradeoffs in the indisputable risk-reward relationship. Understanding the tradeoffs is the art side of knowing which strategy is best for you at that time. The decision is easy once you understand the fundamental concepts.
Options trading is a rewarding venture. However, to maximize the benefits, you must be able to select the proper strategy. Which one is right? The answer has to do with your outlook and risk tolerance and then shaping and shifting the risk-reward profiles to suit your needs. If that sounds difficult, Strategy Lab will show you just how easy it is. 

Time and Price Information

Strategy Lab is now available as a fully online, digital download class! You can start immediately and take it at your own pace. Each video is menu driven so you can navigate through the courses with ease.

Please visit the 
bookstore to purchase

If you have questions, please feel free to email or call561-282-9455 for more information.


 Bill Johnson

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