Strategies

OPTION STRATEGIES
Introduction
Option Strategies, or Options Based Investment Strategies, are calculated ways of using options
singly or in combination in order to profit from one or more market movements. Option Strategies
are a direct alternative to traditional buying and selling of stocks and offers greater profit potential
with limited risk. Choosing which option strategy to use starts from your opinion on the underlying
stock. Option strategies are merely the means through which you transform your "prediction" of
future stock movement into money through option trading
Option Strategies give options traders the versatility to profit from any opinions that they have on
an underlying stock and to limit risk even if that opinion moves against them. The creative use of
Options Strategies makes stock options the most versatile financial instrument in the world today.
Classification of Option Strategies
Broadly, Option Strategies are classified under 5 categories:
Bullish Strategies
Bearish Strategies
Volatile Strategies
Neutral Strategies
Arbitrage Strategies.
Choosing Option Strategies
If you are of the opinion that a stock will go up, you will use a bullish option strategy.
If you are of the opinion that the stock will go down, you will use a bearish option strategy.
If you are of the opinion that a stock will go up or down drastically, you will use a volatile
option strategy and
If you think the stock will stay stagnant, you will certainly use one of the many neutral
option strategies.
If you see a price discrepancy, you will be able to lock in some arbitrage profits with options
arbitrage strategies.
"At this point, you must have noticed that option trading is extremely versatile and does give
certain level of protection when your prediction on the underlying stock is inaccurate but in
order to reach the maximum profit potential of each option strategy, your prediction on the
movement of the underlying stock still needs to be fairly accurate. The good news is, option
strategies allows you to profit not only from just one direction but potentially in many directions
and that certainly gives you a winning edge."
Position Trading
Option Strategies that uses options in combination are called Position Trading. A "Position" in
trading terms simply means any trades that you have open in your trading account. A "Position" in
option strategies terms is one or several option contracts of the same or different types, working
together to produce one's desired reward/risk profile. Such Positions can benefit from an UP,
DOWN or even NEUTRAL move in the underlying instrument or asset. There are even ways to
construct positions which benefit from more than one direction of movement. There are option
strategies which profit from both an UP and DOWN movement or even an UP and NEUTRAL
movement just to name a few.
Basic and Complex Option Strategies
Option Strategies also vary in complexity. Some option strategies are very straightforward and easy
to execute, however, other option strategies can be highly complex and requires a strong
understanding in option Greeks in order to balance the Delta or Theta of a position before
executing it. There are also option strategies which require a significant amount of money to
execute due to margin requirements or which require the broker to allow the use of credit spreads.
These characteristics lead to the classification of option strategies into "Basic" or "Complex".
Beginners should follow the "Basic" option strategies outlined here and become thoroughly familiar
with them before trying "Complex" options strategies.
Debit Spreads and Credit Spreads
When you execute an option trading strategy that involves buying and selling more than one kind of
option, then you are in essence, putting on one what is called a "Spread". The Spread that you put
on falls into one of these 2 categories in terms of capital outlay: Debit Spread or Credit Spread.
Debit Spreads
A Debit Spread is when a low premium option is sold and a high premium option is bought. This is
the most common type of spread which you need to pay money to put on. Hence a "Debit" to your
account. This debit to your account is where the term "Debit Spread" comes from. Anyone with
enough money to pay the debit can put on a debit spread. There are no margin requirements and is
therefore the most popular kind of spread.
Credit Spread
A Credit Spread is when a high premium option is sold and a low premium option is bought on the
same underlying security. When you put on a credit spread, you profit primarily from the difference
between the time decay of the high premium option and the low premium option. You will also end
up with more cash in your account after putting on the spread, hence a "Credit" to your account.
This credit to your account is where the term "Credit Spread" comes from. Yes, you got me right,
instead of having to pay money for putting on a credit spread; you are GIVEN money for putting on
the credit spread. As a credit spread involves a credit to your trading account, it is usually not a
strategy that traders can do without a huge cash margin. Many online brokers require a trader to
have a cash balance of at least $100,000 before one is allowed to do a limited number of credit
spreads. Another important feature of credit spreads is that they are able to profit if the underlying
asset stays stagnant through the decay and expiration of the more expensive short options. This is
something not all debit spreads are capable of.
STOCK REPAI R STRATEGY
Definition
An options trading strategy designed to quickly recover value loss from a drop in share price using
stock options.
Introduction
The Stock Repair Strategy is an option trading strategy designed to "repair" a stock account that has
suffered from capital loss due to a drop in price. The Stock Repair Strategy allows the loss to be
recovered with just a moderate rise in the price of that stock.
For example, if you bought shares of XYZ Company and it has dropped significantly (10% for
example) since you bought it, you could use the Stock Repair Strategy to recover that 10% loss as
long as XYZ company stock rises about 5%. This is achieved through the buying of call options on
that stock, funded by the writing of twice the amount of out of the money call options. Hence, the
Stock Repair Strategy does not cost anything to put on (apart from brokerage fees of course) and
requires no margin. This makes the Stock Repair Strategy an ideal strategy for anyone who wish to
quickly recover losses sustained in a stock position.
When Should You Use The Stock Repair Strategy?
Use the Stock Repair Strategy to recover losses in your stock when that stock is expected to rise
slightly or moderately.
How to Use the Stock Repair Strategy?
The Stock Repair Strategy simply involves buying the same amount of at the money (ATM) call
Options as the shares that you own and then writing twice the amount of out of the money (OTM)
call options.
Example
Assuming you bought 100 shares of XYZ company shares at $70 and it fell 14% to $60, losing
$1000 in total value.
You wish to quickly recover that lost 14% using the Stock Repair Strategy.
You buy to open 1 contract (representing 100 shares) of XYZ $60 strike call options valued at
$10.00.
You then sell to open 2 contracts (representing 200 shares) of XYZ $70 strike call options which
are valued at $5.00.
The cost of the trade is:
($5.00 x 200) - ($10.00 x 100) = $0
The nearest Out of the money options typically cost half the price of the at the money options. As
such, selling twice the amount of out of the money options covers the cost of buying the at the
money options so the stock repair strategy costs nothing to put on at all. Since the extra out of the
money options sold beyond the amount of call options bought are secured by the stocks that you
already own, no margin is required either.
Example
If Stock Rises
Assuming stocks of XYZ Company rises to $70 from $60 within a month.
The 2 contracts of $70 strike call options would expire while the $60 strike call options would now
be worth $10.00 and the shares will now be worth $70.
Total Profits = (rise in shares) + (rise in ATM calls - premium of ATM calls) + (Premium of OTM
calls)
Total Profits = ($10 x 100) + ([$10 - $10] x 100) + ($5.00 x 200)
= ($1000) + (0) + ($1000)
= $2000
From the above calculations, you would realize that by going back to $70, which was the price the
XYZ shares were initially bought, the position is not only repaired but also up by $1000. In fact, the
beauty of the stock repair strategy is that it allows the position to be brought back to breakeven if
the stock just moved back up half of what it lost.
Example
Breakeven Calculation
Assuming stocks of XYZ Company rises to $65 from $60 within a month.
The 2 contracts of $70 strike call options would expire while the $60 strike call options would now
be worth $5.00 and the shares will now be worth $65.
Total Profits = (rise in shares) + (rise in ATM calls - premium of ATM calls) + (Premium of OTM
calls)
Total Profits = ($5 x 100) + ([$5 - $10] x 100) + ($5.00 x 200)
= ($500) + (-$500) + ($1000)
= $1000
Using the Stock Repair Strategy, the stock needs only move up by $5 to reach breakeven even
though the stock dropped $10!
Breakeven Point of Stock Repair Strategy
The Stock Repair Strategy costs nothing to put on and if the stock drops further, the ATM calls
simply expire with the OTM calls, which completely offset each other, causing no additional
(additional as in no more than the loss in the stock value itself) losses to the account.
Example
Options Greeks
Assuming you bought 100 shares of XYZ company shares at $70 and it fell 14% to $60, losing
$1000 in total value.
You wish to quickly recover that lost 14% using the Stock Repair Strategy.
You buy to open 1 contract of XYZ $60 strike call options valued at $10.00.
You then sell to open 2 contracts of XYZ $70 strike call options which are valued at $5.00.
The cost of the trade is:
($5.00 x 200) - ($10.00 x 100) = $0
Position Delta = [(delta of shares) + (delta of atm calls)] - (delta of otm calls)
= [(100) + (0.5 x 100)] - (0.4 x 200)
= (100 + 50) - 80
= 70
Position Theta = (theta of otm calls) - (theta of atm calls)
= (0.022 x 200) - (0.026 x 100)
= 1.8
Position Gamma = (Gamma of atm calls) - (Gamma of otm calls)
= (0.055 x 100) - (0.054 x 200)
= - 5.3
In the above Stock Repair Strategy Greeks example, the position is expected to rise by $70 with
every dollar XYZ stocks rise and makes $1.80 a day due to time decay. Bear in mind that this is
only a snap shot of the expected performance of the Stock Repair Position when it is first put on.
The real potential of the Stock Repair Strategy is unleashed only when it is held until expiry.
Advantages of Stock Repair Strategy
Able to bring a stock account back up to breakeven as long as stock rises moderately.
Costs nothing to put on.
Requires no margin.
Disadvantages of Stock Repair Strategy
No further profits can be obtained if the stock rallies beyond the strike price of the OTM
calls.

RI SK REVERSAL
Introduction
Risk reversal is an options trading strategy that aims to put on a free options position, which is one
where you neither pay nor receive upfront payment (credit), for the purpose of leveraged
speculation or stock hedging.
Risk reversal is a little known strategy in the stock options trading scene but a pretty common term
in the forex options trading scene and the commodities options trading scene for its hedging power,
hence the name "Risk Reversal". Even though the name makes the strategy sound very
sophisticated, it really is a very simple options strategy with a very simple underlying logic.
This tutorial shall explain what Risk Reversal is in options trading and describe in detail all the
different applications of Risk Reversal.
What Is Risk Reversal?
As the name suggests, Risk Reversal is a technique for the reversal of risk using options. This
means that it is inherently a hedging strategy even though it can also be used for leveraged
speculation.
What makes risk reversal different from most leveraged speculation or hedging strategies is the fact
that risk reversal aims to perform hedging or speculation without any additional capital outlay. This
is why risk reversal is so popular in commodities options trading as a means of guaranteeing a
certain price range without any additional cost (apart from commissions).
Risk Reversal can also used as an investor sentiment gauge. When a risk reversal position is selling
for a net debit (what is known as a "Positive Risk Reversal"), it means that call options are more
expensive than put options due to higher implied volatility of call options. This implies a bullish
sentiment on the underlying asset. When a risk reversal position is selling for a net credit (what is
known as a "Negative Risk Reversal"), it means that put options are more expensive than call
options due to higher implied volatility of put options. This implies a Bearish sentiment. In fact, in
forex options trading, risk reversals are directly quoted based on implied volatility so that its even
easier to see which way investor sentiment is inclined towards.
How to Use Risk Reversal?
Risk Reversal uses the sale of one out of the money call or put option in order to finance the
purchase of the opposite out of the money option ideally at zero cost. This means that Risk Reversal
can be executed in two ways:
Buy OTM Call + Sell OTM Put
Or
Buy OTM Put + Sell OTM Call
Risk Reversal for Leveraged Speculation
When executed on its own as a leveraged speculation position, Buying OTM call + Selling OTM
put creates a Bullish speculation position (see the Risk Reversal Bullish risk graph at the top of the
page) while buying OTM put + selling OTM call creates a bearish speculation position (see the
Risk Reversal Bearish risk graph at the top of the page). Both risk reversal positions have unlimited
profit and unlimited loss potential as if you are trading the underlying stock itself, the only
difference being that no cash is paid for this position (ideally) and that there is a small price range
between the strike price of the options involved where neither profit nor loss is made as you can see
from the risk graphs at the top of the page.
In fact, buying OTM call + selling OTM put creates a synthetic long stock position, which is an
options trading position with the same characteristics as owning the underlying stock itself (buts
pays no dividends of course). Conversely, buying OTM put + selling OTM call creates a synthetic
short stock position, which is an options trading position with the same characteristics as shorting
the underlying stock.
Risk Reversal Leveraged Speculation Example:
Assuming XYZ trading at $44.
Its Jun45Call is quoted at $0.75, its Jun43Put is quoted at $0.75.
If You Are Speculating on XYZ Going Upwards
Buy To Open QQQQ Jun45Call, sell To Open QQQQ Jun43Put
Net Effect: $0.75 - $0.75 = $0
If You Are Speculating on XYZ Going Downwards
Buy To Open QQQQ Jun43Put, sell To Open QQQQ Jun45Call
Net Effect: $0.75 - $0.75 = $0
Even though using risk reversal for leverage results in a position that ideally requires no capital
outlay upfront, it does involve margin as the short leg of the position is a naked write. The margin
required may in fact tie up more funds during the life of the position than if you had simply bought
call or put options for the same speculation.
For instance, you could simply tie up only $75 by buying one contract of the call options above in
order to speculate on XYZ going upwards instead of the thousands of dollars with the inclusion of
the short leg. A bit of legging may also be needed in order to drive both prices closer to each other.
Risk Reversal for Hedging
Risk reversal was designed as a hedging strategy in the first place and is most commonly used in
stock options trading for hedging a stock position by buying OTM put and selling OTM call. This
creates a Covered Call Collar strategy which prevents the stock from losing value beyond the put
option strike price and allows the stock to appreciate up to the strike price of the short call options.
Risk Reversal Hedging Example:
Its Jun45Call is quoted at $0.75, its Jun43Put is quoted at $0.75. You own 100 shares of XYZ stocks
and wish to hedge it without paying any extra money (apart from commissions of course).
Net Effect: $0.75 - $0.75 = $0
Net position = 100 shares of XYZ + 1 contract of Jan43Put + Short 1 contract of Jan45Call
The Jan43Put will hedge against a drop in the stock price beyond $43 but the stock position would
also not gain value above $45 due to the short call options.
Risk Reversal Hedging Example 2:
Its Jun45Call is quoted at $0.75, its Jun43Put is quoted at $0.75. You shorted 100 shares of XYZ
stocks and wish to hedge it without paying any extra money (apart from commissions of course).
Net Effect: $0.75 - $0.75 = $0
Net position = Short 100 shares of XYZ + Short 1 contract of Jan43Put + 1 contract of Jan45Call
The Jan45Call will hedge against the stock rising above $45 but the position would also stop
profiting when the stock goes lower than $43 due to the short put options

Choosing Strike Prices for Risk Reversal
Ideally, out of the money call and put options with strike prices of the same distance to the stock
price should be of the same price due to put call parity.
For instance, if the underlying stock is $44, call options which are $1 out of the money ($45) and
put options which are $1 out of the money ($43) should be of the same price as in the examples
above.
However, not only does put call parity rarely exist in such perfection, call and put options are also
rarely exactly the same distance from the stock price since stock price is moving all the time. As
such, put options and call options with strike prices of the same (or almost same) distance from the
stock price are rarely the same price. In fact, in strong trending market conditions, the difference in
price between call and put options can be very significant. As such, it may be almost impossible to
put on Risk Reversal positions for exactly zero cost in practise. Also, out of the money call options
and put options with almost the same price may be of a different distance from the stock price. As
such, options traders practising risk reversal in reality don't always put it on with call and put
options that are of equidistance from the stock price.
The most important point in executing a Risk Reversal is to be able to put on the position with zero
or very near zero cost. As such, you should choose the strike prices which are selling for almost the
same price instead of aiming for equidistance.
The picture below is the actual options chain for QQQQ at $44.74. As you can see, the out of the
money call and put options that are of almost the same price and therefore good for Risk Reversal
isn't equidistant from the stock price of $44.74.

Trading Level Required For Risk Reversal
A Level 5 options trading account that allows the execution of naked options writing is needed for
the Risk Reversal.
Profit Potential of Risk Reversal:
When risk reversal is used for leveraged speculation, it will make an unlimited profit and an
unlimited loss as if you bought or shorted the underlying stock itself. When risk reversal is used for
hedging, the underlying stock would make a maximum profit limited by the strike price of the short
leg and a maximum loss limited by the long leg.
Profit Calculation of Risk Reversal:
There is no limit to the profit potential of Risk Reversal when used for leveraged speculation and
since no money is paid for the position, the return on investment is infinite.
Risk / Reward of Risk Reversal:
When Used For Leveraged Speculation
Maximum Profit: Unlimited
Maximum Loss: Unlimited
Break Even Points of Risk Reversal
When used for leveraged speculation, Risk Reversal makes a profit when the underlying stock rises
(or falls) beyond the long leg and makes a loss when the underlying stock falls (or rises) beyond the
short leg.
Risk Reversal Leveraged Speculation Breakeven Example:
Its Jun45Call is quoted at $0.75, its Jun43Put is quoted at $0.75.

If You Are Speculating on XYZ Going Upwards
Net Effect: $0.75 - $0.75 = $0
Position profits when XYZ rises above $45. Position starts making losses when XYZ falls below
$43.
If You Are Speculating on XYZ Going Downwards
Net Effect: $0.75 - $0.75 = $0
Position profits when XYZ falls below $43. Position starts making losses when XYZ rises above
$45.
Advantages of Risk Reversal:
Can be used for both hedging and speculation
Can be performed at ideally no extra cost
Unlimited profit potential
Disadvantages Of Risk Reversal:
Margin needed.
Unlimited loss potential
Alternate Actions for Risk Reversal Before Expiration :
If the position is already profitable prior to expiration, the position can be closed by closing
out both legs individually.

BULLI SH OPTI ONS STRATEGI ES
Introduction
Bullish Options Strategies are certainly the most common starting point for options trading
beginners. This is because bullish options strategies aim to profit when the underlying stocks goes
up, which is something very familiar to stock traders turned options traders.
Doesn't profiting from an upwards stock movement involve only buying call options?
Yes, buying call options is definitely the simplest of bullish options strategies but stock options,
being the most versatile trading instrument in the world today, offers more than just that. A
combination of different options can allow you to not only profit when the underlying stock goes
up, but also limit your losses, lower your initial outlay, and increase your chances of profit and even
profit when the underlying stock remains stagnant. These are what is collectively known as bullish
options strategies.
This tutorial will explore the underlying mechanisms of bullish options strategies, why they work
and also give you a full list of bullish options strategies.
More than Just Call Options Buying
Buying call options is the simplest of all bullish options strategies and is certainly the most easily
understood for options trading beginners. If the stock goes up above the strike price, the option ends
up in a profit and if the stock goes below the strike price by expiration, the option expires worthless
and you lose nothing more than the money you put into the purchase. Very straight forward.
However, the main problem with buying call options is that the premium or extrinsic value of the
option raises the breakeven point of the trade, so options traders start putting other options together
with call options in order to overcome the extrinsic value. They do so by SHORTING or writing
options on top of the call options. It is this combination of buying and shorting options that creates
bullish options strategies. It not only overcomes extrinsic value to the extend of ending up with a
credit but also produces some pretty amazing options trading risk profiles.
Debit & Credit
There are two broad categories of bullish options strategies; Debit Strategies and Credit Strategies.
Debit Bullish Options Strategies are bullish options strategies which you need to pay cash for.
These are bullish options strategies that may have incorporated short options but does not cover the
premium paid for the long options entirely. Credit Bullish Options Strategies are bullish options
strategies that credits your account with cash when the position is put on. These are bullish options
strategies that are made commonly by shorting put options instead of buying call options in order to
profit from time decay as well. An example of credit bullish options strategy is the Bull Put Spread
where Put options are used instead of call options. Credit bullish options strategies certainly
increases the odds of winning since it puts time decay in your favour but it limits the maximum
options trading profit that can be made.
Lowering Initial Outlay
One main reason for the development of Bullish Options Strategies is the need to lower capital
outlay when buying call options. The lower one pays for a call option position, the higher the ROI
one makes from the same move, right? Bullish options strategies does that primarily by shorting or
writing out of the money call options on top of buying the at the money or in the money call
options. As long as the stock does not move higher than the strike price of the out of the money call
options, the premium earned from selling those call options partially offset the higher cost of the at
the money or in the money call options, lowering the inital capital outlay of the position. An
example of this is the Bull Call Spread.
Profiting From Time Decay
Bullish options strategies are not only capable of producing a profit only when the underlying stock
goes up but also when the underlying stock remains stagnant through time decay. Bullish options
strategies put time decay in your favor through the use of short put options instead of long call
options. Short put options profit as long as the underlying stock closes higher than its strike price
during expiration but has a limited profit and unlimited risk potential. The most direct example of
such a bullish options trading strategy is obviously the Naked Put Write options trading strategy.
The problem with such bullish options strategies is the high margin deposit requirement of most
options trading brokers and that is why other options are also combined with short put options to
produce credit bullish options strategies with lower margin requirements.
The Trade-off
Options trading is all about trade-offs. Utilizing bullish options strategies other than simply buying
call options normally limits the maximum profit that you can make when the underlying stock goes
up indefinitely. This is the price you pay for having all the other benefits that these more complex
bullish options strategies grant.
List of Bullish Options Strategies
Here is a list of Bullish Options Strategies classified according to their relative complexity in
options trading. Complex Bullish Strategies are usually credit bullish options strategies that require
a high account margin.
Bull Calendar Spread
Introduction
The Bull Calendar Spread, also called a Calendar Call Spread, is a bullish strategy that profits in
pretty much the same way a Covered Call does; when the stock stays stagnant or goes up. Another
way of looking at the Bull Calendar Spread is that it is a leveraged Covered Call that replaces the
underlying asset with its LEAP so that more short positions can be written. A Bull Calendar Spread
profits primarily from the difference in rate of premium decay between the near term short options
and the long term LEAPs. This is possible because near term option premiums decay faster than
long term option premiums.
Because you need to buy LEAPs which are more expensive than the short term options that you will
write, this strategy results in a net debit and is therefore a form of Debit Spread.
As you are buying options of different expiration months and different strike prices in this strategy,
it is also classified as a Diagonal Spread or Time Spread.

When To Use Bull Calendar Spread?
One should use a Bull Calendar Spread when one wishes to profit from an underlying asset that is
expected to stay stagnant or with slight bullish inclination.
How to Use Bull Calendar Spread?
Establishing a Bull Calendar Spread is extremely simple. All you have to do is to purchase an In the
Money (ITM) LEAP and then sell At the Money (ATM) or Out of the Money (OTM) near term
calls against the LEAP.
Example:
Assuming QQQQ trading at $45 now. Buy To Open 10 contracts of QQQQ Jan 2008 $44 Call
options at $5.70.
Sell To Open 10 contracts of QQQQ Jan 2007 $45 Call at $0.75.
We use In The Money (ITM) LEAPs instead of At The Money (ATM) or Out of The Money
(OTM) ones so that the Delta value (read about what Option Delta and other option Greeks are.) of
the LEAPs are higher than the Delta value of the short term options. This is to ensure that the
LEAPs rise in value faster than the short term calls should the underlying asset stage a rally.
Trading Level Required For Bull Calendar Spread
A Level 3 options trading account that allows the execution of debit spreads is needed for the Bull
Calendar Spread.
Profit Potential of Bull Calendar Spread:
A Bull Calendar Spread profits when the underlying asset closes at or below the strike price of the
short call options. The short call options then expires out of the money and you make the full value
of the short call options. The Bull Calendar Spread's maximum profit occurs when the underlying
asset closes exactly at the strike price of the short call options at expiration of the short call options.
From the above example:
Assuming QQQQ close at $45 on the third Friday (option expiration day) of Jan 2007.
You will make the $750 value of the 10 Jan 2007 $45 Call options that you wrote as they expire out
of the money, less, the decay of the 10 contracts of Jan 2008 $44 Call options.
The profitability of a bull calendar spread can also be enhanced or better guaranteed by legging into
the position properly.
Profit Calculation of Bull Calendar Spread:
Profit = Long Call Value - Net Debit
Assuming QQQQ close at $45 as mentioned above and QQQQ Jan 2008 $44 Call Options are
trading at $5.60 then.
Profit = $5600 - $4950 = $650
Profit % = $650 / $4950 = 13.13%
Risk / Reward of Bull Calendar Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
Break Even Point of Bull Calendar Spread:
The breakeven point of a Bull Calendar Spread is the point below which the position will start to
lose money if the underlying asset falls.
Break Even = Stock Price when long call value is equal to net debit
The long call value at different prices can only be calculated using the Black-Scholes model.
Advantages of Bull Calendar Spread:
Able to profit even if underlying asset stays stagnant.
Able to offset losses if underlying asset drops in value.
Buying the LEAP in lieu of the stock can generally allow the underlying asset to be
controlled at a discount.
Losses are limited to the net debit.
Disadvantages of Bull Calendar Spread:
Profits are limited even if the underlying asset rallies.
Losses can be sustained if the short call options are assigned when the underlying asset
rallies.
Alternate Actions for Bull Calendar Spreads Before Expiration:
If you wish to profit from a rally in the underlying asset, you could buy back the short call options
before it expires and allow the underlying asset to continue its profit run.
Bull Call Spread
Definition
A bullish options strategy which aims to reduce the upfront cost of buying call options for profiting
from stocks that are expected to rise moderately.

