Sold Straddle

Posted on March 22nd, 2010 admin No Comments

A sold straddle is a non-directional options trading strategy that involves simultaneously selling a put option and a call option of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put option and call option, but it is risky if the underlying security’s price goes up or down much. The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called “non-directional” because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call.

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Bull Put Spread: Trade Example

Posted on March 19th, 2010 admin No Comments

This is a past recommendation on PBL which demonstrates how the bull put spread strategy works in real life.

Trade:

Bull Put Spread

Sell 10 PBL39 Oct 1950 Puts @ 22

Buy 10 PBL36 Oct 1900 Puts @ 12

Net Credit = 10 cents

This trade requires minimal margin requirements.

Maximum Profit

The ideal result is for both options to expire worthless, so that maximum premium is retained from the credit spread.

= Net Premium Received

= Sold Put Premium – Bought Put Premium

= (0.22 – 0.12) x 10 contracts

= $1000

Maximum Loss

This will occur if the share price is below the bought at expiry

= Difference between strike prices less net premium received

= 50 – 10

= 40

= 0.40 x 10 Contracts

= $4000

Breakeven

Upper strike less net premium received

= 19.50 – 0.10

= 19.40

Main Benefits of Strategy

1. Provides leveraged exposure to a rise in the share price

2. Takes advantage of time decay

3. The ideal result is for the options to expire worthless, which means the client will save on brokerage not having to close the position to take a profit.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

What Strategy to Trade?

Posted on March 18th, 2010 admin No Comments

Bull Call Spread
The primary reason for buying a bull call spread is an expected increase in share price. This is a directional trade and the aim should be a high percentage return. The reason for placing a bull call spread is that the calls are expensive so sell an out-of-the-money call will reduce the cost of the trade. This strategy is suited for break out trades and trading trends.

Bear Put Spread
The main reason for buying a bear put spread is an expected decrease in share price. The aim of the directional is to have a high risk vs. reward ratio. The bear put spread can be traded when buying puts is too expensive due to high volatility and selling an options against the bought puts reduces cost, breakeven, volatility effect and time decay effect. The trade is suited to a share price in a downtrend. This strategy is suited for break out trades and trading trends.

Bear Call Spread
A bear call is traded when you are expecting a sideways share price movement to a slight decrease in share price. The bear call spread is a credit spread and can be traded as a type for income. The risk vs. reward can be set up depending on the aim of the trader whether to have high probability small profits or low probability high returns. This trade is suitable when volatility is high and expected to decrease. The bear call spread is traded to take advantage of time decay.

Bull Put Spread
A bull put spread is best suited for a sideways to upward trending share price. The bull put spread is a credit spread and can be used as an income generating strategy. The bull put spread is best implemented when there is high volatility in the puts your outlook is volatility to decrease. This may be because the share price is just above a major level of support or at the bottom end of a trading range. The bull put strategy is traded to take advantage of time decay.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Put Spread: Advantages and Disadvantages

Posted on March 16th, 2010 admin No Comments

Advantages of Bear Put Spread

  • The loss is limited if the underlying share price falls instead of rises.
  • If the share price fails to stay above the strike price of the sold put option, the profit yield will be greater than just buying call options.
  • Able to profit even when the share price remains completely still.
  • Lower risk than simply writing naked put options as maximum downside is limited by bought put option.

Disadvantages of Bull Put Spread

  • There will be no more profits possible if the underlying asset rises beyond the strike price of the sold put option.
  • Because it is a credit spread, there is a margin requirement in order to place the trade.
  • As long as the sold put options remain in-the-money, there is a possibility of it being assigned. You may then have to purchase the underlying stock to meet the sold put obligation.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Put Spread: The Strategy

Posted on March 11th, 2010 admin No Comments

A bull put spread is a moderately bullish option strategy that profits when the underlying share price stays still or increases. A bull put spread is similar to a bull call spread. The bull put spread involves simultaneously selling of a put option at a strike price while also buying the same number of put options of the same asset but at a lower strike. A bull put spread is also a technique to selling naked puts but buying lower puts to reduce the maximum loss. Because the bull put spread is a credit spread, you also make money if the underlying asset does not move through time decay. The bull call spread, on the other hand, would not be able to profit if the stock did not move upward beyond its breakeven point.

Maximum Profit

To achieve maximum profit the share price must be above the sold put strike price at expiry. The maximum profit for a bull put spread is the net credit received.

Maximum Loss

If the stock price decreases below the bought put at the expiration date, then the investor has a maximum loss. The maximum loss is the difference between the sold put and bought put strike price less the net credit received.