Introduction
A Bull Call Spread is a bullish option strategy that profits if the price of the underlying asset rises
moderately.
The Bull Call Spread's main advantage is that it is cheaper than buying call options on its own. In
fact, it is better known as an options trading strategy that lets you buy call options at a discount.
The main drawback of the Bull Call Spread is that it has a limited profit potential. This means that
there is a limit to the maximum possible profit that can be made by the Bull Call Spread. In spite of
that, the Bull Call Spread remains one of the most commonly used options trading strategy of all
time.
This Bull Call Spread tutorial shall cover the bull call spread's logic, when to use, how to use and
different variants of the Bull Call Spread.
Classification
Strategy: Bullish | Outlook : Moderately Bullish | Spread : Vertical Spread | Debit or Credit : Debit
Buying Call Options At A Discount
Time decay of Extrinsic Value is the number one enemy of options traders buying call options.
Having the value of those call options decrease each day the underlying stock fails to rise is
certainly a painful ordeal. The Bull Call Spread helps to reduce the effects of time decay of those
call options by Selling to Open (shorting) out of the money call options in order to partially offset
the price of these call options. This reduces the effect of time decay on the position and also
increases return on investment since part of the price of the call options have been offset by the sale
of the out of the money call options. This effectively allows you to buy call options at a discount
and is what makes the Bull Call Spread so popular in options trading. Another beauty of the Bull
Call Spread is that because it is cheaper than just buying call options, the resultant return on
investment would also be higher when the underlying stock closes at the strike price of the short
call options.
When To Use Bull Call Spread?
One should use a bull call spread when one is confident in a moderate rise in the underlying
instrument.

How To Use Bull Call Spread?
Establishing a Bull Call Spread involves the purchase of an At The Money or In The Money call
option on the underlying asset while simultaneously writing (sell to open) an Out of the Money call
option on the same underlying asset with the same expiration month .
Buy ATM Call + Sell OTM Call
Bull Call Spread Example :
Assuming QQQ at $44. Buy To Open 10 QQQ Jan44Call for $1.05, Sell To Open 10 QQQ
Jan45Call for $0.50.
Net Debit = $1.05 - $0.50 = $0.55
If you expect QQQ to go up to near $46 by expiration, you will Sell to Open QQQ Jan46Call
instead.
Choosing Strike Prices For Bull Call Spread
The choice of which strike price to write the out of the money leg for a bull call spread depends on
the price you expect the underlying stock to rise to by expiration. In our example above, we are
expecting QQQ to rise moderately from $44 to $45 by expiration of the bull call spread position.
Remember, you use the Bull Call Spread only if you expect the underlying stock to rise moderately.
You can write the out of the money leg at a higher strike price if you wish bearing in mind that the
higher the strike price, the lesser the extrinsic value becomes and it quickly come to a point where
the value is too low for a meaningful write.
OTM Bull Call Spread
The Out of the Money Bull Call Spread is an extremely popular variant of the bull call spread used
mostly by institutional speculators to speculate in explosive moves on the underlying stock using
very little money. An OTM Bull Call Spread involves buying out of the money call options and
then writing further out of the money call options against it.
Buy OTM Call + Sell Further OTM Call
Out of the Money Bull Call Spread Example :
Assuming QQQ at $44. Buy To Open 10 QQQ Jan46Call for $0.30, Sell To Open 10 QQQ
Jan47Call for $0.10.
Net debit = $0.30 - $0.10 = $0.20
The Out of the Money Bull Call Spread is a speculative position that can be put on very cheaply. It
makes a profit only when the underlying stock rallies beyond the strike price of the long call options
and reaches it's maximum profit potential when it equals or exceeds the strike price of the short call
options. If the underlying stock do stage such an explosive rally, the return on investment using the
out of the money Bull call spread would be much higher than the conventional bull call spread
outlined above. However, the risks are significant as well. If the stock rallies but fails to exceed the
strike price of the out of the money long call options, the whole position expires worthless. Such
trade-off between ROI and risk is prevalent in all options trading strategies.
Trading Level Required For Bull Call Spread
Call Spread. Read more about Options Account Trading Levels.
Profit Potential of Bull Call Spread
A Bull Call Spread profits if the stock goes up. When the stock goes up, the long call option profits
while the short call option continue to decay in premium until it's strike price has been reached.
From that point onwards, every move in the long call option is matched by an equal move in the
short call option, resulting in no further profits.
The maximum profit potential of a bull call spread is therefore when the price of the underlying
asset rises up to the strike price of the out of the money short call options and beyond.
The profitability of a bull call spread can also be enhanced or better guaranteed by legging into the
position properly.
Profit Calculation of Bull Call Spread
Maximum Possible Profit = Difference in strikes - Net Debit
Following up from the above Bull Call Spread example:
Buy to open 10 QQQ Jan44call for $1.05 per contract and sell to open 10 QQQ Jan45call for $0.60
per contract
Max. Possible Profit = (45 - 44) - (1.05 - 0.60) = 0.55
Max. Risk = Net Debit = $1.05 - $0.60 = $0.45, if QQQ is < $44
Risk / Reward of Bull Call Spread
Net Debit Paid
Break Even Point of Bull Call Spread
BEP: Strike Price of Long Call Option + Net Debit Paid
Breakeven point of Bull Call Spread
Buy to open 10 QQQ Jan44call for $1.05 per contract and sell to open 10 QQQ Jan45call for $0.60
per contract
Break Even = Lower Strike + Net Debit = $44 + $0.45 = $44.45
Bull Call Spread Greeks
Delta : Positive
Delta of a Bull Call Spread is positive at the start. As such, its value will increase as the price of the
underlying stock increases.
Gamma : Negative
Gamma of a Bull Call Spread is negative and will decrease delta as the price of the underlying stock
increases, resulting in a completely delta neutral position if the stock rallies past the strike price of
the short call option.
Theta : Negative
Theta of a Bull Call Spread is negative and will therefore lose value due to time decay as expiration
approaches.
Vega : Decreases with Length of Expiration
Vega of Short Put Ladder Spread is positive when near term options are used but will become
increasingly negative as longer expiration options are used. This is due to the fact that out of the
money options becomes more sensitive to changes in implied volatility at longer expiration than
shorter expirations.
Advantages Of Bull Call Spread
Loss is limited if the underlying financial instrument falls instead of rise.
If the underlying instrument fails to rise beyond the strike price of the out of the money
short call option, the profit yield will be greater than just buying call options.
It is also a way of buying call options at a discount by selling the out of the money call
option at a strike price beyond that which the underlying instrument is expected to rise.
ROI is higher than just buying call options when stock closes at strike price of short call
options.
Disadvantages Of Bull Call Spread
There will be more commissions involved than simply buying call options.
There will be no more profits possible if the underlying instrument or stock rises beyond the
strike price of the out of the money call option.
Alternate Actions Before Expiration
If the underlying instrument or stock is expected to continue to rise strongly beyond the
strike price of the short call option, one could buy to close the out of the money short call
option and then sell to open a further out of the money call option in its place.
If the underlying instrument or stock is expected to continue to rise strongly beyond the
strike price of the short call option, one could also choose to buy to close the out of the
money short call option and then simply allow the long call option to continue to gain in
value.
If it is clear that the underlying stock would not move explosively, one could write an
additional higher strike price out of the money call option, transforming the position into a
Long Call Ladder Spread in order to further reduce capital outlay and breakeven point.
If the price of the underlying stock is expected to retreat upon reaching the short strike price,
one could close out the long call leg when the short strike price is reached and then buy out
of the money call options to transform the position into a Bear Call Spread. This
transformation can be automatically performed without monitoring using a Contingent
Order.
Bull Put Spread
Introduction
A Bull Put Spread is a bullish option strategy that works in the same way a Bull Call Spread does,
profiting when the underlying stock rises.
The Bull Put Spread is simply a naked Put write which minimizes margin requirement and limits
potential loss by purchasing a lower strike price put option. Because the Bull Put Spread involves
buying and selling put options of the same underlying and expiration month, it is classified as a
vertical spread.
Bull Put Spread is also a credit spread, so you also make money if the underlying asset stays
stagnant through the decay and expiration of the more expensive short put options. The Bull Call
Spread, on the other hand, would not be able to profit if the stock did not move down beyond its
breakeven point.

Classification
Strategy : Bullish | Outlook : Moderately Bullish | Spread : Vertical Spread | Debit or Credit : Credit
When To Use Bull Put Spread?
One should use a bull put spread when one is moderately confident of a rise in the underlying asset
and wants some protection and profit should the underlying asset remains stagnant .
How To Use Bull Put Spread?
Establishing a Bull Put Spread involves the purchase of an Out of The Money put option while
simultaneously writing (sell to open) an In the Money or At The Money put option on the same
underlying asset with the same expiration month .
Example 1:
Assuming QQQQ at $44. Sell To Open 10 QQQQ Jan44Put, Buy To Open 10 QQQQ Jan43Put.
Trading Level Required For Bull Put Spread
A Level 4 options trading account that allows the execution of credit spreads is needed for the Bull
Put Spread.
Profit Potential of Bull Put Spread:
Being a credit spread, the maximum profit potential of a Bull Put Spread is the net credit gained
when the position is put on. This occurs when the short put option expires out of the money. The
profitability of a bull put spread can also be enhanced or better guaranteed by legging into the
position properly.

Profit Calculation of Bull Put Spread:
Maximum Return = Net Credit
Following up from the above example 1:
Sell to open 10 QQQQ Jan44Put for $1.85 per contract and Buy to open 10 QQQQ Jan43Put for
$1.05 per contract
Max. Return = $1.85 - $1.05 = $0.80 when QQQQ closes above $44
Max. Risk = Difference in Strike - Net Credit = ($44 - $43) - $0.80 = $0.20 when QQQQ closes
below $43
Break Even= higher Strike - Net credit = $44 - $0.80 = $43.20
Risk / Reward of Bull Put Spread:
Break Even Point of Bull Put Spread:
BEP: higher Strike - Net credit
Advantages Of Bull Put Spread :
Loss is limited if the underlying financial instrument falls instead of rise.
If the underlying instrument fails to rise beyond the strike price of the out of the money
short put option, the profit yield will be greater than just buying call options.
Able to profit even when the underlying asset remains completely stagnant.
Disadvantages Of Bull Put Spread:
There will be more commissions involved than simply buying call options or just selling
naked put options.
Lower risk than simply writing naked put options as maximum downside is limited by the
long ATM/OTM put option.
There will be no more profits possible if the underlying asset rises beyond the strike price of
the short put option.
Because it is a credit spread, there is a margin requirement in order to put on the position.
As long as the short 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 short put
obligation.
Alternate Actions Before Expiration:
If your moderately bullish opinion on the underlying asset turns out to be wrong and the underlying
asset continues to rise strongly beyond the strike price of the short put option, one could sell the out
of the money long put option in order to preserve some equity from the long put option and allow
the short put options to expire. Doing so will transform the position to a naked put position with
unlimited downside risk. One could also close out the position after the underlying asset exceeds the
strike price of the short put option and then switch to an option strategy with unlimited profit
potential, like a long call buy or a long straddle. This transformation can be automatically
performed without monitoring using a Contingent Order.
Covered Call Collar
Introduction
A covered call collar is an improvement made on top of a covered call. A complete understanding
of Covered Call is needed in order to understand what a covered call collar is.

A Covered Call suffers unlimited losses when the underlying asset drop in price drastically. In order
to hedge against such a move, a Covered Call Collar buys a put option on top of the covered call
position such that if the underlying asset should drop in price, the put option will gain in price
proportionally, thereby hedging against the loss. Therefore, a Covered Call Collar, or simply known
as a Collar, is a Covered Call with limited maximum loss.
In options trading, the more hedged and multi-directional a position is, the lower the maximum
profit potential becomes. This is the same trade off in a Covered Call Collar. A part of the profits
obtained from the sale of the call options in the covered call needs to be committed to the purchase
of put options in order to hedge downside risk, transforming the Covered Call into a Covered Call
Collar position.
In fact, veteran options traders would immediately notice that the Covered Call Collar is actually a
Conversion closing out a Synthetic Short Put position. When significant price discrepancies
between the call and put options exist, the Covered Call Collar position actually becomes a
Conversion Arbitrage position, sealing in risk-free profits.
When To Use Covered Call Collar?
One should use a covered call collar when one wishes to profit when the underlying asset is up or
stagnant and to protect against a drop in price of the underlying asset.
How To Use Covered Call Collar?
Establishing a covered call collar is extremely simple. All you have to do is to write (sell to open) 1
contract of nearest out of the money call option for every 100 shares you own and then buy to open
1 Out of the Money (OTM) Put option for every 100 shares you own.
Example:
Assuming you own 700 shares of QQQQ at $44. Sell To Open 7 contracts of QQQQ Jan45Call. Buy
to Open 7 contracts of QQQQ Jan42Put.
Such an ideal situation is, of course, rare. In most cases, the short call options will either be in the
money or out of the money at expiration.
When your stock is stagnant or slightly higher upon expiration of the short call options, you will
profit on the whole value of the call options that you wrote, with whatever profit from the stock if it
is up slightly.
From the above example
Assuming your 700 QQQQ close at $44.50 upon expiration of the 7 contracts of QQQQ Jan45Call.
You will make the $0.50 gain in QQQQ plus the value of the 7 Jan45Call that you wrote, less the
total price paid towards the purchase of the put options as it expires out of the money.
When your stock has gained in price beyond the strike price of the short call options upon
expiration, your stocks will be called off (assigned) and you will profit from the value of the call
options that you wrote and the value of the stock up till the strike price of the short call options.
That is to say, you will not benefit from any rise in your stock beyond the strike price of the short
call options due to the short call options going in the money.
Assuming your 700 QQQQ close at $46 upon expiration of the 7 contracts of QQQQ Jan45Call.
You will gain the value of the 7 contracts of QQQQ Jan45Call that your wrote, less the total price
paid towards the purchase of the put options as it expires out of the money. Your 700 shares of
QQQQ will be called off (bought by the person whom you sold the call option to) at $45 (the strike
price of the QQQQ Jan45Calls that you sold.) You will therefore make $1 from your stock, not $2.
From the below profit calculations of the covered call collar, you will learn that you will make more
profits if your stocks are assigned rather than when your stocks are not assigned. This is of course a
disadvantage if you would like to keep the stock for the long term.
Trading Level Required For Covered Call Collar
A Level 1 options trading account that allows the execution of Covered Call and Protective Put is
needed as the Covered Call Collar is a combination of both strategies.
Profit Calculation of Covered Call Collar:
1. If stocks are not assigned (called off) at expiration:
Profit = (value gained in stock + initial price of short call options - purchase price of OTM put
options) / initial value of underlying stock
Assuming you bought 700 QQQQ close at $44, sold 7 contracts of QQQQ Jan45Call for $1.00 and
bought 7 contracts of Jan42Put for $0.35.
Assuming at expiration, QQQQ closes at $44.50.
Profit = ($0.50 + $1.00 - $0.35) / $44 = 2.61%
2. If stocks are assigned (called off) at expiration:
Profit = ((strike price of short call options - initial value of underlying stock) - purchase price of
OTM put options + initial price of short call options) / initial value of underlying stock
Profit = (($45 - $44) - $0.35 + $1.00) / $44 = 3.75%

3. If stocks have dropped in value at expiration but long put options remain out of the money:
Profit = (initial price of short call options - (initial stock price - stock price at expiration)) - purchase
price of OTM put options) / initial value of underlying stock
Profit = ($1.00 - ($44 - $43.50)) - $0.35) / $44 = 0.34%
4. If stocks have dropped in value at expiration and long put options are in the money:
Maximum Loss = (((initial price of underlying asset - strike price of OTM put option) + Purchase
price of OTM put option) - initial price of short call options) / initial value of underlying stock
Assuming at expiration, QQQQ closes below $42.00.
Maximum Loss = (($44 - $42) + $0.35) - $1.00) / $44 = 3.06%
Risk / Reward of Covered Call Collar:
Break Even Point of Covered Call Collar:
There are 2 ways to look at breakeven point for a covered call collar.
As the Covered Call Collar profits mainly from the decay of the short out of the money call
options, the main way to look at breakeven is the number of days it takes for the decay of
the short call options covers its bid/ask spread and the purchase price of the out of the
money put options.
Stagnant Breakeven point = (Bid ask spread of short call option + Purchase price of OTM put
option) / theta
Assuming the ask price of the short call option is $1.00 and bid price is $1.05 with a theta of -0.012.
Stagnant Breakeven Point = ($0.05 + $0.35 / 0.012) = approximately 33 days.

The lower breakeven point to find out how much the underlying stock can fall before you
start making real losses to your account value.
Lower Breakeven point = (Initial Value of Short Call Options - Purchase price of long OTM put
option) - Initial Value of underlying stock
Assuming you bought 700 QQQQ close at $44 and sold 7 contracts of QQQQ Jan45Call for $1.00
and bought 7 contracts of Jan42Put for $0.35.
Lower Breakeven Point = (($1.00 - $0.35) - $44) = $43.35
Advantages Of Covered Call Collar:
Able to profit even if your stock stays stagnant.
Able to offset losses if your stock drops in value.
Loss is limited even if underlying asset drops in price drastically.
Disadvantages Of Covered Call Collar:
You must continue to hold your stocks if you want to keep the short call options.
You can lose your stocks if it rises beyond the strike price of the short call options through
assignment at expiration.
A narrower lower breakeven than a Covered Call.
Lower potential profit than a Covered Call.
Alternate Actions for Covered Call Collars Before Expiration :
If you wish to keep your stocks when it has gained in price beyond the strike price of the
short call options, you could buy back the short call options before it expires and allow the
stock to continue its profit run.
In addition to keeping your stocks using the action above, you could also use the excess
money after the buyback to buy put options at the money in order to protect the current
profits of the stock. This is known as a Protective Put.
Bull Butterfly Spread
Introduction
The Bull Butterfly Spread is a complex bullish options strategy with limited profit and limited loss.
It makes its maximum profit when the underlying stock rises to a pre-determined higher price. Like
a normal butterfly spread, the Bull Butterfly Spread can be constructed using only call options,
known as the Bull Call Butterfly Spread, or only put options, known as the Bull Put Butterfly
Spread. The Bull Butterfly Spread is really just a normal butterfly spread using a higher middle
strike price, effectively moving the maximum profit point up to a higher strike price.

The Bull Butterfly Spread also has the highest Return on Investment of all the complex bullish
options trading strategies due to its extremely low capital requirement.
Comparing The Bull Butterfly Spread
So, how does the Bull Butterfly Spread compare against the other two most popular complex
bullish options strategies, the Bull Call Spread and the Bull Put Spread? Is the Bull Butterfly Spread
worth the time and effort learning? We decided to compare the Maximum Profit, the Capital Outlay
and the resultant Return on Investment to see if the Bull Butterfly Spread is worth using at all.
For this study, we expect the QQQQ to reach the price of $46 by August expiration. As such, we
shall aim for $46 on all three strategies using the minimum number of contracts. The results are
tabulated below:
QQQQ options chain on 9 July 2010. QQQQ trading at $44.20.
Aug44Call=$1.65, Aug45Call= $1.11 , Aug46Call = $0.68 , Aug47Call = $0.40
Aug44Put = $1.44, Aug45Put = $1.90 , Aug46Put = $2.47 , Aug47Put = $3.17
Strategy Max net profit @ $46 Capital outlay (max loss) Roi
Bull Butterfly Spread* $85 $15 560%
Bull Call Spread $103 $97 106%
Bull Put Spread $103 $97** 106%
*: Bull Call Butterfly Spread was used
**: Maximum loss used as it is a credit spread
As you can see above, if you expect the underlying stock to hit a certain definite strike price (and
not beyond that strike price) by expiration, the Bull Butterfly Spread would return a far higher
return on investment than all the other complex bullish options strategies. However, it must be
noted that the Bull Butterfly Spread makes its maximum profit only when the underlying stock
closes exactly at the strike price of the middle strike upon expiration. If the price of the underlying
stock moves way beyond the strike price of the middle strike, the position could make a lot lesser
profit and may even go into a loss. As such, the high ROI of a Bull Butterfly Spread rewards the
precision of your prediction on the movement of the underlying stock. Indeed, options trading is fair
and higher ROI rewards greater precision or compromises in other areas.
When To Use Bull Butterfly Spread?
One should use a Bull Butterfly Spread when one expects the price of the underlying stock to move
up to but not exceeding a certain strike price by options expiration.
How To Use Bull Butterfly Spread?
There are two ways to establish a Bull Butterfly Spread. One way is to use only call options. We
call this a "Bull Call Butterfly Spread". The other way is to use only put options. We call that a
"Bull Put Butterfly Spread". Either way uses the same strike prices and typically cost almost the
same capital outlay, returning almost the same profit.
The composition of both kinds of Bull Butterfly Spread is the same. It involves selling to open 2
contracts at the strike price which you think the underlying stock will close at by expiration and
then buying to open 1 contract one strike lower and another contract one strike higher.
Buy 1 Lower Strike + Sell 2 @ Expected Strike + Buy 1 Higher Strike
Establishing Bull Call Butterfly Spread
Veteran or experienced option traders would identify at this point that the Bull Call Butterfly
Spread actually consists of an OTM Bull Call Spread and an OTM Bear Call Spread.
The choice of middle strike price is simply the price which you expect the underlying stock to close
at by expiration of the position. The more accurate your prediction is, the greater the chance of
hitting maximum profit.
Bull Call Butterfly Spread Example
Using the data from the comparison example above
Buy To Open 1 contract of Aug $45 Call at $1.11
Sell To Open 2 contracts of Aug $46 Call at $0.68
Net Debit = ($1.11 - $0.68 - $0.68 + $0.40) x 100 = $15.00 per position
In the above Call Bull Butterfly Spread example, we are expecting the QQQQ to reach $46 on
August expiration.
Establishing Bull Put Butterfly Spread
Establishing a Bull Put Butterfly Spread is exactly the same as establishing a Bull Call Butterfly
Spread except that put options are used instead. Strike prices used are exactly the same. The
resultant net debit and maximum of a Bull Put Butterfly Spread is theoretically the same as you
would use call options, however, in practical options trading, sometimes Call options and Put
options do not cost the same to put on. In stocks that are likely to be more bullish, its call options
will be more expensive than its put options and vice versa. Therefore, an options trader needs to
calculate whether a Bull Call Butterfly Spread or a Bull Put Butterfly Spread makes more sense in
the prevailing circumstances.
Bull Put Butterfly Spread Example
Buy To Open 1 contract of Aug $45 Put at $1.90
Sell To Open 2 contracts of Aug $46 Put at $2.47
In this case, Bull Put Butterfly Spread requires a slightly lower net debit than the Bull Call Butterfly
Spread, so the Bull Put Butterfly Spread should be used instead.
Trading Level Required For Bull Butterfly Spread
Butterfly Spread.
Profit Potential of Bull Butterfly Spread:
Bull Butterfly Spreads achieve their maximum profit potential when the underlying stock closes
exactly on the middle strike price by expiration. The profitability of a Bull Butterfly Spread can also
be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Bull Butterfly Spread:
Maximum Profit = Strike Difference between Long and Short leg - debit
Maximum Loss = Net Debit
From the above Bull Put Butterfly Spread example:
Maximum Profit = [($46 - $45) - 0.13] x 100 = $87
Maximum Loss = $13
Risk / Reward of Bull Butterfly Spread:
Break Even Points of Bull Butterfly Spread:
A Bull Butterfly Spread is profitable if the price of the underlying stock remains between the higher
and lower breakeven point.
1. Lower Breakeven Point : Lower Strike Price + Debit
From the above Bull Put Butterfly Spread example :
Debit = $0.13 , Lower Strike Price = $45.00
Lower Breakeven Point = $45 + $0.13 = $45.13.
2. Upper Breakeven Point: Higher Strike Price - Debit
From the above Bull Put Butterfly Spread example:
Debit = $0.13, Upper Strike Price = $47.00
Higher Breakeven Point = $47.00 - $0.13 = $46.87.
In this case, our Bull Put Butterfly Spread makes a maximum profit of $87 if the QQQQ closes
exactly at $46 during August Expiration and remains profitable if the QQQQ closes within the price
range of $45.13 to $46.87.
Advantages Of Bull Butterfly Spread:
Highest ROI of the complex bullish options trading strategies.
Able to aim maximum profit point at any specific price you want.
Low capital requirement results in the lowest maximum loss of all complex bullish options
strategies.
Disadvantages Of Bull Butterfly Spread:
Larger commissions involved than the other bullish option strategies with lesser trades.
Needs to be extremely accurate on the price which the underlying stock will end up by
expiration.
Alternate Actions for Bull Butterfly Spreads Before Expiration:
When it is obvious that the underlying stock is going to go up beyond the middle and higher strike,
you could close out the middle and higher strike legs and then just hold the lower strike leg, turning
it into a long call position. This transformation can be automatically performed without monitoring
using a Contingent Order.
Bull Condor Spread
Introduction
The Bull Condor Spread is a complex bullish strategy that is used for speculating on the underlying
stock rallying to a higher range of prices on very little cost and is a less accuracy demanding price
targeting strategy than the Bull Butterfly Spread. Its extremely high reward risk ratio gives it an
extremely high return on investment if the underlying stock performs as expected.

The Bull Condor Spread is basically a condor spread that brackets a higher strike price such that its
maximum profit potential is only attained when the underlying stock rallies into that price bracket.
This transforms the Condor Spread, which is a neutral options strategy, into a bullish options
strategy.
Comparing the Bull Condor Spread
So, how does the Bull Condor Spread compare against its cousin, the Bull Butterfly Spread? Lets
compare the two bullish price targeting options trading strategies and see where the differences are.
For this study, we expect the QQQ to reach the price of $46 by August expiration. The Bull
Butterfly Spread shall aim for exactly $46 while the Bull Condor Spread would give a bit of
allowance and aim for a range of $45 to $46.
QQQ options chain on 9 July 2010. QQQQ trading at $44.20.
Aug44Call = $1.65 , Aug45Call = $1.11 , Aug46Call = $0.68 , Aug47Call = $0.40
Strategy Max net profit Capital outlay Roi Max profit
@ $46 (max loss) range
Bull Butterfly Spread* $85 $15 560% $46
Bull Condor Spread** $74 $26 284% $45 to $46
**: Bull Call Condor Spread was used
As you can see above, options trading rewards accuracy of outlook. If your price target on the
underlying stock is extremely accurate, the Bull Butterfly Spread would give you the most bang for
your bucks but if you would like to give a bit of allowance for mistakes and still achieve an
extremely favourable reward risk ratio, the Bull Condor Spread in the example above returns almost
a 3times reward as long as the underlying stock remains within the predetermined price range.
When To Use Bull Condor Spread?
One should use a Bull Condor Spread when one expects the price of the underlying stock to move
up to a certain higher price range by options expiration.
How To Use Bull Condor Spread?
There are two ways to establish a Bull Condor Spread. One way is to use only call options. We call
this a "Bull Call Condor Spread". The other way is to use only put options. We call that a "Bull Put
Condor Spread". Either way uses the same strike prices and typically cost almost the same capital
outlay, returning almost the same profit.
The composition of both kinds of Bull Condor Spread is the same. It involves writing options on the
two higher strike prices which you think the underlying stock will close within by expiration and
Buy 1 Lower Strike + Sell 1 One Strike Higher + Sell 1 One Strike Higher + Buy 1 Higher Strike
Establishing Bull Call Condor Spread
Veteran or experienced option traders would identify at this point that the Bull Call Condor Spread
actually consists of an OTM Bull Call Spread and an OTM Bear Call Spread with the short legs
typically one strike apart.
The choice of short leg strike prices is the price range within which you expect the underlying stock
to move into upon expiration of the position. The narrower the price range, the greater the reward
but the more accurate your outlook would have to be. The wider the price range, the lower the
reward but the less accurate your outlook need to be.
Bull Call Condor Spread Example
Sell To Open 1 contract of Aug $45 Call at $1.11
Sell To Open 1 contract of Aug $46 Call at $0.68
Net Debit = ($1.65 + $0.40) - ($1.11 + $0.68) x 100 = $26.00
In the above Call Bull Condor Spread example, we are expecting the QQQ to close between $45
and $46 on August expiration.
Establishing Bull Put Condor Spread
resultant net debit and maximum of a Bull Put Condor Spread is theoretically the same as you
would use call options due to put call parity, however, in practical options trading, sometimes Call
options and Put options do not cost the same to put on. In stocks that are likely to be more bullish,
its call options will be more expensive than its put options and vice versa. Therefore, an options
trader needs to calculate if a Bull Call Condor Spread or a Bull Put Condor Spread makes the most
sense in the prevailing circumstances.
Bull Put Condor Spread Example
Sell To Open 1 contract of Aug $45 Put at $1.90
Net Debit = ($1.50 + $3.17) - ($1.90 + $2.47) x 100 = $30.00
In this case, Bull Put Condor Spread requires a slightly higher net debit than the Bull Call Condor
Spread, the Bull Call Condor Spread should be used instead.
Trading Level Required For Bull Condor Spread
Condor Spread.
Profit Potential of Bull Condor Spread:
Bull Condor Spreads achieve their maximum profit potential when the underlying stock closes
within the strike prices of the two short legs by expiration. The profitability of a Bull Condor
Spread can also be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Bull Condor Spread:
Maximum Profit = Strike Difference between Long and Short Leg - debit
From the above Bull Call Butterfly Spread example:
Maximum Profit = [($46 - $45) - 0.26] x 100 = $74
Maximum Loss = $26
Risk / Reward of Bull Condor Spread:
Break Even Points of Bull Condor Spread:
A Bull Condor Spread is profitable if the price of the underlying stock remains between the higher
1. Lower Breakeven Point: Lower Strike Price + Debit
From the above Bull Call Condor spread example:
2. Upper Breakeven Point : Higher Strike Price - Debit
From the above Bull Call Condor Spread example:
Debit = $0.26 , Upper Strike Price = $47.00
In this case, our Bull Call Condor Spread makes a maximum profit of $74 if the QQQ closes
between $45 and $46 during August Expiration and remains profitable if the QQQ closes within the
price range of $44.26 to $46.74.
Advantages of Bull Condor Spread:
High ROI.
Able to aim maximum profit point within any specific range you want.
Low capital requirement results in the low maximum loss.
Disadvantages Of Bull Condor Spread:
Alternate Actions for Bull Condor Spreads Before Expiration :
When it is obvious that the underlying stock is going to go into a sustained bull trend, you could
close out the short and higher strike legs and then just hold the lower strike leg, transforming it into
a long call position. This transformation can be automatically performed without monitoring using a
Contingent Order.
Bullish Limited Risk Unlimited Profits
Fiduciary Calls
Definition
Fiduciary Call is an option trading strategy which buys call options as a replacement for a protective
put or married put in the same proportion.
Relationship with Protective Put
A Married Put or a Protective Put option trading strategy is where you buy put options in order to
protect your stock from losses beyond the strike price of the put options. To do this, you pay the
price of the put options, like an insurance premium, monthly. In this case, the put options perform
like an insurance.
Example:
Assuming you own 100 MSFT shares at $30 per share. You bought 1 contract of MSFT Nov30Put
for $0.80.
Total cost of position = ($30 x 100) + ($0.8 x 100) = $3080.
The protective put position in the example above costs $3,080 to put on. However, there is a
cheaper way to get exactly the same potential payoff and loss profile and that is by using a
Fiduciary Call.
A Fiduciary Call is simply the buying of enough At The Money call options to represent the total
amount of shares that would be bought. In this case, a Fiduciary Call requires the buying of only 1
contract of MSFT Nov30Call for $80 (Assume Nov30Call = $0.80).
Through buying a Fiduciary Call, the rest of the fund that would have been otherwise committed to
a protective put position can be reinvested in a risk free instrument, thus returning more overall
profit than a protective put position. In essence, a protective put creates a synthetic call position.
Risk Graph Comparison
Comparing the option trading risk graph of the Fiduciary Call (call option) and a Protective Put, you
would notice that they are exactly the same. Same loss if the stock stays stagnant, same profit
profile and same limited loss.

Data Comparison
The table below perfectly explains the benefits of a Fiduciary Call, using the above MSFT example.
Fiduciary Call Protective Put
Cost $80 $3080
Profit If MSFT $50 $1920* $1920**
Loss If MSFT $10 $80` $80``
Fund Committed*** 1.6% 61.6%
*: ((Stock Price - Strike Price) x number of contracts) - net option premium
**: ((Stock Price - Initial Stock Price) x number of shares) - net option premium
***: Assuming a total fund size of $5000
`: Net option premium
``: ((Strike Price Of Put - Stock Price) x number of shares) - net option premium
Clearly, using a Fiduciary Call returns the exact same profit, has the exact same loss but utilises
only a small fraction of the price of a protective put position through the principle of Put Call
Parity. This also means that a stock combined with a put option creates a synthetic call option. In
order for a Fiduciary Call to return the exact same profit/loss profile, leverage must be controlled
such that no additional MSFT shares or options are bought using the remaining fund. The remaining
fund should be held in a fiduciary account which returns a risk free interest rate in order to safely
return an additional profit to the overall fund. Hence the term "Fiduciary". This is also what makes
the famous Stock Replacement Strategy possible.
Conclusion
You must be wondering by now, what's the difference between a "Fiduciary Call" and a plain
vanilla "Long Call" option trading strategy? Well, there really isn't any difference since both option
trading strategies involves just buying call options. The main difference is in the number of call
options purchased and the purpose behind the purchase. Just like people eat at a restaurant over
more reasons then just ridding one of hunger, the different purpose behind executing each strategy
changes the nature of each option trading strategy. Long ago, when there was only call options and
no put options being traded in the exchanges, investors "manufactures" put options for the
protection of a portfolio through the use of Fiduciary Calls, governed by the principle of Put-Call
Parity.
Long Call Options
Introduction
Buying call options, or also known as Long Call Options or simply Long Call, is the simplest
bullish option strategy ever and is a great starting point for beginner option traders.
Buying call options / Long Call Options offers the protection of limited downside loss with the
benefit of leveraged gains. When applied correctly, it allows even beginner option traders to
consistently make more profits than losses.

Buying call options / Long Call Options also allows you to transform the position into more exotic
option strategies like the Bull Call Spread in order to hedge against risk at any point before
expiration. That makes Buying Call Options / Long Call Options an extremely versatile option
strategy in the correct hands.
Buying Call Options / Long Call Options is in reality, a leveraged way of trading the underlying
stock for much more profits on the same move in the stock. One should be familar with call options
before executing this strategy.
When To Buy Call Options / Long Call Options?
Buying Call Options / Long Call Options is an extremely versatile option strategy where one can
use when:
1. Confident of a dramatic short term rise in the underlying stock
Because call options depreciate daily due to time decay, one would want the underlying stock to
rise quickly so that one can sell the call option for a profit before it expires.
2. Wants to control more of the underlying stock using lesser money to hold for long term
gain
When one is bullish on an underlying stock and wants to control it for a lesser price for the long
term, buying call options LEAPS is an ideal strategy and a leveraged alternative to holding stocks.
Long Call Example
GOOG is trading at $473.23 per share at the time of this writing. Each lot of 100 shares would cost
traders $47,323.00, which is not usually an amount beginner traders has. One could instead control
the same 100 shares of GOOG and benefit from the same move for 7 months if it goes up through
buying call options / long call options on it's call options with another 7 months to expiration for
only $4,860.00 per contract, which is only 10.26% of the price of GOOG. That is the discounting
effect of Buying Call Options / Long Call Options. This allows you to take a maximum risk of only
$4,860 no matter how low GOOG goes in the future rather than risking the whole $47,323 in an
outright stock trade.
How To Buy Call Options / Long Call Options?
There are actually 2 ways to execute a buy call options / Long Call Options strategy... I shall simply
refer to them as the Beginner way and the Veteran Way.
The Beginner Way To Buying Call Options / Long Call Options
The beginner way to buying call options / Long Call Options is simply to buy At The Money
(ATM) call options of the stock you think is going to go up. This is known as the "At The Money
Long Call".
At The Money Long Call Example
Assuming QQQQ at $44. Buy To Open 10 contracts of QQQQ Jan44Call.
The Veteran Way To Buying Call Options / Long Call Options
Veterans buying call options / Long Call Options need to consider delta values and strike prices
when choosing what specific strike price to buy the call options at in order to fulfill one's
investment and portfolio needs.
Veteran Option Trader Method 1:
Veterans expecting a quick and dramatic rise in the underlying stock beyond a certain price could
maximise profit potential by buying Out of The Money (OTM) call options at a strike price which
one is sure that the underlying stock would go beyond. This is known as an "Out Of The Money
Long Call".

Out Of The Money Long Call Example
Assuming QQQQ at $44.
Veteran expects QQQQ to rise quickly to $50. Veteran buys to open 10 contracts of Jan$46Call.
In this case, QQQQ needs to rise beyond $46 to turn in a profit by expiration. If QQQQ rises but
not to beyond $46, the call options would be worthless by expiration but if QQQQ rises before
expiration but not beyond $46, one could still turn in a profit based on the delta value of the call
options. In fact, veteran option traders rarely hold a stock option contract to expiration. This is also
the buying call options / Long Call Options method that will turn the highest profit in percentage
but comes also with the highest risk of loss. As such, veteran options traders only use very small
capital committments (money they can afford to lose) for such an options strategy as its a little like
buying a lottery ticket.
Veteran Option Trader Method 2
Veterans expecting the underlying stock to rise moderately and wishes to maximise profits would
buy In The Money (ITM) Options as ITM options contains higher delta value than At The Money
Options. This is known as an "In The Money Long Call".
In The Money Long Call Example
Veteran expects QQQQ to rise moderately. Veteran buys to open 10 contracts of Jan$43Call.
How deep In The Money (ITM) to buy the call options at is really up to the trade management need
of the individual but in essence, one would not go lower than the first strike price that turns in a
delta value of 1 or 0.99. This method of buying call options / Long Call Options is less risky as one
would still have some value left over at expiration if the underlying stock stayed stagnant but will
also turn in less profit per cent then the Out of the money (OTM) method above.
Here is a table explaining the differences between the 3 methods discussed above:
Assume QQQQ Rise To $47 From $44.
Method Price Delta Profit Before Profit @ Loss If QQQQ Risk
Profit
Expiration Expiration Expires@ $44 Ranking
Ranking
Beginner Way $0.80 0.5 +187.5% +275% -100% 2
2
Veteran Method 1 $0.10 0.159 +477% +900% -100% 1
1
Veteran Method 2 $1.80 0.862 +43.66% +22.22% -44.4% 3
3
It's clear from the above table that no matter what method of Buying Call Options / Long Call
Options you choose to execute, you will always end up with more profit per cent than simply
buying QQQQ stocks. A trader who simply bought QQQQ stocks at $44 would only make 6.8%
profit when QQQQ rises to $47. The Options Leverage involved in using each of the above
methods can also be mathematically measured to help make a more informed decision when buying
call options.
Profit Potential of Buying Call Options / Long Call Options
Buying call options / Long Call Options allows you to profit with unlimited ceiling. That means that
your profit grows as long as the underlying stock continues to rise, unlike other more complex
strategies like the Bull Call Spread where the position stops making money after the underlying
stock reaches a certain level. In this sense, Buying Call Options / Long Call Options is one of the
few option strategies that has unlimited profit potential.
Trading Level Required For Buying Call Options
A Level 2 options trading account that allows the buying of call and put options without the owning
the underlying stock is needed for buying call options.
Profit Calculation of Buying Call Options / Long Call Options:
There are 2 ways to calculate profit for Long Call Options:
Before Expiration and After Expiration.
Before Expiration
One can predict the rise in the value of the call options for every $1 rise in the underlying stock
using the delta value of the call option, and hence it's profit.
Following up from the above example:
Buy to open 10 QQQQ Jan44call for $0.80 per contract. QQQQ rises to $47 the next day. Delta
value of Jan44Call is 0.5.
Profit = [(Rise in underlying stock) x delta value] / price of call options
Profit = [($47 - $44) x 0.5] / 0.8 = 187.5% profit.
Note:
Please note that the above figures are only arbituary and that precise calculation of expected profit
before expiration can only be arrived at using a stock option pricing model such as the Black
Scholes Model. That is because delta value increases as a call option gets more and more in the
money.
After Expiration
Upon expiration, call options will be left with the value of the stock above it's strike price. If that
value is greater than the original premium value of the call options, the position turns a profit.
Buy to open 10 QQQQ Jan44call for $0.80 per contract. QQQQ rises to $47 at expiration.
Profit = [(Price of Underlying Stock - Strike Price) - premium value of call options] / Price of Call
Options
Profit = [($47 - $44) - 0.80] / 0.80 = 275% profit.
Risk / Reward of Buying Call Options / Long Call Options:
Upside Maximum Profit: Unlimited
Net Debit Paid. The most one could lose is the entire amount put forward into buying call options
when the underlying stock expires out of the money (OTM).
Break Even Point of Buying Call Options / Long Call Options:
Again, there are 2 ways to determine break even point for buying call options / long call options.
Before Expiration
Before expiration, the bid/ask spread of the call options is the breakeven point.
QQQQ Jan44Call has a bid price of $0.78 and an ask price of $0.80. Because one buy at the ask
price and sell at the bid price, the difference of $0.02 becomes the breakeven point beyond which
one would start to profit.
After Expiration
After expiration, the underlying stock needs to move more than the premium value in the call option
in order to result in a profit. Thus the breakeven point becomes the entire premium value of the call
option.
QQQQ Jan44Call is At The Money and has no intrinsic value. The whole price of $0.80 is premium
value. Thus the breakeven point would be $44 + $0.80 = $44.80. QQQQ needs to move more than
$44.80 by expiration in order to result in a profit.
Advantages Of Buying Call Options / Long Call Options:
Loss is limited if the underlying financial instrument falls instead of rise. This allows one to
risk little money for the same moves in the underlying stock.
It allows traders with different risk appetite and portfolio management strategy to pick call
options with strike prices and delta values that fulfills that trading objective.
It is excellent as a stock substitute where one could either control the same number of
underlying stocks with very little money, or allows one to leverage the profits to one's
portfolio by replacing all stocks with call options.
It is the most basic option strategy where an option trader could simply transform into other
option strategies in order to hedge one's position by buying or selling more options.
It is a simple option strategy which requires no precise calculation to execute, unlike other
complex option strategies.
As it involves buying only one kind of option, the commissions involved would be much
lower than the rest of the other complex option strategies.
As buying call options / long call options do not involve margin, unlike in a short call option
strategy, literally any beginner option trader can execute this simple option strategy.
As one contract of call option is very cheap, this is one option strategy where beginner
option traders with very little money can also participate in. In fact, this also allows stock
traders to control stocks that are too expensive to buy.
Disadvantages Of Buying Call Options / Long Call Options:
There is the danger which you could lose all your money if you use all your money into this
strategy and then the underlying stock falls instead of rises, expiring the call options out of
the money.
Call option premium is subjected to time decay, so the value of the option actually
depreciates daily until expiration. However, this is not a concern if one intends to hold the
call options all the way to expiration.
Alternate Actions for Buying Call Options / Long Call Options Before Expiration:
If the underlying stock is expected to slow down its advance or halt by a certain price, one
could sell to open a corresponding amount of out of the money call options, transforming
the position into a Bull Call Spread, in order to reap an additional profit or to hedge against
a small pullback in the price of the underlying stock.
Alternatively, if one wishes to protect the profits in one's position, one could place a delta
neutral hedge.
If the underlying stock proves to be very volatile and moves up and down in big swings,
then one could buy a corresponding number of put options and transform the position from a
long call option into a long strangle where one can profit no matter if the stock expires
higher or lower.
Alternate Actions for Buying Call Options / Long Call Options During Expiration :
Exercise the call options. One could exercise the call option if it is In The Money in order to
buy the stock at better than market price and hold. An option trader would do this only when
one wishes to hold the stock for long term appreciation or dividends.
Sell the call options. This is the most popular choice of option traders. Simply sell the call
option and realise the profits so far.
Roll the position forward. If one continues to be bullish on the underlying stock, one could
perform what we call a rolling forward. This is a simple procedure where one sells the
expiring call options and buy call options of the following month.
Short Bull Ratio Spread
Introduction
A Short Bull Ratio Spread, or sometimes known as a Short Ratio Bull Spread, a Short Call Ratio
Spread or a Short Ratio Call Spread or a Call Back Spread, is a cousin of the Bull Ratio Spread. It is
a bullish call option strategy which not only eliminates upfront payment, but also allows an
unlimited profit potential, something which the Bull Ratio Spread is unable to achieve.

The Short Bull Ratio Spread is made up of buying At The Money (ATM) or slightly Out Of The
Money (OTM) call options and then selling to open a lesser number of In The Money (ITM), more
expensive call options of the same expiration month.
Because In The Money (ITM) call options costs more than At The Money (ATM) or Out of the
Money (OTM) call options, a lesser number of In The Money (ITM) call options is needed to cover
or significantly reduce the cost of the ATM or OTM options while still gaining in value slower than
the combined number of ATM or OTM options when the underlying stock rises.
Short Bull Ratio Spread Example
Buy To Open 3 QQQQ Jan44Call @ $1.05, Sell To Open 1 QQQQ Jan41Call @ $3.15
As the 3 Jan44Call costs $1.05 x 3 = $3.15, the 1 Jan41Call actually covers the entire price of the
long call options resulting in a zero upfront payment.
The ratio of long and short call options depends largely on the preference of the individual trader. A
common ratio is the 3 : 1 ratio spread where you sell to open 1 In The Money (ITM) call option for
every 3 At The Money (ATM) or Out of the Money (OTM) call options that was bought.
What Strike Prices To Use In Short Bull Ratio Spread?
The main deciding factor when determining what ratio to establish the Short Bull Ratio Spread with
is strike price. Here are the effects of different strike prices being used :
The wider the strike price difference between the short and long call options, the less In The
Money (ITM) call options you would need to sell in order to cover the price of the long call
options but the further the lower breakeven point becomes.
The narrower the strike price difference between the short and long call options, the higher
the potential profit and the nearer the lower breakeven point.
If the short call options costs more than the long call options, a net credit results which
allows the position to make a profit if the underlying stock falls drastically. This transforms
a short bull ratio spread into a volatile option strategy instead of a bullish option strategy.
If the number of In The Money (ITM) short call options is equal to or exceeds the number of
long call options, the position will lose money when the underlying stock goes up,
essentially eliminating it's effectiveness as a bullish option strategy.
From the guidelines above, it is obvious that we should always choose to sell the nearest in the
money (ITM) call options which covers the total price of the long call options without exceeding
the number of long call options bought.
When To Use Short Bull Ratio Spread?
One should use a Short Bull Ratio Spread when one is confident in a strong rise in the underlying
instrument and wishes to profit from that rise without any upfront payment and not lose any money
should the stock falls.
When To Use Short Bull Ratio Spread?
One should use a Short Bull Ratio Spread when one is confident in a strong rise in the underlying
instrument and wishes to profit from that rise without any upfront payment and not lose any money
should the stock falls .
Profit Potential of Short Bull Ratio Spread:
The Short Bull Ratio Spread has an unlimited profit potential. It will keep making more profit as
long as the underlying stock keeps rising. The profitability of a short bull ratio spread can also be
enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Short Bull Ratio Spread:
Profit = ((stock price - long call strike) x number of long call options) - ((stock price - short call
strike) x number of short call options)
Profit Calculation of Short Bull Ratio Spread
Assuming QQQQ at $44. Buy To Open 3 QQQQ Jan44Call @ $1.05, Sell To Open 1 QQQQ
Jan41Call @ $3.15.
Assume QQQQ rises to $47.
Profit = ((47 - 44) x 300) - (((47 - 41) x 100) = 900 - 600 = $300 profit.
Because you paid nothing to put on this position, profit % is infinite. You made money out of
nothing.
Maximum loss = Total Premium Value Of Long Call Options - Total Premium Value Of Short Call
Options
Jan41Call @ $3.15.
Maximum Loss = ($1.05 x 300) - (($3.15 - $3) x 100) = $315 - $15 = $300 when QQQQ closes at
$44 upon expiration.
Risk / Reward of Short Bull Ratio Spread:
Maximum Loss: limited
Maximum loss occurs when the underlying stock closes exactly at the strike price of the Long Call
Options.
Break Even Point of Short Bull Ratio Spread:
There are 2 breakeven points for a Short Bull Ratio Spread. The Upper Breakeven Point is point
above which the position will start to make a profit. The Lower Breakeven Point is the point below
which the position will lose only the net debit (if any).
Upper Breakeven Point = (Maximum loss / (number of long call options - number of short call
options)) + Strike Price Of Long Call Options
Jan41Call @ $3.15.
Net debit = 0, Maximum Loss = $300
Upper Breakeven Point = (300 / (300 - 100)) + 44 = 1.5 + 44 = $45.50
Lower Breakeven Point = Strike Price Of the Short Call Options.

Jan41Call @ $3.15.
Net debit = 0
Lower Breakeven Point = $41
If the stock drops below $41, the position will expire with zero profit / loss.
Note:
As you noticed from above, the short bull ratio spread offers the best of both worlds as long as the
underlying stock moves significantly up or down.
Advantages Of Short Bull Ratio Spread:
No upfront payment needed for the position.
No loss occurs if the underlying stock falls drastically instead of rises.
Disadvantages Of Short Bull Ratio Spread:
Broker needs to allow the trading of credit spreads.
Makes less profit than a long call option strategy on the same rise in the underlying stock.
If the position is already in profit and the underlying stock is expected to continue its rally,
one could buy to close the short call options, transforming the position into a Long Call
Option in order to maximise profits.
If the position is in profit and the underlying stock is expected to reach a certain price by
expiration or stay stagnant at a certain higher price, one could buy to close the short call
options and then sell to open call options at the strike price which the underlying stock is
expected to rise to. This transforms the position into a Bull Call Spread.
Bullish Unlimited Risk Limited Profits
Bull Ratio Spread
Introduction
A Bull Ratio Spread, or sometimes known as a Ratio Bull Spread, a Call Ratio Spread or a Ratio
Call Spread, is a Bull Call Spread enhancement in order to achieve 3 aims;
1. To result in a higher profit when the underlying stock closes within the strike prices of the long
and short options.
2. To reduce risk by eliminating upfront payment for the position.
3. To result in a profit even if the underlying stock stays stagnant or goes down, getting 3 way
profit.
You need to completely understand the Bull Call Spread in order to apply the Bull Ratio Spread.