Break Even

The breakeven is higher than just selling a put; however the maximum loss is reduced significantly. The break even point is the strike price of the sold put minus the net credit received.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Call Spread: Strategy Risks

Posted on March 10th, 2010 admin No Comments

It is important to always be aware of the strategy risks. The primary risk when placing a bear call spread is when the share price increases past the sold call option and an ever greater concern is if the share price increases above the bought call option (protection). Since you receive a premium to enter this trade there is a required margin. This margin can increase to as much as 1.2 times your maximum loss. For example if you were risk $5,000 the cash margin required in the account can increase to $6,000 (5000 *1.2) which includes the premium received. So it is important to know your maximum risk and make sure there are enough funds to cover the worst case scenario.

Another risk inherent with selling options is volatility. When you open the bear call spread you want the volatility to be high so you can sell the call options for as much value as possible. Once the trade is placed you want the volatility to drop off and time decay to kick in. So even if the share price stays still but volatility increases the position may not profit in the short-term. Increased levels in volatility mean to close out it will cost more to buy back the sold call option. If the share price increase above the sold put option prior to expiry there is potentially a risk of exercise.

Exercise

The main risk of credit spreads is the risk of being exercised. If the sold call option is exercised it means that you are obligated to sell shares at the exercise price of the sold call option. This can have a negative impact in terms of you have sold shares you do not own which means you need to buy them back at the higher level and therefore locking in a loss on that position. If the share price is above the bought call option (protection) when exercised then you can sell the call option which will reduce the loss from being exercised. It is still not possible to lose more than the maximum risk before entering the trade. Another disadvantage of being exercised is the brokerage on the share sale and purchase so it is a good idea to try an avoid exercise. To avoid being exercised you need to monitor your position and more importantly the delta of the sold call option. If the share price is above the sold call option an indication of the likelihood of being exercised can be identified by the delta. If the delta on the sold call option is above 0.95 there is a chance being exercised. If the delta is above 0.98 then it is necessary to implement one of your exit strategies.

To avoid exercise there are two options. If you think the share price will keep increasing you can close the trade for a loss. If you think you view is correct and the share price will fall from this level and want to keep the position you can roll out to the next month. What this means is you can close the positions you have an open the same position for the next month and do this for no cost or a small credit. Therefore if the share price then decreases below the sold call by the next month you can still make maximum profit. This options is normally recommended unless your analysis, technical or fundamentals, indicate a change is trend or market conditions.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Call Spread: The Psychology

Posted on March 9th, 2010 admin No Comments

The reasoning behind placing a credit spread is different to placing a debit spread. Bear Call Spreads and Bull Put Spreads are credit spreads. They are not as aggressive cause you do not need the share price to move to far in a certain direction for instance a bear call spread profits if the share price goes sideways or fall whereas the bear put spread requires the share price to fall to a certain level for maximum profit. This strategy profits from time decay.

The expected share price movement is neutral to slightly bearish. Selling a call option out-of-the-money you receive premium if the share price is below the sold call option strike price at expiry the premium received is the profit. The bear call spread just means you buy a call at a higher level then you sold the call to cap your risk and indentify you maximum risk rather than having no protection and potentially unlimited risk for a small percentage credit. The reasons for trading bear call spreads are;

  • Alternative to naked calls (selling calls with no protection) as you have a predefined profit and loss and a better risk vs. reward ratio.
  • Share price outlook may be neutral to slight bearish on the share price due to a resistance level.
  • Consider the bear call spread when you are expecting a small fall in the price of the stock.
  • The trade of with placing a bear call far out of the money is that the stock price can increase in share price slightly, stay flat or fall to make a profit. So even if you are wrong you can still profit from the trade.
  • This strategy can be used to produce income.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Call Spread: Advantages and Disadvantages

Posted on March 8th, 2010 admin No Comments

Advantages of Bear Call Spread

  • Loss is limited if the underlying financial instrument rises instead of falls.
  • If the underlying instrument fails to drop below the strike price of the out-of-the -money sold call option, the profit yield will be greater than just buying put options.
  • Able to profit even when the underlying asset remains completely still.
  • Lower risk than simply writing naked call options as maximum downside is limited by the bought call option.

Disadvantages of Bear Call Spread

  • There will be no more profits possible if the share price drops beyond the strike price of the sold call option.
  • Because it is a credit spread, there is a margin requirement in order to put on the position.
  • As long as the short call options remain in-the-money, there is a possibility of it being assigned. You may then have to purchase the underlying stock to meet the sold call obligation.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au