The Bull Ratio Spread is executed simply by selling more Out Of The Money (OTM) call options
than long call options. The ratio of short and long call options depends on the trader's specific
objective, hence the name "Ratio Spread". There are 3 types of Bull Ratio Spreads that can be
established, covering all the possible ratio of short and long call options; 1. Bull Debit Ratio Spread.
2. Bull Free Ratio Spread and 3. Bull Credit Ratio Spread.
What Is A Bull Debit Ratio Spread?
A Bull Debit Ratio Spread is established when the amount of call options that are sold do not cover
the amount of money used on the long call options. One would usually put on a Bull Debit Ratio
Spread only when one wishes to reduce upfront payment for the Bull Call Spread while limiting
losses if the underlying stock should fall instead of rise.
Example of Bull Debit Ratio Spread:
Jan45Call @ $0.60

In this example, you are selling 1 more Jan45Call than a Bull Call Spread.
The net effect is, instead of paying $0.90 to put on this position (as in a bull call spread), you are
only paying only $0.30 due to the extra call option sold.
The advantage of a Bull Debit Ratio Spread versus the Bull Free Ratio Spread or the Bull Credit
Ratio Spread is that if the underlying stock should close above the strike price of the short call
options, a Bull Debit Ratio Spread stands to lose lesser money than the other two kinds as there are
lesser call options sold.
What Is A Bull Free Ratio Spread?
A Bull Free Ratio Spread is established when the amount of call options that are sold exactly covers
the amount of money used on the long call options, thus resulting in no cash payment for the
position. Again, one would usually put on a Bull Debit Ratio Spread only to not put an upfront
payment for the position and do not wish to run the high risk of loss of the credit version should the
stock surge suddenly.
Example of Bull Free Ratio Spread:
Jan45Call @ $0.60
The net effect is, instead of paying $0.90 to put on this position (as in a bull call spread), the 7
Jan45calls ($0.60 x 7 = $4.20) totally pays off the cost of 4 Jan44Call ($1.05 x 4 = $4.20), thus the
position is put on for free.
The advantage of a Bull Free Ratio Spread is that you do not pay cash for it like the Bull Debit
Ratio Spread and you stand to lose lesser money than a Bull Credit Ratio Spread if the underlying
stock rallies above the strike price of the short call options. However, because more call options are
sold than a Bull Debit Ratio Spread, you will lose more money than the Bull Debit Ratio Spread if
the stock should rally strongly above the strike price of the short call options.
What Is A Bull Credit Ratio Spread?
A Bull Credit Ratio Spread or sometimes called a Call Credit Ratio Spread, is established when the
total cost of the call options that are sold is more than the amount of money being paid on the long
call options, thus resulting in a credit. This is the way most option traders want a Bull Ratio Spread
to be set up as it returns the highest profit if the underlying stock closes exactly at the strike price of
the short call options when compared to the above 2 methods and it is the only way in which the
position can profit no matter if the stock goes up, down or stagnant as long as it does not exceed the
strike price of the short call options.
Example of Bull Credit Ratio Spread:
Jan45Call @ $0.60
The net effect is, instead of paying $0.90 to put on this position (as in a bull call spread), you
receive ($0.60 x 10) - ($1.05 x 4) = $1.80 as credit for putting on the position.
The advantage of a Bull Credit Ratio Spread lies in its maximum profit and the ability to make a
profit if the underlying stock stays stagnant. The number of call options you can sell is limited only
to the maximum margin granted to your by your broker.
No matter what kind of Bull Ratio Spread is used, there is one similarity; The position will lose
money if the underlying stock closes above the strike price of the short call options and that
maximum profit is attained when the underlying stock moves up and close at the strike price of the
short call options.
When To Use Bull Ratio Spread?
One should use a bull ratio spread when one is confident in a rise in the underlying instrument up to
a certain price. It is a good strategy to maximise profits on stocks that are expected to hit a technical
resistance level.
Trading Level Required For Bull Ratio Spread
the Bull Ratio Spread as the additional options written are not covered by corresponding long
options positions.
Profit Potential of Bull Ratio Spread :
The maximum profit potential of a Bull Ratio Spread is attained when the underlying stock closes at
the strike price of the short call options. In this respect, the profit potential of a Bull Ratio Spread is
limited. The profitability of a bull ratio spread can also be enhanced or better guaranteed by legging
into the position properly.

Profit Calculation of Bull Ratio Spread:
Maximum Return = (Total Credit From Short Call Options + [(Difference in strikes - Price of Long
Call) x number of long call contracts])
Profit Calculation of Bull Debit Ratio Spread:
Jan45Call @ $0.60
Max. Return = (0.6 x 3) + ([(45 - 44) - 1.05] x 2) = $1.70
Profit Calculation of Bull Free Ratio Spread:
Jan45Call @ $0.60
Max. Return = (0.6 x 7) + ([(45 - 44) - 1.05] x 4) = $4.00
Profit Calculation of Bull Credit Ratio Spread:
Jan45Call @ $0.60
Max. Return = (0.6 x 10) + ([(45 - 44) - 1.05] x 4) = $5.80
Risk / Reward of Bull Ratio Spread:
Position will start losing money if the stock rises past the strike price of the short call options.
However, if the stock falls instead of rises, then the maximum loss is limited to the net debit (if
any).
Note:
In this sense, a Bull Free Ratio Spread and a Bull Credit Ratio Spread will not lose any money if the
underlying stock falls. In fact, if the underlying stock falls, a Bull Credit Ratio Spread will still
make the total credit as profit. In this sense, a Bull Ratio Spread is more of a neutral option strategy
than a bullish option strategy but because it achieves it's maximum profit when the underlying stock
rises to the strike price of the short call options, it is classified as a bullish option strategy.
Break Even Point of Bull Ratio Spread:
The breakeven point of a Bull Ratio Spread is the price beyond which the position starts to go into a
loss.
BEP: Strike Price of Short Call Options + [Maximum Profit / (number of short call options -
number of long call options)]
Breakeven Point of Bull Debit Ratio Spread:
Jan45Call @ $0.60
BEP = 45 + [$1.70 / (3 - 2)] = $46.70
Breakeven Point of Bull Free Ratio Spread:
Jan45Call @ $0.60
BEP = 45 + [$4 / (7 - 4)] = $46.33
Breakeven Point of Bull Credit Ratio Spread:
Jan45Call @ $0.60
BEP = 45 + [$5.80 / (10 - 4)] = $45.97
Note:
As you noticed from above, the Bull Credit Ratio Spread has the nearest breakeven point even
though it has the highest profit potential.
Advantages Of Bull Ratio Spread:
3 way profit through the use of a Bull Credit Ratio Spread.
Much higher profit can be made than a Bull Call Spread when the underlying stock closes at
the strike price of the short call options.
Disadvantages Of Bull Ratio Spread:
Some brokers may not allow beginners to execute such a strategy.
Margin is required.
When the underlying stock reaches the strike price of the short call options before expiration, one
may choose to buy back the extra short call options and transform the position into a Bull Call
Spread in order to prevent a surge in price past breakeven. This transformation can be automatically
Naked Put Write
Introduction
Naked Put Write is sometimes known as a Put Write, Naked Put, Write Put Options, Short Put,
Uncovered Put Write, Selling Naked Puts or Short Put Options.
A Naked Put Write is when you Sell To Open Put options without first being short in the underlying
stock.

Which also means that you are selling a put option when you do not own that put option in the first
place. When the stock rises, the put options that you sold expire out of the money, giving the whole
price of the put options as profit.
One would use a Naked Put Write to speculate a quick rise in the price of the underlying stock and
still to make a profit even if the underlying stock stays stagnant.
One should be familiar with put options and options trading before executing the Naked Put Write
strategy.
When you Sell To Open a put option in this Naked Put Write options strategy, you are essentially
playing the role of a banker where you sell the put options you are selling put options to people who
are betting on the price of the underlying stock going down. If they are wrong and the stock rises,
you keep the money they paid you for the put options if the put options expires Out Of The Money (
OTM ). If this person is correct and the stock falls, you, as the banker, suffers a loss. That is how a
Naked Put Write works in a nutshell.
Complex bullish option strategies, such as the Naked Put Write, usually have added benefits such as
profiting even if the underlying stock stays stagnant or profiting even if the underlying stock should
fall slightly instead of rise. This is because short options positions puts time decay in your favor, the
more the value of the options you sold decay, the more you profit from the sale. The Naked Put
Write, as the simplest of the complex bullish option strategies, is no exception. By writing a put
option, you are not only making money if the underlying stock rises due to delta effect, you are also
putting Time Decay, which is the biggest evil of buying stock options, in your favor as Time Decay
works against the favor of the buyer of the put options that you sold. Yes, this means that if the
options you sold failed to rise in price, you also profit from its premium value!
Writing a put option is never really "Naked" or "Uncovered". Because you are obligated to buy the
underlying stock at the strike price of the put options sold, the position is a covered one as long as
you have the corresponding amount of money to fulfill that obligation. Today, all option trading
brokers require option traders to have that corresponding amount of money before they are allowed
to sell a put option. This is known as Margin.
When To Use Naked Put Write?
One would use a Naked Put Write when speculating a small or moderate rise in the underlying
stock. This rise need not be a dramatic one like in the Long Call Options strategy as it only need to
rise enough to allow the put options to expire out of the money (OTM).
Example:
Assuming QQQQ at $44. Sell To Open 10 QQQQ Jan44Put for $0.80.
You will make the entire $0.80 in profit even if the QQQQ expires at $44.05.
If you are expecting a huge, dramatic rise in the underlying stock, you would use a Long Call
Options strategy instead because, using the Naked Put Write as in the example above, you would
make only $0.80 no matter how high the underlying stock goes up to.
How To Use Naked Put Write?
A Naked Put Write is a simple option strategy where you simply sell to open put options at a strike
price which you are confident that the underlying stock would rise beyond by option expiration.
One would usually sell put options of the nearest expiration month so that the underlying stock
would not have time to go back in the money (ITM).
Example:
If you expect QQQQ to rise to $46, you could Sell To Open QQQQ Jan45Put.
If you expect QQQQ to rise very slightly, you could Sell To Open QQQQ Jan44Put.
The more In The Money (ITM) Put Options that you sold, the higher your maximum profit potential
but the more QQQQ needs to move in order to expire that option out of the money (OTM).
Here is a table showcasing the differences:
Assume QQQQ Trading At $44 Now.
Strike Price Price Amount QQQQ Needs Profit If QQQQ
To Move For Max Profit Expires @ $44.01
$43 $0.10 0 $0.10
$44 $0.80 $0.01 $0.80
$45 $1.80 $1.01 $0.81
Naked Put Write on out of the money put options is a very interesting option strategy that it
warrants a page on its own. Please read about Writing Out Of The Money Put Options.
Trading Level Required For Naked Put Write:
A Level 5 options trading account that allows the execution of naked writes is needed for the naked
put write.
Profit Potential of Naked Put Write:
The Naked Put Write has a limited profit as its maximum profit is the price at which the put option
is sold no matter how high the underlying stock goes up. The Naked Put Write also profits from the
premium value decay even if the underlying stock stays stagnant. This enables the Naked Put write
to have a much higher chance of turning a profit than a simple Long Call Option strategy.
Profit Calculation of Naked Put Write:
There are 2 ways to calculate profit for Naked Put Write:
Before Expiration and
After Expiration.
Before Expiration
Before expiration, the Naked Put Write profits from a fraction of the move in the underlying stock
based on its delta value and a fraction of the put option's premium value due to time decay based on
it's theta value.
Sell to open 1 lot of QQQQ Jan44Put for $0.80 per contract with a delta value of 0.5 and theta value
of -0.018.
QQQQ rises to $44.80, 5 days later.
Profit = [(Rise in underlying stock) x delta value] + [(theta x number of lots) x number of days] /
price of put options
Profit = [($44.80 - $44) x 0.5] + [(0.018 x 1) x 5] / 0.8 = 61.25% profit.
Note:
Scholes Model.
After Expiration
Upon expiration, there can be 2 possible scenarios for the Naked Put Write:
1. The underlying stock rises higher than the strike price
When the underlying stock is trading higher than the strike price of the put options that you sold
upon expiration, those put options expires out of the money (OTM) and the entire price of the put
options that you sold becomes your profit.
2. The underlying stock is trading lower than the strike price
Profit / Loss = Net Credit - (Strike Price - Stock Price)
Sell to open 1 QQQQ Jan44call for $0.80 per contract.
If QQQQ falls to $43.5 at expiration.
Profit = $0.80 - ($44 - $43.5) = $0.30 or 37.5%
If QQQQ falls to $42 at expiration.
Loss = $0.80 - ($44 - $42) = $1.20
Maximum Loss Of Naked Put Write
Contrary to common believe about naked positions and what other option trading sites have
wrongly assumed, Naked Put Write is unlike a Naked Call Write where maximum loss is unlimited.
Maximum loss of a naked call write is unlimited because the underlying stock can, theoretically,
move higher infinitely. However, in a Naked Put Write, where the position loses money when the
underlying stock goes down, the stock can only go down all the way to zero, not infinity! Which
means that there IS a limit to the maximum possible loss of a Naked Put Write!
Maximum loss = (Strike Price - Premium Value) x Number of Contracts.
Sell to open 1 lot of QQQQ Jan44Put for $0.80 per contract.
QQQQ falls to $0,
Maximum Loss = ($44 - $0.80) x 100 = $4320
Risk / Reward of Naked Put Write:
Limited to net credit received.
Limited to 100% of the strike price when stock falls to zero.
Note:
Because you can lose an increasing amount of money as long as the underlying stock continues to
fall, you should always place a reasonable stop loss when executing a Naked Put Write.
Break Even Point of Naked Put Write:
The breakeven point for a Naked Put Write is the point beyond which the underlying stock can drop
before the position starts to go into a loss. This is calculated as:
Breakeven = Strike Price - premium value of put options sold.
QQQQ is trading at $44 and QQQQ's Jan44Put is At The Money and has no intrinsic value. The
whole price of $0.80 is extrinsic value. Thus the breakeven point would be $44 - $0.80 = $43.20.
QQQQ needs to fall below $43.20 before the position starts making a loss.
One would notice by now that a Naked Put Write has a much higher chance of a profit than simply
Long Call Options as you will make money even if the stock does not move and lose money only
when the stock drops below the breakeven point.
Advantages Of Naked Put Write:
As the strategy results in a net credit, risk is reduced.
more complex option strategies.
As it involves trading only one kind of option, the commissions involved would be much
lower than the rest of the other more complex option strategies
It allows you to profit even if the underlying stock stays completely stagnant.
It is a versatile option strategy which can be transformed into other option strategies in order
to accomodate changing market outlooks prior to expiration.
Unlike in a Long Call Option, a Naked Put Write offers you a degree of protection from loss
if the underlying stock falls slightly instead of rises.
Disadvantages Of Naked Put Write:
Potential profit is limited, so if the stock goes into a huge rally, one could miss out on the
profit opportunity.
One could lose a lot of money if the underlying stock falls drastically.
As Naked Put Write is a credit strategy that involves margin, beginners are rarely allowed to
execute it with most online brokers.
As margin requirements can be quite large, one may not be able to put on as many positions
as one may simply by buying call options.
Alternate Actions for Naked Put Write Before Expiration:
If the underlying stock has moved so much as to leave the put options with very little value
left before expiration, one may wish to buy to close the put options in order to profit these
profits instead of risking it all by holding till expiration.
If the underlying stock is about to pull back from it's quick rally, you could transform the
Naked Put Write into a Bear Put Spread in order to profit from the downturn by buying an
equivalent number of At The Money (ATM) put options.
If the underlying stock proves to be trading within a narrow trading range, one could
transform Naked Put Write into a Short Strangle by further Selling To Open a corresponding
number of Out Of The Money (OTM) Call Options.
Alternate Actions for Naked Put Write During Expiration:
One should always allow Out Of The Money (OTM) put options to expire and always Buy
To Close these put options if they are In The Money (ITM).
Long Call Ladder Spread
Definition
An options strategy consisting of writing an additional higher strike price call option on a bull call
spread in order to further reduce capital outlay.

Introduction
The Long Call Ladder Spread, also known as the Bull Call Ladder Spread, is an improvement made
to an extremely popular options trading strategy, the Bull Call Spread. It further eliminates capital
outlay by writing an additional further out of the money call option of the same expiration month.
Such an improvement not only reduces capital outlay but sometimes eliminates capital outlay
altogether, transforming the Bull Call Spread into a credit spread. The drawback of such an
improvement is that the Long Call Ladder Spread is exposed to unlimited upside loss if the
underlying stock moves explosively.
This tutorial shall explain what the Long Call Ladder Spread is, its calculations, pros and cons as
well as how to profit from it.
Classification
Type of Strategy: Bullish | Type of Spread: Vertical Spread | Debit or Credit: Debit
The Long Call Ladder Spread is part of the "Ladder Spreads" family. Ladder Spreads add an
additional further out of the money option on top of two legged spreads, stepping the position up by
another strike price. The use of progressively higher or lower strike prices in a single spread gave
"Ladder Spreads" its name.
Distinction Between Long Call Ladder Spread and Bull Ratio Spread
The Long Call Ladder Spread is extremely similiar to another options trading strategy, the Bull
Ratio Spread. Both the Bull Ratio Spread and Long Call Ladder Spread aim to reduce or eliminate
upfront capital outlay for a Bull Call Spread position. In doing so, both the Bull Ratio Spread and
Long Call Ladder Spread require margin for the uncovered options. However, the Bull Ratio Spread
does so by writing more out of the money call options at the same strike price while the Long Call
Ladder Spread does so by writing call options at a higher strike price than the existing short call leg.
The result of this difference is that the Long Call Ladder Spread require a lower margin than the
Bull Ratio Spread due to the higher strike price of the additional short call options, while the Bull
Ratio Spread would have a higher maximum profit, closer breakeven point and a lower capital
outlay due to the higher extrinsic value offered by the lower strike price of the additional short call
options.
When To Use Long Call Ladder Spread?
The Long Call Ladder Spread should be used as an improvement to a Bull Call Spread position
when it is clear that the price of the underlying stock would not move explosively.
How To Use Long Call Ladder Spread?
Long Call Ladder is made up of buying an At The Money (or slightly ITM or OTM) Call Option,
writing an equivalent amount of a higher strike price Out Of The Money Call Option and then
writing yet another equivalent amount of an even higher strike price out of the money call option.
Buy ATM Call + Sell OTM Call + Sell Higher Strike OTM Call
Long Call Ladder Spread Example
Assuming QQQ trading at $44.
Buy To Open 1 contract of QQQ Jan44Call, Sell To Open 1 contract of QQQ Jan46Call and Sell To
Open 1 contract of QQQ Jan47Call.
Choosing Strike Prices For Long Call Ladder Spread
The consideration behind the middle strike price for Long Call Ladder spreads is the same as the
Bull Call Spread. You write the middle strike price call options at the price you expect the
underlying stock to move up to but not exceed by expiration. In our example above, we expect
QQQ to move up to but not exceed $46. If we expect QQQ to move up to $47 by expiration, we
will write the middle strike price at $47 and then move the further OTM strike price higher as well.
The higher strike price OTM call is usually written one strike price higher than the middle strike
price. In our example, since we wrote the middle strike price at $46, we have chosen to write the
higher strike price OTM call one strike higher at $47. However, the higher the strike price of this
highest strike price leg, the lower the margin requirement becomes as the extrinsic value of the
position decreases. As such, one could also choose to write this highest strike price leg at as high a
strike price as it takes to reduce the capital outlay of the position to a level of one's satisfaction.
Trading Level Required For Long Call Ladder Spread
A Level 5 options trading account that allows naked write is needed for the Long Call Ladder
Spread due to the uncovered highest strike price leg.
Profit Potential of Long Call Ladder Spread
Long Call Ladder Spread profits primarily when the price of the underlying stock increases up to
and remains between the strike prices of the two short calls. The Long Call Ladder Spread would
start to go into a loss when the price of the underlying stock increase beyond the strike price of the
highest strike price call options. As such, it would be advisable to place a stop loss at the highest
strike price call options using a contingent order to close out the whole position when the
underlying stock reaches that strike price or to make an adjustment to the position to transform it
into a more bullish options trading strategy when it is clear that the stock is going to rally
explosively (see alternate actions before expiration below).
Profit Calculation of Long Call Ladder Spread
Maximum Profit = Middle strike price - Strike Price of Long Call - Net Debit Paid
Maximum Loss if Stock Falls = Net Debit
Maximum Loss if Stock Rallies Beyond Highest Strike Price = Unlimited
Long Call Ladder Spread Calculations
Following up on the above example, assuming QQQQ at $46.50 at expiration.
Bought the JAN 44 Call for $1.50
Wrote the JAN 46 Call for $0.50
Wrote the JAN 47 Call for $0.15
Net Debit = $1.50 - $0.50 - $0.15 = $0.85
Maximum Profit = 46 - 44 - 0.85 = $1.15
Reward Risk Ratio = 1.15 / 0.85 = 1.35
Max. Downside Risk = $0.85
Max. Upside Risk = Unlimited
Upper Break Even = $1.15 + $47 = $48.15
Lower Break Even = $44 + $0.85 = $44.85
Risk / Reward of Long Call Ladder Spread
Maximum Profit: Limited
Maximum Downside Loss: Limited to net debit paid
Maximum Upside Loss: Unlimited beyond highest strike price
Break Even Point of Long Call Ladder Spread
There are 2 break even points to a Long Call Ladder Spread. One breakeven point if the underlying
asset goes up (Upper Breakeven) beyond which the position goes into an unlimited loss, and one
breakeven point if the underlying asset goes down (Lower Breakeven).
Upper BEP: Max. Profit + Highest Strike
Lower BEP: Long Call Strike Price + Net Debit Paid
Long Call Ladder Spread Greeks
Delta: Positive
Delta of Long Call Ladder Spread is positive at the start. As such, its value will increase as the price
of the underlying stock increases.
Gamma: Negative
Gamma of Long Call Ladder Spread is negative and will reduce delta as the price of the underlying
stock increases. It will then come to a point where the delta will become negative and the position
will start to decline in value as the price of the underlying stock continues to increase.
Theta: Positive
Theta of Long Call Ladder Spread is positive and will therefore gain value over time due to time
decay in the short term prior to expiration as the short out of the money call options lose value
faster than the long call options.
Vega: Negative
Vega of Long Call Ladder Spread is negative and will therefore lose value as implied volatility rises
and gains value as implied volatility drops. As such, it is highly disadvantageous to use a Long Call
Ladder Spread in periods of rising implied volatility prior to expiration.
Advantages Of Long Call Ladder Spread
Further reduces capital outlay of a Bull Call Spread
Wider maximum profit zone than a Bull Ratio Spread
Lowers breakeven point of a Bull Call Spread
Disadvantages Of Long Call Ladder Spread
Margin required due to uncovered OTM leg
Alternate Actions for Long Call Ladder Spread Before Expiration
If the underlying asset has moved beyond its breakeven point and is expected to continue to
move strongly in the same direction, one could Buy To Close the short call options and hold
the long call options for unlimited upside profit.
Covered Call Collar
Introduction
A covered call collar is an improvement made on top of a covered call. A complete understanding
of Covered Call is needed in order to understand what a covered call collar is.
A Covered Call suffers unlimited losses when the underlying asset drop in price drastically. In order
to hedge against such a move, a Covered Call Collar buys a put option on top of the covered call
position such that if the underlying asset should drop in price, the put option will gain in price
proportionally, thereby hedging against the loss. Therefore, a Covered Call Collar, or simply known
as a Collar, is a Covered Call with limited maximum loss.
In options trading, the more hedged and multi-directional a position is, the lower the maximum
profit potential becomes. This is the same trade off in a Covered Call Collar. A part of the profits
obtained from the sale of the call options in the covered call needs to be committed to the purchase
of put options in order to hedge downside risk, transforming the Covered Call into a Covered Call
Collar position.
In fact, veteran options traders would immediately notice that the Covered Call Collar is actually a
Conversion closing out a Synthetic Short Put position. When significant price discrepancies
between the call and put options exist, the Covered Call Collar position actually becomes a
Conversion Arbitrage position, sealing in risk-free profits.

When To Use Covered Call Collar?
One should use a covered call collar when one wishes to profit when the underlying asset is up or
stagnant and to protect against a drop in price of the underlying asset .
How to Use Covered Call Collar?
Establishing a covered call collar is extremely simple. All you have to do is to write (sell to open) 1
contract of nearest out of the money call option for every 100 shares you own and then buy to open
1 Out of the Money (OTM) Put option for every 100 shares you own.
Example: Assuming you own 700 shares of QQQQ at $44. Sell To Open 7 contracts of QQQQ
Jan45Call. Buy to Open 7 contracts of QQQQ Jan42Put.
Profit Potential of Covered Call Collar:
The Covered Call Collar's maximum profit occurs when the stock closes exactly at the strike price
of the short call options at expiration of the short call options. Its maximum profit will be lower
than a Covered Call because part of that profit has been spent towards purchasing a downside
protection in the form of the OTM put option.
You will make the $1 gain in QQQQ plus the value of the 7 Jan45Call that you wrote, less the total
price paid towards the purchase of the put options as it expires out of the money.
Such an ideal situation is, of course, rare. In most cases, the short call options will either be in the
When your stock is stagnant or slightly higher upon expiration of the short call options, you will
profit on the whole value of the call options that you wrote, with whatever profit from the stock if it
is up slightly.
Assuming your 700 QQQQ close at $44.50 upon expiration of the 7 contracts of QQQQ Jan45Call.
You will make the $0.50 gain in QQQQ plus the value of the 7 Jan45Call that you wrote, less the
total price paid towards the purchase of the put options as it expires out of the money.
When your stock has gained in price beyond the strike price of the short call options upon
expiration, your stocks will be called off (assigned) and you will profit from the value of the call
options that you wrote and the value of the stock up till the strike price of the short call options.
That is to say, you will not benefit from any rise in your stock beyond the strike price of the short
call options due to the short call options going in the money.
You will gain the value of the 7 contracts of QQQQ Jan45Call that your wrote, less the total price
paid towards the purchase of the put options as it expires out of the money. Your 700 shares of
QQQQ will be called off (bought by the person whom you sold the call option to) at $45 (the strike
price of the QQQQ Jan45Calls that you sold.) You will therefore make $1 from your stock, not $2.
From the below profit calculations of the covered call collar, you will learn that you will make more
profits if your stocks are assigned rather than when your stocks are not assigned. This is of course a
disadvantage if you would like to keep the stock for the long term.
Trading Level Required For Covered Call Collar
A Level 1 options trading account that allows the execution of Covered Call and Protective Put is
needed as the Covered Call Collar is a combination of both strategies.
Profit Calculation of Covered Call Collar:
1. If stocks are not assigned (called off) at expiration:
Profit = (value gained in stock + initial price of short call options - purchase price of OTM put
options) / initial value of underlying stock
Profit = ($0.50 + $1.00 - $0.35) / $44 = 2.61%
2. If stocks are assigned (called off) at expiration:
Profit = ((strike price of short call options - initial value of underlying stock) - purchase price of
OTM put options + initial price of short call options) / initial value of underlying stock
Profit = (($45 - $44) - $0.35 + $1.00) / $44 = 3.75%
3. If stocks have dropped in value at expiration but long put options remain out of the money:
Profit = (initial price of short call options - (initial stock price - stock price at expiration)) - purchase
price of OTM put options) / initial value of underlying stock
Profit = ($1.00 - ($44 - $43.50)) - $0.35) / $44 = 0.34%
4. If stocks have dropped in value at expiration and long put options are in the money:
Maximum Loss = (((initial price of underlying asset - strike price of OTM put option) + Purchase
price of OTM put option) - initial price of short call options) / initial value of underlying stock
Assuming at expiration, QQQQ closes below $42.00.
Maximum Loss = (($44 - $42) + $0.35) - $1.00) / $44 = 3.06%
Risk / Reward of Covered Call Collar:
Break Even Point of Covered Call Collar:
There are 2 ways to look at breakeven point for a covered call collar.
1. As the Covered Call Collar profits mainly from the decay of the short out of the money call
options, the main way to look at breakeven is the number of days it takes for the decay of the short
call options covers its bid/ask spread and the purchase price of the out of the money put options.
Stagnant Breakeven point = (Bid ask spread of short call option + Purchase price of OTM put
option) / theta
Assuming the ask price of the short call option is $1.00 and bid price is $1.05 with a theta of -0.012.
Stagnant Breakeven Point = ($0.05 + $0.35 / 0.012) = approximately 33 days.
2. The lower breakeven point to find out how much the underlying stock can fall before you start
making real losses to your account value.
Lower Breakeven point = (Initial Value of Short Call Options - Purchase price of long OTM put
option) - Initial Value of underlying stock
Assuming you bought 700 QQQQ close at $44 and sold 7 contracts of QQQQ Jan45Call for $1.00
and bought 7 contracts of Jan42Put for $0.35.
Lower Breakeven Point = (($1.00 - $0.35) - $44) = $43.35
Advantages Of Covered Call Collar:
Able to offset losses if your stock drops in value.
Loss is limited even if underlying asset drops in price drastically.
Disadvantages Of Covered Call Collar:
You must continue to hold your stocks if you want to keep the short call options.
You can lose your stocks if it rises beyond the strike price of the short call options through
assignment at expiration.
A narrower lower breakeven than a Covered Call.
Lower potential profit than a Covered Call.
Alternate Actions for Covered Call Collars Before Expiration:
If you wish to keep your stocks when it has gained in price beyond the strike price of the
short call options, you could buy back the short call options before it expires and allow the
stock to continue its profit run.
In addition to keeping your stocks using the action above, you could also use the excess
money after the buy back to buy put options at the money in order to protect the current
profits of the stock. This is known as a Protective Put.
Deep In The Money Covered Call
Definition
An options trading strategy designed to profit when a stock remains stagnant, moves up or moves
down to a certain limit by purchasing the stock and writing deep in the money call options against
it.

Introduction
Unlike its more popular cousin, the Covered Call, which is a bullish options strategy that makes its
maximum profit when the stock moves upwards, the Deep In The Money Covered Call is a neutral /
volatile options strategy which makes its maximum profit even when the stock remains stagnant or
moves up / down. Yes, profiting in all 3 directions. Due to its deep protection, its returns are also
very small and if the underlying stock go all the way down like shares of Lehman Brothers did, you
also stand to lose the whole position.
Differences Between Deep In The Money Covered Call and Covered Call:
The most obvious difference between the Deep In The Money Covered Call (Deep ITM Covered
Call) and the regular covered call is the fact that out of the money call options are written in a
regular covered call and deep in the money call options are written in Deep In The Money Covered
Calls.
This is the difference that made all the difference.
Because out of the money call options are written in a regular covered call, the position makes its
maximum options trading profit when the stock goes up to the strike price of the short call options
and the position loses money when the credit received from the sale of the call options fails to offset
the drop in price of the stock. This results in the following risk graph:

In a Deep In The Money Covered Call, deep in the money call options are written, which means
that these call options literally offsets any price movement of the underlying stock, immunizing the
options trading position from any directional risk. This is due to the fact that deep in the money call
options have delta that is close to 1 and that creates a delta neutral position against the stock itself.
The position then makes the extrinsic value of the deep in the money call options (which is very
little of course) as profit upon expiration. However, this immunity to directional risk is not infinite.
The position can still lose money if the stock falls below the strike price of the short call options,
which of course would be a very long way down. This results in the following options trading risk
graph:

As you can see from above, the maximum profit potential for a regular covered call is way higher
than the maximum profit potential of the Deep In The Money Covered Call due to the room given
for the stock to appreciate in value as well as the much much higher extrinsic value of the out of the
money call options. However, with this increased profitability, the regular Covered Call is subjected
to higher options trading risk as the position can start losing money way quicker than the Deep In
The Money Covered Call if the stock drops.
As such, the trade-off here is between a higher profit and a higher level of protection. The higher
the level of protection (as in a Deep In The Money Covered Call), the lower the profitability. The
higher the level of profitability (as in a regular covered call), the lower the level of protection. This
is the kind of trade-off that exist in all areas of options trading. There is never a perfect scenario.
Why use Deep In The Money Covered Calls?
Yes, the biggest advantage of Deep In The Money Covered Calls is PROTECTION!
Because Deep In The Money Call Options with delta value of almost 1 are written, these short call
options move dollar for dollar against the movement in the stock, thus immunizing it against any
directional risk. So how far does this protection go? This protection allows the stock to drop all the
way past the strike price of the short call options.
For example, the QQQQ is trading at $29 today and its $22 strike price call options are bidding at
$7.30 with a delta value of 0.99, which is almost 1. The $22 strike price all options have an
extrinsic value of $0.30, which will be the maximum profit for the position should the stock close at
any price above the strike price of the short call options, which is $22. Now, in order for this
position to lose money, the QQQQ needs to drop below $22, which is a drop of 24%!
That's how big a protection the Deep In The Money Covered Call grants for making that $0.30 in
extrinsic value. It's really as close to an options trading arbitrage as you can get without all the
complex options trading calculations. All you have to do is to look for deep in the money call
options with enough extrinsic value to worth the trouble. Of course, the profits to be expected
would also be like in an arbitrage trade... very little. As we all know in options trading, low risk
equals to low profits.
Now, is a drop of more than 24% possible? Yes, of course it is possible. A lot of stocks drop much
more than 24% during market crashes. Even so, you would have received 24% of protection rather
than being unprotected like the others holding only the stock.
Deep In The Money Covered Call as Income Strategy:
The advantage of having predictable options trading return each month using the Deep In The
Money Covered Call is also its biggest drawback.
The Deep In The money Covered Call should be regarded as an income strategy in order to make a
predictable monthly return in the form of the small extrinsic value of the deep in the money call
options because the position will no longer benefit from any gains in the stock. Yes, for the
protection and predictable return, you will give up any speculative profits should the stock should
suddenly stage a rally. This is because any gains in the stock would be totally offset by the loss in
the call options as these call options would move dollar for dollar with the stock.
When To Use Deep In The Money Covered Call?
One should use a Deep In The Money Covered Call when one wishes to make a small, low risk
profit without betting on the direction of the stock.
How To Use Deep In The Money Covered Call?
Establishing a Deep In The Money Covered Call is extremely simple. All you have to do is to write
(sell to open) 1 contract of deep in the money call option for every 100 shares you own.
Deep In The Money Covered Call Example:
Assuming you own 700 shares of QQQQ at $29. Sell To Open 7 contracts of QQQQ Jan22Call.
Which strike price should you choose for the call options to be written?
There are just 2 simple criterias:
The delta value of the call options need to be 0.99 to 1. This is to completely neutralize the
directional risk of the position.
The selected option needs to have enough extrinsic value to return a profit above what you
will pay in expenses in the form of brokerage commissions.
Profit Potential of Deep In The Money Covered Call:
The Deep In The Money Covered Call's maximum profit is the extrinsic value of the short call
options. This happens as long as the price of the stock remains above the strike price of the call
options all the way to expiration of the short call options.
Profit Calculation of Deep In The Money Covered Call:
% Profit = total extrinsic value of call options / total outlay of position
Assuming the Jan22Calls are bidding at $7.30.
% Profit = ($0.30 x 700) / ($29 x 700) = 210 / 20,300 = 1.03% profit.
Risk / Reward of Deep In The Money Covered Call:
Happens when the stock drops below strike price of short call options.
Losing Point of Deep In The Money Covered Call:
The losing point of the Deep In The Money Covered Call is the price below which the position
starts to make its loss.
Losing Point = Strike price of short call options - extrinsic value of short call options.
Assuming the Jan22Calls are bidding at $7.30.
Losing Point = $22 - $0.30 = $21.70.
Advantages Of Deep In The Money Covered Call:
Profiting as long as stock remains above strike price of short call options.
Very deep stock position protection.
Disadvantages Of Deep In The Money Covered Call:
Maximum profit is very small.
Alternate Actions for Deep In The Money Covered Calls Before Expiration:
If the price of the stock drops to the strike price of the short call options before expiration
and is assessed that the stock could rebound, you could buy to close the short call options,
which should now be worth very little, and then buy to open at the money put options to
transform the position into a protective put position in order to profit when the stock
rebounds and yet be protected should the drop continues.
Bearish Options Strategies
Bearish Limited Risk Limited Profits
Bear Call Spread
Introduction
A Bear Call Spread is a bearish option strategy that works in the same way a Bear Put Spread does,
profiting when the underlying stock drops.
The Bear Call Spread is simply a naked call write which minimizes margin requirement and limits
potential loss by purchasing a higher strike price call option.
Because the Bear Call Spread is a credit spread, you also make money if the underlying asset stays
stagnant through the decay and expiration of the more expensive short call options. The Bear Put
Spread, on the other hand, would not be able to profit if the stock did not move down beyond its
breakeven point. As the Bear Call Spread involves buying and selling options of the same type and
expiration month, it is classified as a vertical spread.

Classification:
Strategy : Bearish | Outlook : Moderately Bearish | Spread : Vertical Spread | Debit or Credit :
Credit
When To Use Bear Call Spread?
One should use a Bear Call Spread when one is moderately confident of a drop in the underlying
asset and wants some protection and profit should the underlying asset remains stagnant .
How To Use Bear Call Spread?
Establishing a Bear Call Spread involves the purchase of an At The Money or Out of The Money
call option on the underlying asset while simultaneously writing (sell to open) an In the Money or
At The Money call option on the same underlying asset with the same expiration month .
Bear Call Spread Example
Assuming QQQQ at $44. Buy To Open 10 QQQQ Jan44Call, Sell To Open 10 QQQQ Jan43Call
If you expect QQQQ to go down beyond $42 by expiration, you will Sell to Open QQQQ Jan42Call
instead.
Which strike prices to choose also depends on your desired effect. If the Bear Call Spread is
established by selling ATM call option and buying OTM call options, the position needs only stay
stagnant or drop to result in a profit, hence a higher profit probability. The drawback is that this
method decreases the maximum profit potential of the Bear Call Spread. Again, like all option
trading strategies, there is a trade-off between maximum profit and profit probability.
Assuming QQQQ at $44. Buy To Open 10 QQQQ Jan45Call, Sell To Open 10 QQQQ Jan44Call
A Bear Call Spread results in maximum profit when the underlying stock closes below the strike
price of the short call options. In this case, the strike price of the short call options is directly on the
prevailing stock price, allowing it to reach maximum profit even if the stock remains stagnant.
The profitability of a bear call spread can be enhanced or better guaranteed by legging into the
position properly. A bear call spread can also be transformed into a Deep ITM Bear Call Spread for
better reward risk ratio and possibly even an arbitrage.
Trading Level Required For Bear Call Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Bear
Call Spread.
Profit Potential of Bear Call Spread:
Bear Call Spreads profits in 2 ways. Firstly, if the stock goes down, the short call option goes down
in price and eventually expire out of the money when the underlying asset drops beyond the strike
price of the short call option (example 1 above). Secondly, while the underlying asset stays
stagnant, the premium on the more expensive short call option will continue to decay until it has no
value thereby allowing one to pocket the price of the short option (example 2 above).
Being a credit spread, the maximum profit potential of a Bear Call Spread is the net credit gained
when the position is put on. This occurs when the short call option expires out of the money.
Profit Calculation of Bear Call Spread:
Maximum Return = Net Credit
Buy to open 10 QQQQ Jan44Call for $1.05 per contract and sell to open 10 QQQQ Jan43call for
$1.85 per contract
Max. Return = $1.85 - $1.05 = $0.80 when QQQQ close below $43
Max. Risk = Difference in Strike - Net Credit = ($44 - $43) - $0.80 = $0.20 when QQQQ close
above $44
Break Even = Lower Strike + Net credit = $43 + $0.80 = $43.80
Buy to open 10 QQQQ Jan45Call for $0.60 per contract and sell to open 10 QQQQ Jan44Call for
$1.05 per contract
Max. Return = $1.05 - $0.60 = $0.45 when QQQQ close below $44
Max. Risk = Difference in strike - net credit = ($45 - $44) - $0.45 = $0.55 when QQQQ close above
$45
Break Even = Lower Strike + Net credit = $44 + $0.45 = $44.45
Notice that using higher strike prices for a Bear Call Spread results in a lower maximum profit but a
much more favorable profit probability and a maximum loss that occurs at a much higher point.
Risk / Reward of Bear Call Spread:
Break Even Point of Bear Call Spread:
BEP: Lower Strike + Net credit
Advantages Of Bear Call Spread:
Loss is limited if the underlying financial instrument rises instead of falls.
If the underlying instrument fails to drop beyond the strike price of the out of the money
short call option, the profit yield will be greater than just buying put options.
Able to profit even when the underlying asset remains completely stagnant.
Lower risk than simply writing naked call options as maximum downside is limited by the
long ATM/OTM call option.
Disadvantages Of Bear Call Spread:
There will be more commissions involved than simply buying put options or just selling
naked call options.
There will be no more profits possible if the underlying asset drops beyond the strike price
of the short 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 short call
obligation.
If your moderately bearish opinion on the underlying asset turns out to be wrong and the
underlying asset continues to drop strongly beyond the strike price of the short call option,
one could sell the out of the money long call option in order to preserve some equity from
the long call option and allow the short call options to expire. Doing so will transform the
position to a naked call write position with unlimited upside risk. One could also close out
the position after the underlying asset exceeds the strike price of the short call option and
then switch to an option strategy with unlimited profit potential, like a long put buy or a
long straddle.
If the underlying stock is determined to have the potential of turning bullish and rally
significantly, you could transform the Bear Call Spread into a Short Call Ladder Spread by
buying as many further out of the money call options as you have short call options. This
transformation can be automatically performed without monitoring using a Contingent
Order.
Deep ITM Bear Call Spread
Introduction
The Deep In The Money Bear Call Spread is a complex bearish options strategy with limited profit
and limited loss. What makes it so interesting is that even though it takes a significant drop in price
of the underlying stock to become profitable with this options trading strategy, it does have one of
the best reward risk ratio for bearish options strategies. In fact, it could even become an arbitrage
position!

Classification
Strategy: Bearish | Outlook : Sustained Bearish | Spread : Vertical Spread | Debit or Credit : Credit
What Is Deep ITM Bear Call Spread
Deep ITM Bear Call Spread is simply a Bear Call Spread using deep in the money strike prices. A
regular Bear Call Spread writes at the money call options and then buy out of the money call
options in order to partially offset margin requirements and to put a ceiling to the maximum loss
possible by the position. This resulted in an options trading position which profits when the price of
the underlying stock goes sideways or downwards with greater maximum loss potential than
maximum profit potential, a negative reward risk ratio. However, when strike prices are moved in
the money, the reward risk ratio of the position starts to come around and will come to a point when
it becomes positive. Like a regular bear call spread, a deep in the money bear call spread requires
the price of the underlying stock to close below the short strike in order to return its maximum
profit potential, which in this case would mean dropping significantly. However, this results in a
reward risk ratio as high as 9:1 due to the extremely small maximum loss of the deep ITM bear call
spread.
The Deep ITM Bear Call Spread has such an amazing reward risk ratio due to the extremely small
maximum loss potential. This is a result of the long call leg being in the money and would rise
almost dollar for dollar with the short call leg if the price of the underlying stock goes upwards
instead. The long call leg in a regular bear call spread is out of the money and would require the
price of the underlying stock to rise significantly in order to take it in the money before it is able to
completely hedge against the loss on the short leg.
When To Use Deep ITM Bear Call Spread?
The Deep ITM Bear Call Spread could be used when one expects the price of the underlying stock
to move down significantly by options expiration, wants as low a maximum loss potential as
possible and has an options trading account level high enough for credit spreads.
How To Use Deep ITM Bear Call Spread?
Deep ITM Bear Call Spread consists of writing a deep in the money call option with the buying of
the same amount of call options of the same expiration month at a higher in the money strike price.
Buy ITM Call + Sell Deep ITM Call
Deep ITM Bear Call Spread Example
Assuming QQQ is trading at $63 and its May $60 strike price call options are trading at $3.06 and
$55 strike price call options are trading at $7.94.
Buy To Open 1 contract of May $60 Call at $3.06
Sell To Open 1 contract of May $55 Call at $7.94
Net Credit = $7.94 - $3.06 = $4.88
Choosing Strike Price and Expiration Month for Deep ITM Bear Call Spread:
The choice of expiration month depends on how long you think it will take the price of the
underlying stock to go below the strike price of the short call options. If you expect an extremely
quick move downwards, then using the nearest expiration month is ok but if you expect the move
downwards to be completed in 3 months, then using options with at least 3 months to expiration
would be in order. As Deep ITM Bear Call Spreads typically have a very far breakeven point,
sufficient time should be given for such a move to happen.
The choice of strike price for the short call options depends on how low you think the price of the
underlying stock would go down to and beyond. In the example above, we are expecting QQQ to
drop down to and beyond $55, hence writing the $55 strike price call options. Bear in mind that the
lower the strike price of the short call leg, the higher the maximum profit potential would be but the
more the price of the underlying stock needs to drop in order to achieve maximum profit and
breakeven.
Deep ITM Bear Call Spread Arbitrage:
Deep ITM Bear Call Spread can become an arbitrage position with no possibility of loss. In this
case, instead of making a loss when the price of the underlying stock remain stagnant or rises, it will
make a very small profit and make a big profit if the price falls strongly, resulting in the risk graph
below.

This happens when the net credit of the position exceeds the difference between the strike prices.
This could happen naturally or it could happen by legging into the position successfully.
Deep ITM Bear Call Spread Arbitrage Example 1
Net Credit = $8.10 - $3.06 = $5.04
Minimum profit = $5.04 - (60 - 55) = $0.04 with no possibility of loss.
Deep ITM Bear Call Spread Arbitrage Example 2 - Legging
$55 strike price call options are trading at $7.94. You decided to leg into the position and managed
to fill at the following prices:
Net Credit = $8.10 - $3.06 = $5.04
Minimum profit = $5.04 - (60 - 55) = $0.04 with no possibility of loss.
In both cases above, the Deep ITM Bear Call Spread would make a minimum profit of $0.04 with
no possibility of loss, making it an arbitrage position.
Trading Level Required For Deep ITM Bear Call Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Deep
ITM Bear Call Spread.
Profit Potential of Deep ITM Bear Call Spread:
Deep ITM Bear Call Spreads achieve their maximum profit potential when the underlying stock
closes at or below the short strike price by expiration. The profitability of a Deep ITM Bear Call
Profit Calculation of Deep ITM Bear Call Spread:
Maximum Profit = Net Credit
Maximum Loss = Difference Between Strikes - Net Credit
Deep ITM Bear Call Spread Profit/Loss Calculation
Net Credit = $7.94 - $3.06 = $4.88
Maximum Profit = $4.88
Maximum Loss = (60 - 55) - $4.88 = 5 - 4.88 = $0.12
Reward Risk Ratio = $4.88 / $0.12 = 40.6
Risk / Reward of Deep ITM Bear Call Spread
Break Even Points of Deep ITM Bear Call Spread:
A Deep ITM Bear Call Spread is profitable if the price of the underlying stock falls below the
breakeven point.
Breakeven = Higher Strike - Maximum Loss Potential
From the above Deep ITM Bear Call Spread example:
Maximum Loss = $0.12, Higher Strike = $60
Breakeven = $60 - $0.12 = $59.88
This Deep ITM Bear Call Spread would start to become profitable when the price of QQQ falls
from $63 to $59.88 and beyond. This means a drop of 4.95% in the price of QQQ in order to reach
breakeven, which is a very significant downwards move. This far breakeven point is one of the most
significant disadvantages of the Deep ITM Bear Call Spread and why it should be used only when a
significant downwards move is expected.
Deep ITM Bear Call Spread Greeks:
Delta: Negative
Deep ITM Bear Call Spreads have negative delta which allows it to profit as the price of the
underlying stock goes down. This is characteristic of all bearish options strategies.
Gamma: Positive
Being slightly Gamma Positive, the delta of a Deep ITM Bear Call Spread will becoming
increasingly negative as the price of the underlying stock goes down, increasing its profitability
downwards.
Vega: Positive
Vega for Deep ITM Bear Call Spreads tends to be positive and will increase the value of the
position when implied volatility goes up and decrease value when implied volatility goes down.
Theta: Slightly Negative
Deep ITM Bear Call Spreads are not significantly affected by Time Decay as the erosion of
extrinsic value on the long legs are offset by the erosion of extrinsic value on the short leg.
However, the long leg tends to decay slightly faster than the short leg.
Advantages Of Deep ITM Bear Call Spread:
Highest ROI of the complex bearish options trading strategies.
Able to achieve arbitrage when legged in correctly.
Disadvantages Of Deep ITM Bear Call Spread:
Requires margin.
Requires a big downwards move in order to become profitable.
Alternate Actions for Deep ITM Bear Call Spreads Before Expiration:
When the price of the underlying stock has fallen below the strike price of the short leg and
is expected to stage a pullup, one could Buy To Close the short leg and hold the long leg,
transforming the position into a Long Call in order to profit from such a pullup.
When the direction of the breakout has become uncertain and that the price of the
underlying stock has an equal chance of a significant topside breakout, one could add a
Deep ITM Bull Put Spread to the position, transforming it into an ITM Iron Condor Spread
to profit from a breakout in either direction. One could also close out the short leg and then
buy another ITM Put option to transform the position into a Long Gut spread which also
profits from a breakout in either direction. Such transformations can be automatically
The deeper in the money the short options are and the nearer to expiration it gets, the higher
the chance of them getting assigned early. If that happens, the short call options will be
replaced with short stocks and transform the position from a Deep ITM bear call spread into
a Synthetic Long Put with unlimited profitability to downside. If you think the stock is
going to continue going downwards, you can continue to hold this new position. If you are
of the opinion that the stock is going to reverse into a rally, you can close out the short stock
position and just hold on to the long calls.

Bear Put Spread
Introduction
A Bear Put Spread is a bearish option strategy that profits when the underlying stock falls.
A Bear Put Spread is the reverse of a Bull Call Spread and works the same way in the opposite
direction. The Bear Put Spread involves simultaneously buying to open and selling to open options
of the same expiration month, making it a Vertical Spread and because you need to pay money to
put on this position, resulting in a net debit, this is also a Debit Spread.

A Bear Put Spread is also a technique to buy put options at a discount. Because you sell to open an
Out of the Money (OTM) put option in this option strategy, it effectively reduces your investment
on your In the Money (ITM) or At The Money (ATM) Put options. This reduces upfront payment
and therefore the risk of the position, making it an ideal option trading strategy for beginners who
wish to profit from a down market.
Classification
Strategy: Bearish | Outlook : Moderately Bearish | Spread : Vertical Spread | Debit or Credit : Debit
When To Use Bear Put Spread?
One should use a Bear Put Spread when one is confident in a moderate drop in the price of the
underlying asset.
How To Use Bear Put Spread?
Establishing a Bear Put Spread involves the purchase of an At The Money or In The Money put
option on the underlying asset while simultaneously writing (sell to open) an Out of the Money put
option on the same underlying asset with the same expiration month .
Buy ATM Put + Sell OTM Put

Bear Put Spread Example
Example: Assuming QQQQ at $44. Buy To Open 10 QQQQ Jan44Put for $1.05, Sell To Open 10
QQQQ Jan43Put for $0.50
Net Debit = $1.05 - $0.50 = $0.55
If you expect QQQQ to go down to near $42 by expiration, you will Sell to Open QQQQ Jan42Put
instead.
The profitability of a bear put spread can be enhanced or better guaranteed by legging into the
position properly.
Trading Level Required For Bear Put Spread:
A Level 3 options trading account that allows the execution of debit spreads is needed for the Bear
Put Spread.
Profit Potential of Bear Put Spread:
The Bear Put Spread profits when the stock goes down. When that happens, the long put option
goes up in price along with the underlying asset while the short put options continue to decay in
premium.
The maximum profit potential of a bear put spread is when the price of the underlying instrument
drops down to the strike price of the out of the money short options and beyond where any gain in
the long put options is matched exactly by a loss in the short put options.
Profit Calculation of Bear Put Spread:
Maximum Return = (Difference in strikes - Net Debit) Net Debit
Buy to open 10 QQQQ Jan44Put for $1.05 per contract and sell to open 10 QQQQ Jan43Put for
$0.60 per contract
Max. Return = (44 - 43 - (1.05 - 0.60)) (1.05 - 0.60) = 0.55 0.45 = 122%
Max. Risk = Net Debit = $1.05 - $0.60 = $0.45, if QQQQ is > $44
Break Even = Higher Strike - Net Debit = $44 - $0.45 = $43.55
Risk / Reward of Bear Put Spread:
Net Debit Paid
Break Even Point of Bear Put Spread:
BEP: Strike Price of Long Put Option - Net Debit Paid
Advantages Of Bear Put Spread:
Loss is limited if the underlying asset rises instead of fall.
If the underlying asset fails to fall beyond the strike price of the out of the money short call
option, the profit yield will be greater than just buying put options.
It is also a way of buying put options at a discount by selling the out of the money put
option at a strike price beyond that which the underlying asset is expected to fall.
Disadvantages Of Bear Put Spread:
There will be more commissions involved than simply buying put options.
There will be no more profits possible if the underlying asset falls beyond the strike price of
the out of the money put option so profit is limited.
If the underlying asset is expected to continue to fall strongly beyond the strike price of the
short put option, one could buy to close the out of the money short put option and then sell
to open a further out of the money put option in its place.
If the underlying asset is expected to continue to fall strongly beyond the strike price of the
short put option, one could also choose to buy to close the out of the money short put option
and then simply allow the long put option to continue to gain in value.
If the underlying stock is expected to pull up upon reaching the strike price of the short put
options, you could close the profitable long put options when the strike price of the short put
options are reached and then buy out of the money put options in order to transform the
position into a Bull Put Spread. This transformation can be automatically performed without
monitoring using a Contingent Order.
Bear Butterfly Spread
Introduction
The Bear Butterfly Spread is a complex bearish options strategy with limited profit and limited loss.
It makes its maximum profit when the underlying stock drops to a pre-determined lower price. This
makes the Bear Butterfly Spread ideal for price targeting.
Like a normal butterfly spread, the Bear Butterfly Spread can be constructed using only call
options, known as the Bear Call Butterfly Spread, or only put options, known as the Bear Put
Butterfly Spread.

The Bear Butterfly Spread is really just a normal butterfly spread using a lower middle strike price,
effectively moving the maximum profit point down to a lower strike price.
The Bear Butterfly Spread also has the highest Return on Investment of all the complex bearish
Bear Butterfly Spread - Classification
Comparing The Bear Butterfly Spread:
So, how does the Bear Butterfly Spread compare against the other two most popular complex
bearish options strategies, the Bear Put Spread and the Bear Call Spread? Is the Bear Butterfly
Spread worth the time and effort learning? We decided to compare the Maximum Profit, the Capital
Outlay and the resultant Return on Investment to see if the Bear Butterfly Spread is worth using at
all.
For this study, we expect the QQQ to reach the price of $56 by August expiration. As such, we shall
aim for $56 on all three strategies using the minimum number of contracts. The results are tabulated
below:
QQQ options chain on 24 April 2011. QQQ trading at $58.34.
May58Call = $1.11 , May57Call = $1.85 , May56Call = $2.69 , May55Call = $3.58
May58Put = $0.78 , May57Put = $0.52 , May56Put = $0.32 , May55Put = $0.21
Strategy Max Net Profit @ $56 Capital Outlay (Max Loss) ROI
Bear Butterfly Spread* $95 $5 1900%
Bear Put Spread $153 $47
325%
Bear Call Spread $154 $46** 334%
*: Bear Call Butterfly Spread was used
As you can see above, the Bear Butterfly Spread is an options trading strategy that rewards the
precision of your prediction on the movement of the underlying stock. As long as the price of the
underlying stock closes exactly on the predicted price, the Bear Butterfly Spread would produce a
much higher Return on Investment (ROI). However, if the price of the underlying stock goes lower
than the predicted price, the other two bearish options strategies would actually perform better.
When To Use Bear Butterfly Spread?
The Bear Butterfly Spread could be used when one expects the price of the underlying stock to
move down to but not exceeding a certain strike price by options expiration.
How To Use Bear Butterfly Spread?
There are two ways to establish a Bear Butterfly Spread. One way is to use only call options. We
call this a "Bear Call Butterfly Spread". The other way is to use only put options. We call that a
"Bear Put Butterfly Spread". Either way uses the same strike prices and typically cost almost the
The composition of both kinds of Bear Butterfly Spread is the same. It involves selling to open 2
contracts at the strike price which you think the underlying stock will close at by expiraiton and
Establishing Bear Call Butterfly Spread
Veteran or experienced option traders would identify the Bear Call Butterfly Spread as consisting of
an ITM Bear Call Spread and an ITM Bull Call Spread.
Bear Call Butterfly Spread Example
Sell To Open 2 contracts of May $56 Call at $2.69
In the above Call Bear Butterfly Spread example, we are expecting the QQQ to reach $56 on May
expiration.
Establishing Bear Put Butterfly Spread
Establishing a Bear Put Butterfly Spread is exactly the same as establishing a Bear Call Butterfly
resultant net debit and maximum of a Bear Put Butterfly Spread is theoretically the same as you
calculate whether a Bear Call Butterfly Spread or a Bear Put Butterfly Spread makes more sense in
A Bear Put Butterfly Spread actually consists of an OTM Bear Put Spread and an OTM Bear Call
Spread placed around a central strike price ($56 in this case).
Bear Put Butterfly Spread Example
Buy To Open 1 contract of May $57 Put at $0.52
Sell To Open 2 contracts of May $56 Put at $0.32
In this case, Bear Put Butterfly Spread requires a slightly higher net debit than the Bear Call
Butterfly Spread, so the Bear Call Butterfly Spread should be used instead.
Choosing Strike Price and Expiration Month for Bear Butterfly Spread:
The choice of middle strike price for Bear Butterfly Spread is the price to which you expect the
stock to end up by expiration. The two long legs would then be put on one strike higher and one
strike lower than the middle strike.
The choice of expiration month for Bear Butterfly Spread is typically when you expect the stock to
hit the expected strike price. Such targetting is possible when the stock is expected to hit a certain
price on a certain day due to events such as a buyout. Bear in mind that Bear Butterfly Spreads are
adversely affected by implied volatility the longer the expiration. More on the greeks of Bear
Butterfly Spreads below.
Trading Level Required For Bear Butterfly Spread:
Butterfly Spread.
Profit Calculation of Bear Butterfly Spread:
From the above Bear Call Butterfly Spread example :
Maximum Profit = [($57 - $56) - 0.05] x 100 = $95
Maximum Loss = $5
Risk / Reward of Bear Butterfly Spread:
Break Even Points of Bear Butterfly Spread:
A Bear Butterfly Spread is profitable if the price of the underlying stock remains between the higher
From the above Bear Call Butterfly Spread example:
Debit = $0.05, Lower Strike Price = $55.00
Lower Breakeven Point = $55 + $0.05 = $55.05
2. Upper Breakeven Point: Higher Strike Price - Debit
From the above Bear Call Butterfly Spread example:
Debit = $0.05, Upper Strike Price = $57.00
In this case, our Bear Call Butterfly Spread makes a maximum profit of $95 if the QQQ closes
exactly at $56 during May Expiration and remains profitable if the QQQ closes within the price
range of $55.05 to $56.95.
Bear Butterfly Spread Greeks:
Delta: Negative
Bear Butterfly Spreads have a slightly negative delta which allows the position to profit as the price
of the underlying stock goes down. This is characteristic of all bearish options strategies.
Gamma: Positive
Being slightly Gamma Positive, the delta of a Bear Butterfly Spread will becoming increasingly
negative as the price of the underlying stock goes down, increasing its profitability downwards.
Vega: Variable
Vega for Bear Butterfly Spreads tend to be neutral or slightly positive with nearer expiration but
slightly negative for longer expiration. As such, Bear Butterfly Spreads placed with longer
expiration tends to be negatively affected with increases in implied volatility.
Theta: Neutral
Bear Butterfly Spreads are not significantly affected by Time Decay as the erosion of extrinsic
value on the long legs are offset by the erosion of extrinsic value on the short leg.
Advantages Of Bear Butterfly Spread:
Low capital requirement results in the lowest maximum loss of all complex bearish options
strategies.

Disadvantages Of Bear Butterfly Spread:
Larger commissions involved than the other bearish option strategies with lesser trades.
expiration.
Alternate Actions for Bear Butterfly Spreads Before Expiration:
When it is obvious that the underlying stock is going to go down beyond the middle and
lower strike and you are holding a Bear Put Butterfly Spread, you could close out the middle
strike short puts and hold on to the long puts for unlimited downside profit. If you are
holding a Bear Call Butterfly Spread, you could close out the two long legs and hold the
short legs to expiration in order to profit from the whole extrinsic value of the short legs.
This will turn the position into a naked call write which will require Margin.
Bearish Limited Risk Unlimited Profits
Long Put Options
Introduction
Buying Put options, or also known as Long Put Options or simply Long Put, is the simplest bearish
option strategy ever.

Many beginner option traders find it mentally challenging to Buy Put Options or Long Put Options
as profiting when a stock goes down is something which is unfamilar and often preceived as risky
in the stock trading world.
Stock traders wanting to profit from a drop in the underlying stock needs to short that stock,
running into margin and credit risks and unlimited loss potential. Buying Put options / Long Put
Options allows an option trader to profit from a down move exactly the same way as one would
profit from an up move without all the margin and credit requirements of shorting the stock or its
futures.
Buying Put Options / Long Put Options truly opened up, for the first time in trading history, the
ability to "invest" in a downwards move with limited risk and unlimited profit potential. Here's how
Buying Put Options / Long Put Options compares to shorting stocks and futures:
Method Margin Max Loss Max Profit
Buying Put Options No Low High
Shorting Stocks Yes High Low
Shorting Futures Yes Highest Highest
As you can see from the table above, Buying Put Options / Long Put Options gives a trader the
most favourable reward/risk balance when trading a downwards move in an underlying stock.
When To Buy Put Options / Long Put Options?
Buying Put Options / Long Put Options is an extremely versatile option strategy where one can use
when:
Confident of a significant drop in the underlying stock
As explained above, Buying Put Options / Long Put Options is the most direct, safe and profitable
way of profiting from a drop in the underlying stock.
Wants to hedge one's stock against a drop in price
Buying Put Options / Long Put Options is not only good as a leverage tool but also as a hedging
tool. This is known as a "Married Put" or "Protective Put".
How To Buy Put Options / Long Put Options?
There are actually 2 ways to execute a buy Put options / Long Put Options strategy... I shall simply
refer to them as the Beginner way and the Veteran Way.
The Beginner Way To Buying Put Options / Long Put Options
The beginner way to buying Put options / Long Put Options is simply to buy At The Money (ATM)
Put options of the stock you think is going to go down.
Example: Assuming QQQQ at $44. Buy To Open 10 QQQQ Jan44Put.
The Veteran Way To Buying Put Options / Long Put Options
Veterans buying Put options / Long Put Options need to consider delta values and strike prices
when choosing what specific strike price to buy the Put options at in order to fulfill one's
investment and portfolio needs.
Veterans expecting a quick and dramatic drop in the underlying stock beyond a certain price could
maximise profit potential by buying Out of The Money (OTM) Put options at a strike price which
one is sure that the underlying stock would drop below.
Example: Assuming QQQQ at $44.
Veteran expects QQQQ to drop quickly to $40. Veteran buys to open 10 Jan$42Put.
In this case, QQQQ needs to drop below $42 to turn in a profit by expiration. If QQQQ drops but
not to below $42, the Put options would be worthless by expiration. If QQQQ drops before
expiration but not beyond $42, one could still turn in a profit based on the delta value of the Put
options. In fact, veteran option traders rarely hold a stock option contract to expiration. This is also
the buying Put options / Long Put Options method that will turn the highest profit in percentage but
comes also with the highest risk of loss.
Veterans expecting the underlying stock to drop moderately and wishes to maximise profits would
buy In The Money (ITM) Options as ITM options contains higher delta value than At The Money
Options.
Example: Assuming QQQQ at $44.
Veteran expects QQQQ to rise moderately. Veteran buys to open 10 Jan$45Put.
How deep In The Money (ITM) to buy the Put options at is really up to the trade management need
of the individual but in essence, one would not go lower than the first strike price that turns in a
delta value of -1 or -0.99. This method of buying Put options / Long Put Options is less risky as one
would still have some value left over at expiration if the underlying stock stayed stagnant. It will
however turn in less profit per cent then the Out of the money (OTM) method above.
Here is a table explaining the differences between the 3 methods discussed above:

Assume QQQQ Drops From $44 To $40.
Method Price Delta Profit Before Profit @ Loss If QQQQ Risk
Profit
Expiration Expiration Expires @ $44 Ranking
Ranking
Beginner Way $0.80 -0.5 +250% +400% -100% 2 2
Veteran Method 1 $0.10 -0.159 +636% +1900% -100% 1 1
Veteran Method 2 $1.80 -0.862 +191.55% +177.77% -44.4% 3 3
Note:
Please note that the above figures for Profit Before Expiration are only arbituary and that precise
calculation of expected profit before expiration can only be arrived at using a stock option pricing
model such as the Black Scholes Model. That is because delta value increases as a Put option gets
more and more in the money.
It's clear from the above table that no matter what method of Buying Put Options / Long Put
Options you choose to execute, you will always end up with more profit per cent than simply
shorting QQQQ. A trader who simply short QQQQ stocks at $44 would only make 9% profit when
QQQQ drops to $40. The Options Leverage involved in using each of the above methods can also
be mathematically measured to help make a more informed decision when buying call options.
Profit Potential of Buying Put Options / Long Put Options:
Buying Put options / Long Put Options allows you to profit with unlimited ceiling. That means that
your profit grows as long as the underlying stock continues to drop, unlike other more complex
strategies like the Bear Put Spread where the position stops making money after the underlying
stock drops to a certain level. In this sense, Buying Put Options / Long Put Options is one of the
few option strategies that has unlimited profit potential.
Trading Level Required For Buying Put Options:
A Level 2 options trading account that allows the buying of call and put options without first
owning the underlying stock is needed for buying put options.
Profit Calculation of Buying Put Options / Long Put Options:
There are 2 ways to calculate profit for Long Put Options:
Before Expiration
After Expiration.
Before Expiration
One can predict the rise in the value of the Put options for every $1 drop in the underlying stock
using the delta value of the Put option, and hence it's profit.
Buy to open 10 QQQQ Jan44Put for $0.80 per contract. QQQQ drops to $40 the next day. Delta
value of Jan44Put is -0.5. (please leave out the "-" sign during calculation.
Profit = [(drop in underlying stock) x delta value] / price of Put options
Profit = [($44 - $40) x 0.5] / 0.8 = 250% profit.
Note:
Scholes Model. That is because delta value increases as a Put option gets more and more in the
money.
After Expiration
Upon expiration, Put options will be left with the value of the stock below it's strike price. If that
value is higher than the original premium value of the Put options, the position turns a profit. ( Read
About How To Calculate Premium Value Of An Option Here )
Buy to open 10 QQQQ Jan44Put for $0.80 per contract. QQQQ drops to $40 at expiration.
Profit = [(Strike Price - Price of Underlying Stock) - premium value of Put options] / Price of Put
Options
Profit = [($44 - $40) - 0.80] / 0.80 = 400% profit
Risk / Reward of Buying Put Options / Long Put Options:
Net Debit Paid. The most one could lose is the entire amount put forward into buying Put options
when the underlying stock expires out of the money (OTM).
Break Even Point of Buying Put Options / Long Put Options:
Again, there are 2 ways to determine break even point for buying Put options / long Put options.
Before Expiration
Before expiration, the bid/ask spread of the Put options is the breakeven point.
QQQQ Jan44Put has a bid price of $0.78 and an ask price of $0.80. Because one buy at the ask
price and sell at the bid price, the difference of $0.02 becomes the breakeven point beyond which
one would start to profit.
After Expiration
After expiration, the underlying stock needs to move more than the premium value in the Put option
in order to result in a profit. Thus the breakeven point becomes the entire premium value of the Put
option.
QQQQ Jan44Put is At The Money and has no intrinsic value. The whole price of $0.80 is premium
value. Thus the breakeven point would be $44 + $0.80 = $44.80. QQQQ needs to move more than
$44.80 by expiration in order to result in a profit.
Advantages Of Buying Put Options / Long Put Options:
Loss is limited if the underlying financial instrument rises instead of fall. This allows one to
risk little money for the same moves in the underlying stock versus using other instruments
like futures.
It allows traders with different risk appetite and portfolio management strategy to pick Put
options with strike prices and delta values that fulfills that trading objective.
It is the most basic option strategy where an option trader could simply transform into other
option strategies in order to hedge one's position by buying or selling more options.
complex option strategies.
As it involves buying only one kind of option, the commissions involved would be much
lower than the rest of the other complex option strategies.
As buying Put options / long Put options do not involve margin, unlike in a short Put option
strategy, literally any beginner option trader can execute this simple option strategy.
Disadvantages Of Buying Put Options / Long Put Options:
There is the danger which you could lose all your money if you use all your money into this
strategy and then the underlying stock rises instead of falls, expiring the Put options out of
the money.
Put option premium is subjected to time decay, so the value of the option actually
depreciates daily until expiration. However, this is not a concern if one intends to hold the
Put options all the way to expiration.
Alternate Actions for Buying Put Options / Long Put Options Before Expiration:
If the underlying stock is expected to slow down its decline or halt by a certain price, one
could sell to open a corresponding amount of out of the money Put options, transforming the
position into a Bear Put Spread, in order to reap an additional profit or to hedge against a
small pullup in the price of the underlying stock.
Alternatively, if one wishes to protect the profits in one's position, one could place a delta
neutral hedge.
If the underlying stock proves to be very volatile and moves up and down in big swings,
then one could buy a corresponding number of put options and transform the position from a
long Put option into a long strangle where one can profit no matter if the stock expires
higher or lower.
Alternate Actions for Buying Put Options / Long Put Options During Expiration:
Exercise the Put options. One could exercise the Put option if it is In The Money in order to
sell the stock at better than market price. One would normally do this only if one is already
holding the underlying stock.
Sell the Put options. This is the most popular choice of option traders. Simply sell the Put
option and realise the profits so far.
Roll the position forward. If one continues to be bearish on the underlying stock, one could
perform what we call a rolling forward. This is a simple procedure where one sells the
expiring Put options and buy Put options of the following month.

Short Bear Ratio Spread
Introduction
A Short Bear Ratio Spread, or sometimes known as a Short Ratio Bear Spread, a Short Put Ratio
Spread or a Short Ratio Put Spread or a Put Back Spread, is a cousin of the Bear Ratio Spread. It is
a bearish put option strategy which not only eliminates upfront payment, but also allows an
unlimited profit potential, something which the Bear Ratio Spread is unable to achieve.

The Short Bear Ratio Spread is made up of buying At The Money (ATM) or slightly Out Of The
Money (OTM) put options and then selling to open a lesser number of In The Money (ITM), more
expensive put options of the same expiration month.
Because In The Money (ITM) put options costs more than At The Money (ATM) or Out of the
Money (OTM) put options, a lesser number of In The Money (ITM) put options is needed to cover
or significantly reduce the cost of the ATM or OTM options while still gaining in value slower than
the combined number of ATM or OTM options when the underlying stock falls.
Short Bear Ratio Spread Example
Buy To Open 3 QQQQ Jan44Put @ $1.05, Sell To Open 1 QQQQ Jan47Put@ $3.15
As the 3 Jan44Put costs $1.05 x 3 = $3.15, the 1 Jan47Put actually
covers the entire price of the Long Put Options resulting in a zero upfront payment.
The ratio of long and short put options depends largely on the preference of the individual trader. A
common ratio is the 3 : 1 ratio spread where you sell to open 1 In The Money (ITM) put option for
every 3 At The Money (ATM) or Out of the Money (OTM) put options that was bought.
What Strike Prices To Use In Short Bear Ratio Spread?
The main deciding factor when determining what ratio to establish the Short Bear Ratio Spread with
is strike price. Here are the effects of different strike prices being used :
The wider the strike price difference between the short and Long Put Options, the less In
The Money (ITM) put options you would need to sell in order to cover the price of the Long
Put Options but the further the lower breakeven point becomes.
The narrower the strike price difference between the short and Long Put Options, the higher
the potential profit and the nearer the lower breakeven point.
If the short put options costs more than the Long Put Options, a net credit results which
allows the position to make a profit if the underlying stock falls drastically. This transforms
a Short Bear Ratio Spread into a volatile option strategy instead of a bearish option strategy.
If the number of In The Money (ITM) short put options is equal to or exceeds the number of
Long Put Options, the position will lose money when the underlying stock goes up,
essentially eliminating it's effectiveness as a bearish option strategy.
From the guidelines above, it is obvious that we should always choose to sell the nearest in the
money (ITM) put options which covers the total price of the Long Put Options without exceeding
the number of Long Put Options bought.
When To Use Short Bear Ratio Spread?
One should use a Short Bear Ratio Spread when one is confident in a strong fall in the underlying
instrument and wishes to profit from that fall without any upfront payment and not lose any money
should the stock rises.
Trading Level Required For Short Bear Ratio Spread:
A Level 3 options trading account that allows the execution of debit spreads is needed for the Short
Bear Ratio Spread.
Profit Calculation of Short Bear Ratio Spread:
Profit = ((long put strike - stock price) x number of Long Put Options) - ((short put strike - stock
price) x number of short put options)
Profit Calculation of Short Bear Ratio Spread
Assuming QQQQ at $44. Buy To Open 3 QQQQ Jan44Put @ $1.05, Sell To Open 1 QQQQ
Jan47Put@ $3.15.
Assume QQQQ falls to $41.
Profit = ((44 - 41) x 300) - (((47 - 41) x 100) = 900 - 600 = $300 profit.
Because you paid nothing to put on this position, profit % is infinite. You made money out of
nothing.
Maximum loss = Total Premium Value Of Long Put Options - Total Premium Value Of Short put
options
Jan47Put@ $3.15.
Maximum Loss = ($1.05 x 300) - (($3.15 - $3) x 100) = $315 - $15 = $300 when QQQQ closes at
$44 upon expiration.
Risk / Reward of Short Bear Ratio Spread:
Maximum Loss: limited
Maximum loss occurs when the underlying stock closes exactly at the strike price of the Long Put
Options.
Break Even Point of Short Bear Ratio Spread:
There are 2 breakeven points for a Short Bear Ratio Spread. The Lower Breakeven Point is point
below which the position will start to make a profit. The Upper Breakeven Point is the point above
which the position will lose only the net debit (if any).
Lower Breakeven Point = Strike Price Of Long Put Options - (Maximum loss / (number of Long
Put Options - number of short put options))
Jan47Put@ $3.15.
Net debit = 0, Maximum Loss = $300
Lower Breakeven Point = 44 - (300 / (300 - 100)) = 44 - 1.5 = $42.50
Upper Breakeven Point = Strike Price Of the Short put options.
Jan47Put@ $3.15.
Net debit = 0
Upper Breakeven Point = $47
If the stock rises above $47, the position will expire with zero profit / loss.
Note:
As you noticed from above, the Short Bear Ratio Spread offers the best of both worlds as long as
the underlying stock moves significantly up or down.
Advantages Of Short Bear Ratio Spread:
No upfront payment needed for the position.
No loss occurs if the underlying stock rises drastically instead of falls.
Disadvantages Of Short Bear Ratio Spread:
Broker needs to allow the trading of credit spreads.
Makes less profit than a Long Put Option strategy on the same move in the underlying stock.
If the position is already in profit and the underlying stock is expected to continue it's drop,
one could buy to close the short put options, transforming the position into a Long Put
Option in order to maximise profits.
If the position is in profit and the underlying stock is expected to reach a certain price by
expiration or stay stagnant at a certain lower price, one could buy to close the short put
options and then sell to open put options at the strike price which the underlying stock is
expected to drop to. This transforms the position into a Bear Put Spread.
Bearish Unlimited Risk Limited Profits
Bear Ratio Spread / Ratio Bear Spread
Introduction:
A Bear Ratio Spread, or sometimes known as a Ratio Bear Spread, a Put Ratio Spread or a Ratio
Put Spread, is a similar strategy to the Bull Ratio Spread except that Put options are used instead of
call options.

It is essentially an enhanced Bear Put Spread which achieves 3 aims;
1. To result in a higher profit when the underlying stock closes within the strike prices of the long
and short options.
2. To reduce risk by eliminating upfront payment for the position.
3. To result in a profit even if the underlying stock stays stagnant upon expiration.
You need to completely understand the Bear Put Spread in order to apply the Bear Ratio Spread.
The Bear Ratio Spread is executed simply by selling more Out Of The Money (OTM) put options
than long put options. The ratio of short and long put options depends on the trader's specific
objective, hence the name "Ratio Spread". There are 3 types of Bear Ratio Spreads that can be
established, covering all the possible ratio of short and long put options; 1. Bear Debit Ratio Spread.
2. Bear Free Ratio Spread and 3. Bear Credit Ratio Spread
What Is A Bear Debit Ratio Spread?
A Bear Debit Ratio Spread is established when the amount of put options that are sold do not cover
the amount of money used on the long put options. One would usually put on a Bear Debit Ratio
Spread only when one's broker do not allow credit spreads to be put on or when one wishes to
reduce upfront payment for the Bear Put Spread while limiting losses if the underlying stock should
rise instead of fall.
Example of Bear Debit Ratio Spread:
Jan43Put @ $0.60
In this example, you are selling 1 more Jan43Put than a Bear Put Spread.
The net effect is, instead of paying $0.90 to put on this position (as in a Bear Put Spread), you are
only paying only $0.30 due to the extra put option sold.
The advantage of a Bear Debit Ratio Spread versus the Bear Free Ratio Spread or the Bear Credit
Ratio Spread is that if the underlying stock should ditch strongly and close below the strike price of
the short put options, a Bear Debit Ratio Spread stands to lose less money as there are lesser put
options sold.
What Is A Bear Free Ratio Spread?
A Bear Free Ratio Spread is established when the amount of put options that are sold exactly covers
the amount of money used on the long put options, thus resulting in no cash payment for the
position. Again, one would usually put on a Bear Debit Ratio Spread only when one's broker do not
allow credit spreads to be put on and wishes to not put an upfront payment for the position.
Example of Bear Free Ratio Spread:
Jan43Put @ $0.60
The net effect is, instead of paying $0.90 to put on this position (as in a Bear Put Spread), the 7
Jan43Puts ($0.60 x 7 = $4.20) totally pays off the cost of 4 Jan44Put ($1.05 x 4 = $4.20), thus the
position is put on for free.
The advantage of a Bear Free Ratio Spread is that you do not pay cash for it like the Bear Debit
Ratio Spread and you stand to lose lesser money than a Bear Credit Ratio Spread if the underlying
stock closes above the strike price of the short put options. However, because more put options are
sold than a Bear Debit Ratio Spread, you will lose more money than the Bear Debit Ratio Spread if
the stock should ditch strongly below the strike price of the short put options.
What Is A Bear Credit Ratio Spread?
A Bear Credit Ratio Spread or sometimes called a Put Credit Ratio Spread, is established when the
total cost of the put options that are sold is more than the amount of money being paid on the long
put options, thus resulting in a credit. This is the way most option traders want a Bear Ratio Spread
to be set up as it returns the highest profit if the underlying stock closes exactly at the strike price of
the short put options when compared to the above 2 methods.
Example of Bear Credit Ratio Spread:
Jan43Put @ $0.60
The net effect is, instead of paying $0.90 to put on this position (as in a Bear Put Spread), you
receive ($0.60 x 10) - ($1.05 x 4) = $1.80 as credit for putting on the position.
The advantage of a Bear Credit Ratio Spread lies in its maximum profit and the ability to make a
profit if the underlying stock stays stagnant. The number of put options you can sell is limited only
to the maximum margin granted to your by your broker.
No matter what kind of Bear Ratio Spread is used, there is one similarity; The position will lose
money if the underlying stock closes below the strike price of the short put options and that
maximum profit is attained when the underlying stock moves down and close at the strike price of
the short put options.
When To Use Bear Ratio Spread?
One should use a Bear Put Spread when one is confident in a rise in the underlying instrument up to
a certain price. It is a good strategy to maximise profits on stocks that are expected to hit a technical
support level.
Trading Level Required For Bear Ratio Spread:
the Bear Ratio Spread as the additional options written are not covered by a corresponding long
options position.
Profit Potential of Bear Ratio Spread:
The maximum profit potential of a Bear Ratio Spread is attained when the underlying stock closes
at the strike price of the short put options. In this respect, the profit potential of a Bear Ratio Spread
is limited. The profitability of a bear ratio spread can also be enhanced or better guaranteed by
legging into the position properly.
Profit Calculation of Bear Ratio Spread:
Maximum Return = (Total Credit From Short put options + [(Difference in strikes - Price of Long
Put) x number of Long Put contracts])
Profit Calculation of Bear Debit Ratio Spread:
Jan43Put @ $0.60
Max. Return = (0.6 x 3) + ([(44 - 43) - 1.05] x 2) = $1.70
Profit Calculation of Bear Free Ratio Spread:
Jan43Put @ $0.60
Max. Return = (0.6 x 7) + ([(44 - 43) - 1.05] x 4) = $4.00
Profit Calculation of Bear Credit Ratio Spread:
Jan43Put @ $0.60
Max. Return = (0.6 x 10) + ([(44 - 43) - 1.05] x 4) = $5.80
Risk / Reward of Bear Ratio Spread:
Position will start losing money if the stock falls past the strike price of the short put
options. However, if the stock rises instead of falls, then the maximum loss is limited to the
net debit (if any).
Note:
In this sense, a Bear Free Ratio Spread and a Bear Credit Ratio Spread will not lose any money if
the underlying stock rises. In fact, if the underlying stock rises, a Bear Credit Ratio Spread will still
make the total credit as profit. In this sense, a Bear Ratio Spread is more of a neutral option strategy
than a Bearish option strategy but because it achieves it's maximum profit when the underlying
stock drops to the strike price of the short put options, it is classified as a Bearish option strategy.
Break Even Point of Bear Ratio Spread:
The breakeven point of a Bear Ratio Spread is the price below which the position starts to go into a
loss.
BEP: Strike Price of Short put options - [Maximum Profit / (number of short put options - number
of long put options)]
Breakeven Point of Bear Debit Ratio Spread:
Jan43Put @ $0.60
BEP = 43 - [$1.70 / (3 - 2)] = $41.30
Breakeven Point of Bear Free Ratio Spread:
Jan43Put @ $0.60
BEP = 43 - [$4 / (7 - 4)] = $41.67
Breakeven Point of Bear Credit Ratio Spread:
Jan43Put @ $0.60
BEP = 43 - [$5.80 / (10 - 4)] = $42.03
Note:
As you noticed above, the Bear Credit Ratio Spread has the nearest breakeven point even though it
has the highest profit potential.
Advantages Of Bear Ratio Spread:
A profit can be made even if the underlying stock rises through the use of a Bear Credit
Ratio Spread.
Much higher profit can be made than a Bear Put Spread when the underlying stock closes at
the strike price of the short put options.
Disadvantages Of Bear Ratio Spread:
Some brokers may not allow beginners to execute such a strategy.
Margin is required.
When the underlying stock reaches the strike price of the short put options before expiration,
one may choose to buy back the extra short put options and transform the position into a
Bear Put Spread in order to prevent a ditch in price past breakeven. This transformation can
be automatically performed without monitoring using a Contingent Order.
COVERED PUT
Introduction
The Covered Put, also known as Selling Covered Puts, is a lesser known variant of the popular
Covered Call option strategy. In a Covered Call, you buy shares and sell call options against it in
order to profit from a stagnant or bullish move while in a Covered Put, you short shares and then
sell put options against it in order to profit from a stagnant or bearish move.
Studying the Covered Call first makes the Covered Put easier to understand.
Selling Put options in this case is considered "Covered" due to the short shares. If the short put
options are assigned, shares will be delivered which will covers the short share position.

The Covered Put is not a common strategy that most option traders use when speculating a stagnant
or bearish move in the underlying stock as a Covered Put has a limited profit potential along with an
unlimited loss potential. Couple this with the fact that most shares rise over time, the Covered Put is
always exposed to the danger of unlimited loss. When speculating a quick bearish move on the
underlying stock, most option traders prefer to use other complex bearish strategies which profits
from both a bearish and stagnant move on the underlying move like the Bear Ratio Spread.
A Covered Put is most commonly used by share traders to increase the profits from shorting shares
and also to protect a short share position against a slight rise in price. In the first scenario, if the
underlying stock should drop to the strike price of the put options sold, one would make the drop in
price on the underlying stock plus the premium on the put options sold as profit. In this case, the
premium on the put options sold serves as additional profits. In the second scenario, the premium
on the put options serves to offset the loss on the short shares should the underlying stock rise.
When To Use Covered Put?
One should use a Covered Put when one wishes to increase one's profits when shorting shares or to
protect one's short share position from a slight rise in price.
How To Use Covered Put?
Establishing a Covered Put is extremely simple. All you have to do is to write (sell to open) 1
contract of nearest out of the money put option for every 100 shares you shorted.
Covered Put Example
Assuming you shorted 700 shares of QQQQ at $44. Sell To Open 7 contracts of QQQQ Jan43Put.
Profit Potential of Covered Put:
The Covered Put's maximum profit occurs when the stock closes exactly at the strike price of the
short put options at expiration.
Covered Put Example
Assuming your 700 QQQQ close at $43 upon expiration of the 7 contracts of QQQQ Jan43Put. You
will make the $1 move in QQQQ plus the value of the 7 Jan43Put that you wrote as profit.
Such an ideal situation is, of course, rare. In most cases, the short put options will either be in the
When the underlying stock is stagnant or slightly lower upon expiration of the short put options,
you will profit on the whole value of the put options that you wrote, with whatever profit from the
stock.
Covered Put Example
Assuming your 700 short QQQQ close at $43.50 upon expiration of the 7 contracts of QQQQ
Jan43Put. You will make $0.50 from the QQQQ move plus the whole value of the 7 Jan43Put.
When the underlying stock drops below the strike price of the short puts options upon expiration,
further gain in value on the short shares will be offset by an equivalent rise in value on the put
options that you sold. This means that if the underlying stock drops below the strike price of the
short put options, the position will stop rising in value.
Covered Put Example
Assuming your 700 QQQQ close at $42 upon expiration of the 7 contracts of QQQQ Jan43Put. You
will gain $2 from the short shares, $1 from the short put option's premium value and lose $1 on the
short Jan43Puts as it goes $1 In The Money for a net gain of $2.
Profit Calculation of Covered Put:
Maximum profit = (Short Stock Price - Strike Price) + Option Bid
Covered Put Calculations
Assuming you bought 700 QQQQ close at $44 and sold 7 contracts of QQQQ Jan43Put @ $1.00.
Maximum Profit = ($44 - $43) + $1.00 = $2.00
Risk / Reward of Covered Put:
Advantages Of Covered Put:
Able to offset losses if your stock rises instead of falls.
No margin required for writing put options.
Disadvantages Of Covered Put:
You must continue to hold your short stocks if you want to keep the short put options.
Your broker must allow you to short stocks in the first place.
Alternate Actions for Covered Puts Before Expiration:
If you expect the underlying stock to fall drastically, you should buy to close the short put
options.
Naked Call Write
Introduction
Naked Call Writes are sometimes known as a Call Write, Naked Call, Write Call Options, Short
Call, Uncovered Call Write, Selling Naked Calls or Short Call Options.
A Naked Call Write is when you Sell To Open Call options without first owning the underlying
stock.

Which means that you are selling the right to buy the underlying stock at a certain price without
even owning the stock in the first place... like signing a contract to sell a car when you do not even
have that car...yet. If the stock falls, you get to keep the whole cost of the call options as profit as
the call options expire out of the money.
One should be familiar with Call options before executing this strategy.
When you Sell To Open a Call option in this Naked Call Write strategy, you are essentially playing
the role of a banker where you sell the Call options to someone who is betting on the underlying
stock to go up. If this person is wrong and the stock drops, you keep the money he/she paid you for
the Call options if the Call options expires Out Of The Money ( OTM ). If this person is correct and
the stock rises, you, as the banker, suffers a loss. That is how a Naked Call Write works in a
nutshell.
Complex bearish option strategies, such as the Naked Call Write, usually have added benefits such
as profiting even if the underlying stock stays stagnant or even profiting if the underlying stock
should rise slightly instead of drop. The Naked Call Write, as the simplest of the complex bearish
option strategies, is no exception. By writing a Call option, you are not only making money if the
underlying stock drops due to delta effect, you also have Time Decay, which is the biggest evil of
buying stock options, in your favor as Time Decay works against the favor of the buyer of the Call
options that you sold. Yes, this means that if the options you sold failed to rise in price, you also
profit from its premium value!
Naked Call Write is a credit strategy where you recieve cash for putting on the position. This puts
the broker at risk if you are not able to cover the position when required. This results in most option
trading brokers asking for a fairly high margin before one is allowed to execute this strategy.
When To Use Naked Call Write?
One would use a Naked Call Write when speculating a small or moderate drop in the underlying
stock. This drop need not be a dramatic one like in the Long Put Options strategy as it only need to
drop enough to allow the Call options to expire out of the money (OTM).
Example:
Assuming QQQQ at $44. Sell To Open 10 QQQQ Jan44Call for $0.80.
You will make the entire $0.80 in profit even if the QQQQ expires at $43.95.
If you are expecting a huge, dramatic drop in the underlying stock, you would use a Long Put
Options strategy instead because, using the Naked Call Write as in the example above, you would
make only $0.80 no matter how low the underlying stock drops to.
How To Use Naked Call Write?
A Naked Call Write is a simple option strategy where you simply sell to open Call options at a
strike price which you are confident that the underlying stock would drop below by option
expiration. One would usually sell Call options of the nearest expiration month so that the
underlying stock would not have time to go back in the money (ITM).
Example:
If you expect QQQQ to fall to $43, you could Sell To Open QQQQ Jan43Call.
If you expect QQQQ to fall very slightly, you could Sell To Open QQQQ Jan44Call.
The deeper In The Money (ITM) Call Options that are written, the higher your maximum profit
potential but the more QQQQ needs to move in order to expire that option out of the money (OTM).
Here is a table showcasing the differences:
Assume QQQQ Trading At $44 Now.
Strike Price Price Amount QQQQ Needs Profit If QQQQ
To Drop For Max Profit Expires @ $43.99
$45 $0.10 0 $0.10
$44 $0.80 $0.01 $0.80
$43 $1.80 $1.01 $0.81
Trading Level Required For Naked Call Write:
A Level 5 options trading account that allows the execution of naked writes is needed for the naked
call write.
Profit Potential of Naked Call Write:
The Naked Call Write has a limited profit as the most one could make is the price at which the Call
option is sold no matter how low the underlying stock drops to. The Naked Call Write also profits
from the premium value decay even if the underlying stock stays stagnant. This enables the Naked
Call write to have a much higher chance of turning a profit than a simple Long Put Option strategy.
Profit Calculation of Naked Call Write:
There are 2 ways to calculate profit for Naked Call Write:
Before Expiration
Before expiration, the Naked Call Write profits from a fraction of the move in the underlying stock
based on its delta value and a fraction of the Call option's premium value due to time decay based
on it's theta value.
Sell to open 1 lot of QQQQ Jan44Call for $0.80 per contract with a delta value of 0.5 and theta
value of 0.018.
QQQQ falls to $43.20, 5 days later.
Profit = [(Drop in underlying stock) x delta value] + [(theta x number of lots) x number of days] /
price of Call options
Profit = [($44 - $43.20) x 0.5] + [(0.018 x 1) x 5] / 0.8 = 61.25% profit.
Note:
Scholes Model.
After Expiration
Upon expiration, there can be 2 possible scenarios for the Naked Call Write :
1. The underlying stock drops lower than the strike price
When the underlying stock is trading lower than the strike price of the Call options that you sold
upon expiration, those Call options expires out of the money (OTM) and the entire price of the Call
options that you sold becomes your profit.
2. The underlying stock is trading higher than the strike price
Profit / Loss = Net Credit - (Stock Price - Strike Price)
Sell to open 1 QQQQ Jan44call for $0.80 per contract.
If QQQQ rises to $44.5 at expiration.
Profit = $0.80 - ($44.5 - $44) = $0.30 or 37.5%
If QQQQ rises to $46 at expiration.
Loss = $0.80 - ($46 - $44) = -$1.20
Risk / Reward of Naked Call Write:
Limited to net credit received.
Note:
Because you can lose an unlimited amount of money as long as the underlying stock continues to
rise, you should always place a reasonable stop loss when executing a Naked Call Write.
Break Even Point of Naked Call Write:
The breakeven point for a Naked Call Write is the point beyond which the underlying stock can rise
before the position starts to go into a loss. This is calculated as:
Breakeven = Strike Price + premium value of Call options sold.
QQQQ is trading at $44 and QQQQ's Jan44Call is At The Money and has no intrinsic value. The
whole price of $0.80 is premium value. Thus the breakeven point would be $44 + $0.80 = $44.80.
QQQQ needs to rise above $44.80 before the position starts making a loss.
One would notice by now that a Naked Call Write has a much higher chance of a profit than simply
Long Put Options as you will make money even if the stock does not move and lose money only
when the stock rises above the breakeven point.
Advantages Of Naked Call Write:
As the strategy results in a net credit, risk is reduced.
more complex option strategies.
As it involves trading only one kind of option, the commissions involved would be much
lower than the rest of the other more complex option strategies
It allows you to profit even if the underlying stock stays completely stagnant.
It is a versatile option strategy which can be transformed into other option strategies in order
to accommodate changing market outlooks prior to expiration.
Unlike in a Long Put Option, a Naked Call Write offers you a degree of protection from loss
if the underlying stock should rise slightly instead of fall.
Disadvantages Of Naked Call Write:
Potential profit is limited, so if the stock goes into a huge drop, one could miss out on the
profit opportunity.
Potential loss is unlimited and one could lose a lot of money if the underlying stock rises
drastically.
As Naked Call Write is a credit strategy that involves margin, beginners are rarely allowed
to execute it with most online brokers.
As margin requirements can be quite large, one may not be able to Call on as many positions
as one may simply by buying put options.
Alternate Actions for Naked Call Write Before Expiration:
If the underlying stock has moved so much as to leave the Call options with very little value
left before expiration, one may wish to buy to close the Call options in order to profit these
profits instead of risking it all by holding till expiration.
If the underlying stock is about to rebound after it's drop is over, you could transform the
Naked Call Write into a Bull Call Spread by buying an equivalent number of At The Money
(ATM) Call options.
If the underlying stock proves to be trading within a narrow trading range, one could
transform Naked Call Write into a Short Strangle by further Selling To Open a
corresponding number of Out Of The Money (OTM) Put Options.
Alternate Actions for Naked Call Write During Expiration:
One should always allow Out Of The Money (OTM) Call options to expire and always Buy
To Close these Call options if they are In The Money (ITM).
Long Put Ladder Spread
Definition:
An options strategy consisting of writing an additional lower strike price put option on a bear put
spread in order to further reduce capital outlay.

Introduction:

The Long Put Ladder Spread, also known as the Bear Put Ladder Spread, is an improvement made
to the Bear Put Spread. It further eliminates capital outlay by writing an additional further out of the
money put option of the same expiration month. Such an improvement not only reduces capital
outlay but sometimes eliminates capital outlay altogether, transforming the Bear Put Spread into a
credit spread. The drawback of such an improvement is that the Long Put Ladder Spread is exposed
to unlimited upside loss if the underlying stock moves downwards explosively. Yes, there are
always pros and cons to every options trading strategy.
Classification:
Type of Strategy: Bearish | Type of Spread : Vertical Spread | Debit or Credit : Debit
The Long Put Ladder Spread is part of the "Ladder Spreads" family. Ladder Spreads add an
additional further out of the money option on top of two legged spreads, stepping the position down
by another strike price. The use of progressively higher or lower strike prices in a single spread
gave "Ladder Spreads" its name.
Distinction Between Long Put Ladder Spread and Bear Ratio Spread:
The Long Put Ladder Spread is extremely similiar to the Bear Ratio Spread as both the Bear Ratio
Spread and Long Put Ladder Spread aim to reduce or eliminate upfront capital outlay for a Bear Put
Spread position. In doing so, both the Bear Ratio Spread and Long Put Ladder Spread require
margin for the uncovered options. However, the Bear Ratio Spread does so by writing more out of
the money put options at the same strike price while the Long Put Ladder Spread does so by writing
put options at a lower strike price than the existing short put leg. The result of this difference is that
the Long Put Ladder Spread require a lower margin than the Bear Ratio Spread due to the lower
strike price of the additional short put options, while the Bear Ratio Spread would have a higher
maximum profit, closer breakeven point and a lower capital outlay due to the higher extrinsic value
offered by the higher strike price of the additional short put options.
When To Use Long Put Ladder Spread?
The Long Put Ladder Spread should be used as an improvement to a Bear Put Spread position when
it is clear that the price of the underlying stock would not move explosively.
How To Use Long Put Ladder Spread?
Long Put Ladder is made up of buying an At The Money (or slightly ITM or OTM) Put Option,
writing an equivalent amount of a lower strike price Out Of The Money put Option and then writing
yet another equivalent amount of an even lower strike price out of the money put option.
Buy ATM Put + Sell OTM Put + Sell Lower Strike OTM Put
Long Put Ladder Spread Example
Assuming QQQ trading at $44.
Buy To Open 1 contract of QQQ Jan44Put, Sell To Open 1 contract of QQQ Jan42Put and Sell To
Open 1 contract of QQQ Jan41Put.
Choosing Strike Prices For Long Put Ladder Spread:
The consideration behind the middle strike price for Long Put Ladder spreads is the same as the
Bear Put Spread. You write the middle strike price put options at the price you expect the
underlying stock to move down to but not exceed by expiration. In our example above, we expect
QQQ to move down to but not exceed $42. If we expect QQQ to move down to $41 by expiration,
we will write the middle strike price at $41 and then move the further OTM strike price lower as
well.
The lower strike price OTM put is usually written one strike price lower than the middle strike
price. In our example, since we wrote the middle strike price at $42, we have chosen to write the
lower strike price OTM put one strike lower at $41. However, the lower the strike price of this
lowest strike price leg, the lower the margin requirement. As such, one could also choose to write
this lowest strike price leg at as low a strike price as it takes to reduce the capital outlay of the
position to a level of one's satisfaction.
Trading Level Required For Long Put Ladder Spread:
A Level 5 options trading account that allows naked write is needed for the Long Put Ladder Spread
due to the uncovered lowest strike price leg.
Profit Potential of Long Put Ladder Spread:
Long Put Ladder Spread profits primarily when the price of the underlying stock decreases to and
remains between the strike prices of the two short puts. The Long Put Ladder Spread would start
losing money when the price of the underlying stock decrease beyond the strike price of the lowest
strike price put options. As such, it would be advisable to place a stop loss at the lowest strike price
put options using a contingent order in order to close out the whole position when the underlying
stock reaches that strike price or to make an adjustment to the position to transform it into a more
bearish options trading strategy when it is clear that the stock is going to drop drastically.
Profit Calculation of Long Put Ladder Spread:
Maximum Profit = Strike Price of Long Put - Middle Strike Price - Net Debit Paid
Maximum Loss if Stock Rises = Net Debit
Maximum Loss if Stock Drops Beyond Lowest Strike Price = Unlimited
Long Put Ladder Spread Calculations
Following up on the above example, assuming QQQQ at $46.50 at expiration.
Bought the JAN 44 Put for $1.50
Wrote the JAN 42 Put for $0.50
Wrote the JAN 41 Put for $0.15
Net Debit = $1.50 - $0.50 - $0.15 = $0.85
Maximum Profit = 44 - 42 - 0.85 = $1.15
Reward Risk Ratio = 1.15 / 0.85 = 1.35
Max. Upside Risk = $0.85
Max. Downside Risk = Unlimited
Upper Break Even = $44 - $0.85 = $43.15
Lower Break Even = $41 - $1.15 = $39.85
Risk / Reward of Long Put Ladder Spread:
Maximum Upside Loss: Limited to net debit paid
Maximum Downside Loss: Unlimited beyond lowest strike price

Break Even Point of Long Put Ladder Spread:
There are 2 break even points to a Long Put Ladder Spread. One breakeven point if the underlying
asset goes up (Upper Breakeven) beyond which the position goes into an unlimited loss, and one
breakeven point if the underlying asset goes down (Lower Breakeven).
Upper BEP: Long Put Strike - Net Debit
Lower BEP: Lowest Strike - Max. Profit
Long Put Ladder Spread Greeks:
Delta: Negative
Delta of Long Put Ladder Spread is negative at the start. As such, its value will increase as the price
of the underlying stock decreases.
Gamma: Negative
Gamma of Long Put Ladder Spread is negative and will increase delta as the price of the underlying
stock decreases. It will then come to a point where the delta will become positive and the position
will start to decline in value as the price of the underlying stock continues to decrease.
Theta: Positive
Theta of Long Put Ladder Spread is positive and will therefore gain value over time due to time
decay in the short term prior to expiration as the short out of the money put options lose value faster
than the Long Put options.
Vega: Negative
Vega of Long Put Ladder Spread is negative and will therefore lose value as implied volatility rises
and gains value as implied volatility drops. As such, it is highly disadvantageous to use a Long Put
Ladder Spread in periods of rising implied volatility prior to expiration.
Advantages Of Long Put Ladder Spread:
Further reduces capital outlay of a Bear Put Spread
Wider maximum profit zone than a Bear Ratio Spread
Lowers breakeven point of a Bear Put Spread
Disadvantages Of Long Put Ladder Spread:
Margin required due to uncovered OTM leg
Alternate Actions for Long Put Ladder Spread Before Expiration:
If the underlying asset has declined beyond its breakeven point and is expected to continue
to move strongly in the same direction, one could Buy To Close the short put options and
hold the Long Put options for unlimited downside profit.
Neutral Options Strategies
Frontspreads
Definition
Options Trading Strategies designed to profit from neutral market conditions where prices remain
stagnant or within a very narrow trading range.
Introduction
Anyone can profit when stocks go up or down trading just stocks but only through options trading
can you profit even when stocks remain stagnant! Frontspreads, or neutral options trading
strategies, are creative combinations of stock options which profits through the sale of call and put
options and then hoping that they expire worthless. More technically, frontspreads profit primarily
through time decay and being short Theta. Being short theta, the erosion of extrinsic value through
time decay works in your favor, gradually increasing the value of your position as expiration draws
near. Frontspreads therefore provide an additional profit opportunity if a stock is expected to remain
relatively stagnant through options expiration.
Frontspread Strategies:
Butterfly Spread - The grandfather of all Frontspreads. The Butterfly Spread is probably the most
popular of all Frontspreads, due to the fact that it is a debit spread which anyone can put on with a
low level trading account.
Condor Spread - A cousin of the Butterfly Spread with a wider profitable range but a lower
maximum profit potential.
Iron Butterfly Spread - The credit spread version of the Butterfly spread with both higher
maximum profit potential and a wider profitable range.
Iron Condor Spread - The credit spread version of the condor spread, having the highest
maximum profit potential of the 4 variants while producing a wider profitable range than the condor
spread.
Short Straddle - The selling of a Long Straddle. This is a completely naked, uncovered position
with potentially unlimited loss. All 4 front spreads above have limited loss potential, which means
that there is a limit to how much the position can lose if the stock moves dramatically.
Short Strangle - The selling of a Long Strangle. This results in a lower profit than a Short Straddle
but a wider profitable range.
Drawbacks of Frontspreads:
The main drawback of Frontspreads is that periods of stagnation in both the market as well as
individual stocks are relatively short and unpredictable. Stocks rarely remain stagnant for long and
frequently breaks strongly and suddenly to upside or downside, resulting in big losses for
Frontspreads. That is why understanding the profitable ranges of the individual Frontspread
strategies are so important. Frontspreads such as the Butterfly spread with extremely narrow
profitable range needs to be used with extreme caution. Furthermore, the most profitable
Frontspreads are always the credit spread ones such as the Iron Butterfly Spread or the Iron Condor
Spread. These are inaccessible to the newbie options traders as low level trading accounts do not
usually allow the use of credit spreads.
Neutral Limited Risk Limited Profits
Calendar Call Spread
Horizontal Calendar Call Spread
Introduction
The Horizontal Calendar Call Spread, also known as the Call Horizontal Calendar Spread, is a
neutral options strategy that profits when the underlying stock remains stagnant or within a very
tight price range. It is an options trading strategy that profits using the difference in time decay
between long term options and short term options and makes its maximum profit when the
underlying stock remains completely stagnant. With a long term call position in place, one
Horizontal Calendar Call Spread can be rolled forward for multiple months. Another advantage of
the Horizontal Calendar Call Spread is that it is a debit spread, not a credit spread. This allows any
options trader to put it on without any margin requirement.

Types of Calendar Call Spreads
There are two main kinds of Calendar Call Spread; Horizontal Calendar Call Spread and Diagonal
Calendar Call Spread. The Diagonal Calendar Call Spread has a higher profitability if the
underlying stock is expected to move higher moderately. Therefore, if the underlying stock is
expected to remain largely stagnant and may move upwards moderately, the Diagonal Call Time
Spread would better maximize your profitability than the Horizontal Calendar Call Spread.
Differences Between Horizontal Calendar Call Spread and Diagonal Call Time Spread
The Horizontal Calendar Call Spread has both a lower maximum profit potential and a narrower
profitable range (the stock needs to stay within a narrower price range in order to stay profitable)
than the Diagonal Calendar Call Spread. However, the Horizontal Calendar Call Spread has a much
higher profit if the underlying stock remained totally stagnant, closing at the same price as when the
position was first put on. Despite a much narrower profitable range and maximum profit range than
the Diagonal Calendar Call Spread, the Horizontal Calendar Call Spread exceeds the profitability of
a Diagonal Calendar Call Spread significantly when the underlying stock remains totally stagnant.
As such, if you think a stock is going to stay extremely stagnant, the Horizontal Calendar Call
Spread would be your options trading strategy of choice versus the Diagonal Calendar Call Spread.
When To Use Horizontal Calendar Call Spread?
Horizontal Calendar Call Spreads could be used when you wish to profit from a stock that is
expected to stay stagnant or trade within a tight price range for the short term while keeping a long
term call option position in place in case of future breakouts.
How To Use Horizontal Calendar Call Spread?
In a Horizontal Calendar Call Spread, At The Money (ATM) LEAPS call options are bought and
then ATM near term calls are sold against the LEAPS call options.
Buy Long Term ATM Call + Sell Short Term ATM Call
Horizontal Calendar Call Spread Example
options at $4.70.
Net Debit = $4.70 - $0.75 = $3.95

Trading Level Required For Horizontal Calendar Call Spread:
A Level 3 options trading account that allows the execution of debit spreads is needed for the
Horizontal Calendar Call Spread.You would notice that the Horizontal Calendar Call Spread has a
lower net debit than the Diagonal Calendar Call Spread as the at the money call options written has
a larger premium than the out of the money call options written in a Diagonal Calendar Call Spread.
Profit Potential of Horizontal Calendar Call Spread :
The Horizontal Calendar Call Spread makes its maximum profit potential when the stock closes at
the strike price of the short term call options upon expiration of the short term call options.
Profit Calculation of Horizontal Calendar Call Spread:
The value of a Horizontal Calendar Call Spread during expiration of the short call options can only
be arrived at using an options pricing model such as the Black-Scholes Model because the
expiration value of the long term call options can only be arrived at using such a model.
Horizontal Calendar Call Spread Example
Assuming QQQQ closes at $45 upon expiration of the short term call options.
The 10 contracts of QQQQ Jan 2008 $45 Call options is now trading at $4.30.
The 10 contracts of QQQQ Jan 2007 $45 Call expired worthless.
Net Profit = $0.75 (total premium gained from the Jan 2007 $45 Call) - $0.40 (total premium lost
on the Jan 2008 $45 call)
= $0.35 x 1000 = $350.
You would notice that the Horizontal Calendar Call Spread has a lower maximum profit than a
Diagonal Calendar Call Spread.
Risk / Reward of Horizontal Calendar Call Spread:
(limited to net debit paid)
Horizontal Calendar Call Spread Breakeven Calculation:
The breakeven point of a Horizontal Calendar Call Spread is the point below which the position will
start to lose money if the underlying stock rises or falls strongly and can only be calculated using
the Black-Scholes model.
Advantages Of Horizontal Calendar Call Spread:
Can be rolled forward for as many months as the expiration month of the long term call
options.
No Margin Needed.
Disadvantages Of Horizontal Calendar Call Spread:
Profits are limited.
Much narrower profitable range and lower maximum profit than the Diagonal Call Time
Spread.
Alternate Actions for Horizontal Calendar Call Spreads Before Expiration:
If you wish to profit from a rally in the underlying asset, you could buy back the short call
options before it expires and allow the LEAPS Call Options to continue its profit run.
Diagonal Calendar Call Spread
Introduction
The Diagonal Calendar Call Spread, also known as the Calendar Diagonal Call Spread, is a neutral
options strategy that profits when the underlying stock remains within a very tight price range,
reaching its maximum profit potential when the stock moves slightly higher.

Like all Calendar spreads, the Diagonal Calendar Call Spread profits through the difference in time
decay between options with different expiration months. Because the Diagonal Calendar Call
Spread has a long term call option in place, it can be rolled forward for multiple months, eventually
lowering or eliminating the cost of buying the long term call options.
Another advantage of the Diagonal Calendar Call Spread is that it is a debit spread while most
neutral options strategies are credit spreads which requires margin.
Types of Calendar Call Spreads
The Diagonal Calendar Call Spread is one of two types of calendar spreads utilizing only call
options. The other one is the Horizontal Calendar Call Spread which produces a higher profit if the
underlying stock remained totally stagnant. As such, if the underlying stock is expected to remain
totally stagnant, the Horizontal Calendar Call Spread would be a better choice.
Differences between Diagonal Calendar Call Spread and Horizontal Calendar Call Spread
The Diagonal Calendar Call Spread produces a higher maximum profit and a wider profitable range
than a Horizontal Calendar Call Spread. This is because the Diagonal Calendar Call Spread allows
the underlying stock to move upwards. That increases the value of the long term call options,
increasing maximum profitability. Even though the Diagonal Calendar Call Spread has a higher
maximum profit potential, it produces a lower profit than the Horizontal Calendar Call Spread if the
underlying stock remains totally stagnant. This is because the Diagonal Calendar Call Spread
reaches its maximum profit potential only when the stock moves upwards and not when it is
completely stagnant. The Diagonal Calendar Call Spread also requires a higher net debit due to the
lower offset value of out of the money call options, decreasing ROI. Everything in options trading is
a trade-off. Diagonal Calendar Call Spreads also have an assymetric risk graph, incurring its
maximum loss (the net debit) only when the stock falls strongly. If the stock rallies strongly, the
Diagonal Calendar Call Spread would make a much lower loss than the Horizontal Calendar Call
Spread. As such, a Diagonal Calendar Call Spread options trading strategy should be used when a
stock is expected to remain within a tight price range with the potential to move moderately higher.
When To Use Diagonal Calendar Call Spread?
Diagonal Calendar Call Spreads are used to profit from stocks that are expected to remain stagnant
or move up slightly for the short term while keeping a long term call option position in place in case
of future breakouts.
How To Use Diagonal Calendar Call Spread?
In a Diagonal Calendar Call Spread, at the money (ATM) long term calls are bought and then Out
of The Money (OTM) near term call options are written against them.
Buy Long Term ATM Call + Sell Short Term OTM Call
Diagonal Calendar Call Spread Example
options at $4.70.
Net Debit = $4.70 - $0.50 = $4.20
Trading Level Required For Diagonal Calendar Call Spread
Diagonal Calendar Call Spread.
Profit Potential of Diagonal Calendar Call Spread:
The Diagonal Calendar Call Spread makes its maximum profit potential when the stock rises to the
strike price of the short term call options upon expiration of the short term call options.
Profit Calculation of Diagonal Calendar Call Spread:
The value of a Diagonal Calendar Call Spread during expiration of the short call options can only
expiration value of the long term call options can only be arrived at using such a model.
Diagonal Calendar Call Spread Example
Assuming QQQQ closes at $46 upon expiration of the short term call options.
The 10 contracts of QQQQ Jan 2008 $45 Call options is now trading at $5.00.
The 10 contracts of QQQQ Jan 2007 $46 Call expired worthless.
Net Profit = $0.50 (total premium gained from the Jan 2007 $45 Call) + $0.30 (profit on long term
call options)
= $0.80 x 1000 = $800.
Loss Calculation of Diagonal Calendar Call Spread:
The Diagonal Calendar Call Spread makes it maximum possible loss, which is the net debit paid,
when the underlying stock falls drastically. The premium earned from writing the short term call
options serve as a hedge against the drop in value of the long term call options.
conversely, when the underlying stock rallies, the out of the money call options gain in value only
slightly faster than the long term at the money call options, resulting in a much lower loss than if the
underlying stock falls. This is unlike a horizontal calendar call spread where maximum loss is the
same whether the underlying stock rallies or falls.
Risk / Reward of Diagonal Calendar Call Spread:
(Limited to net debit paid when stock falls strongly).
Diagonal Calendar Call Spread Breakeven Calculation:
The breakeven point of a Diagonal Calendar Call Spread is the point below and above which the
position will start to lose money if the underlying stock rises or falls strongly and can only be
calculated using the Black-Scholes model.
Advantages Of Diagonal Calendar Call Spread:
Higher profit can be attained when the stock moved moderately higher.
Can be rolled forward for as many months as the expiration month of the long term call
options.
No Margin Needed.
Disadvantages Of Diagonal Calendar Call Spread:
Maximum profit lower than Horizontal Call Time Spread if stock remains stagnant.
Alternate Actions for Diagonal Calendar Call Spreads Before Expiration:
If you wish to profit from a rally in the underlying asset, you could buy back the short call
options before it expires and allow the LEAPS Call Options to continue its profit run.
Horizontal Calendar Put Spread
Introduction
The Horizontal Calendar Put Spread, also known as the Put Horizontal Time Spread, is a neutral
strategy that profits from stocks that are expected to remain stagnant or trade sideways within a
tight price channel. Horizontal Calendar Put Spreads profit through the difference in time decay
between long term put options and short term put options. Because of its long term position, one
Horizontal Calendar Put Spread can be rolled forward for many months. Most other complex
neutral options strategies needs to re-establish the whole position on a monthly basis. Another
advantage of the Horizontal Calendar Put Spread is that it is a debit spread due to the fact that more
expensive long term options are bought and cheaper short term options are sold, thereby requiring
no margin.

Types of Put Time Spreads
There are two main types of Put Time Spreads; The Horizontal Calendar Put Spread and the
Diagonal Calendar Put Spread. Both Put Time Spreads are differentiated based on the moneyness of
the short term put options written. As a Diagonal Spread, Diagonal Calendar Put Spread writes out
of the money put options instead of at the money put options. As a Horizontal Spread, the
Horizontal Calendar Put Spread writes at the money put options at the same strike price as the long
term put options.
Differences Between Horizontal Calendar Put Spread and Diagonal Calendar Put Spread:
The Horizontal Calendar Put Spread has both a lower maximum profit potential and a narrower
profitable range (the stock needs to stay within a narrower price range in order to stay profitable)
than the Diagonal Calendar Put Spread. However, the Horizontal Calendar Put Spread has a much
higher profit if the underlying stock remained totally stagnant, closing at the same price as when the
position was first put on. The Diagonal Calendar Put Spread has a higher maximum profit which
only reaches when the underlying stock drops moderately. As such, if you think a stock is going to
stay extremely stagnant, the Horizontal Calendar Put Spread would be your options trading strategy
of choice versus the Diagonal Calendar Put Spread.
When To Use Horizontal Calendar Put Spread?
Horizontal Calendar Put Spreads could be used when you wish to profit from a stock that is
expected to stay stagnant or trade within a tight price range for the short term while keeping a long
term call option position in place in case of future breakouts.

How To Use Horizontal Calendar Put Spread?
In a Horizontal Calendar Put Spread, At The Money (ATM) LEAPS put options are bought and
then ATM near term put options are sold.
Buy Long Term ATM Put + Sell Short Term ATM Put
Horizontal Calendar Put Spread Example
Assuming QQQQ trading at $45 now. Buy To Open 10 contracts of QQQQ Jan 2008 $45 Put
options at $4.70.
Sell To Open 10 contracts of QQQQ Jan 2007 $45 Put at $0.75.
Net Debit = $4.70 - $0.75 = $3.95
Trading Level Required For Horizontal Calendar Put Spread:
Horizontal Calendar Put Spread.
Profit Potential of Horizontal Calendar Put Spread:
The Horizontal Calendar Put Spread makes its maximum profit potential when the stock closes at
the strike price of the short term put options upon expiration of the short term put options.
Profit Calculation of Horizontal Calendar Put Spread:
The value of a Horizontal Calendar Put Spread during expiration of the short put options can only
expiration value of the long term put options can only be arrived at using such a model.
Horizontal Calendar Put Spread Example
Assuming QQQQ closes at $45 upon expiration of the short term put options.
The 10 contracts of QQQQ Jan 2008 $45 put options is now trading at $4.30.
The 10 contracts of QQQQ Jan 2007 $45 put expired worthless.
Net Profit = $0.75 (total premium gained from the Jan 2007 $45 put) - $0.40 (total premium lost on
the Jan 2008 $45 put)
= $0.35 x 1000 = $350.

Risk / Reward of Horizontal Calendar Put Spread:
(limited to net debit paid)
Horizontal Calendar Put Spread Breakeven Calculation:
The breakeven point of a Horizontal Calendar Put Spread is the point below which the position will
start to lose money if the underlying stock rises or falls strongly and can only be calculated using
the Black-Scholes model.
Advantages Of Horizontal Calendar Put Spread:
Can be rolled forward for as many months as the expiration month of the long term put
options.
No Margin Needed.
Disadvantages Of Horizontal Calendar Put Spread:
Much narrower profitable range and lower maximum profit than the Diagonal Calendar Put
Spread.
Alternate Actions for Horizontal Calendar Put Spreads Before Expiration:
If you wish to profit from a drop in the underlying asset, you could buy back the short put
options before it expires and allow the LEAPS put Options to continue its profit run.
Diagonal Calendar Put Spread
Introduction
The Diagonal Calendar Put Spread, also known as the Put Diagonal Calendar Spread, is a neutral
options strategy that profits from stagnant stocks and reaches maximum profit when the stock goes
moderately lower.
Like all time spreads, the Diagonal Put Time Spread profits through the difference in time decay
between options with longer and shorter expiration. With a long expiration Put Option in place, or a
LEAPS Put Option, one Diagonal Calendar Put Spread can be rolled forward for multiple months.

Another advantage of the Diagonal Calendar Put Spread is that it is a debit spread. Most neutral
options strategies are credit spreads which requires margin to put on.
Types of Call Time Spreads
The Diagonal Calendar Put Spread is one of two types of time spreads that uses only Put options.
The other one being the Horizontal Calendar Put Spread which produces its maximum profit when
the underlying stock remains stagnant. Therefore, if the underlying stock is expected to remain
stagnant or go down slightly, the Diagonal Calendar Put Spread would better maximise your profits.
Differences Between Diagonal Calendar Put Spread and Horizontal Put Time Spread:
The Diagonal Calendar Put Spread has a higher maximum profit potential and a wider profitable
range than a Horizontal Calendar Put Spread. This is due to the fact that the Diagonal Calendar Put
Spread allows the underlying stock some room to move downwards through writing out of the
money put options instead of at the money put options. Even though the Diagonal Calendar Put
Spread has a higher maximum profit potential, it actually returns a lower profit than the Horizontal
Calendar put Spread if the underlying stock remains totally stagnant. This is because the stock
needs to move downwards to the strike price of the short Put Options in order for the Diagonal
Calendar Put Spread to produce its maximum profit. The Diagonal Calendar Put Spread is also
more expensive to put on as out of the money Put Options of lesser value than at the money options
are written. Such is the kind of trade off in options trading. Because out of the money Put Options
are written, Diagonal Calendar Put Spreads also have an assymetric risk graph which produces its
maximum loss (the net debit) only when the stock rises strongly. If the stock falls strongly, the
Diagonal Calendar Put Spread would also produce a much lesser loss than the Horizontal Calendar
Put Spread due to the fact that the long term at the money put options would gain in value faster or
in step with the short term out of the money put options. As such, you would use a Diagonal
Calendar Put Spread options trading strategy when a stock is expected to remain within a tight price
range and might move moderately lower.

When To Use Diagonal Calendar Put Spread?
Diagonal Calendar Put Spreads could be used when you wish to profit from a stock that is expected
to stay stagnant or move down slightly for the short term while keeping a long term Put Option
position in place in case of future downside breakouts.
How To Use Diagonal Calendar Put Spread?
In a Diagonal Calendar Put Spread, Out of The Money (OTM) near term Put Options are written
and then at the money (ATM) long term puts are bought.
Buy Long Term ATM Put + Sell Short Term OTM Put
Diagonal Calendar Put Spread Example
Assuming QQQQ trading at $45 now. Buy To Open 10 contracts of QQQQ Jan 2008 $45 Put
Options at $4.70.
Sell To Open 10 contracts of QQQQ Jan 2007 $44 Put at $0.50.
Net Debit = $4.70 - $0.50 = $4.20
Compare the net debit with the net debit paid for the Horizontal Calendar Put Spread using at the
money options, you would see that the Diagonal Calendar Put Spread requires more money to put
on the same base strike price.
Profit Potential of Diagonal Calendar Put Spread:
The Diagonal Calendar Put Spread makes its maximum profit potential when the stock closes at the
strike price of the short term Put Options upon expiration of the short term Put Options.
Trading Level Required For Diagonal Calendar Put Spread;
Diagonal Calendar Put Spread.
Profit Calculation of Diagonal Calendar Put Spread:
The value of a Diagonal Calendar Put Spread during expiration of the short Put Options can only be
arrived at using an options pricing model such as the Black-Scholes Model because the expiration
value of the long term putl options can only be arrived at using such a model.
Diagonal Calendar Put Spread Example
Assuming QQQQ closes at $44 upon expiration of the short term Put Options.
The 10 contracts of QQQQ Jan 2008 $45 Put Options is now trading at $5.00.
The 10 contracts of QQQQ Jan 2007 $44 Put expired worthless.
Net Profit = $0.50 (total premium gained from the Jan 2007 $44 Call) + $0.30 (profit on long term
Put Options)
= $0.80 x 1000 = $800.
From the above example, you can see the huge difference in maximum profit attainable by the
Horizontal Calendar Put Spread and the Diagonal Calendar Put Spread.
Loss Calculation of Diagonal Calendar Put Spread:
The Diagonal Calendar Put Spread makes it maximum possible loss, which is the net debit paid,
when the underlying stock rises drastically. In this case, the premium earned from writing the short
term Put Options serve as a hedge against the drop in value of the long term Put Options, up to the
value of the short term Put Options written.
Conversely, when the underlying stock drops, the out of the money Put Options gain in value only
slightly faster than the long term at the money Put Options, resulting in a much lower loss than if
the underlying stock falls. This is unlike a horizontal put time spread where maximum loss is the
same whether the stock rallies or falls.
Risk / Reward of Diagonal Calendar Put Spread:
(limited to net debit paid when stock rises strongly)
Diagonal Calendar Put Spread Breakeven Calculation:
The breakeven point of a Diagonal Calendar Put Spread is the point below or above which the
position will start to lose money if the underlying stock rises or falls strongly and can only be
calculated using the Black-Scholes model.
Advantages Of Diagonal Calendar Put Spread:
Higher profit can be attained when the stock moved moderately lower.
Can be rolled forward for as many months as the expiration month of the long term Put
Options.
No Margin Needed.
Disadvantages Of Diagonal Calendar Put Spread:
Maximum profit lower than Horizontal Calendar Put Spread if stock remains stagnant.
Alternate Actions for Diagonal Calendar Put Spreads Before Expiration:
If you wish to profit from a drop in the underlying asset, you could buy back the short Put
Options before it expires and allow the LEAPS Put Options to continue its profit run.
Calendar Straddle
Introduction
The Calendar Straddle is a neutral options strategy designed to profit when a stock is expected to
moved within a tight channel in the short term while still keeping the potential for profiting should
the stock stage a breakout. The Calendar Straddle produces this effect by buying a long term
straddle while writing a short term straddle.

Indeed, the Calendar Straddle is a Calendar Spreads that optimizes profit through the higher rate of
time decay of the short term straddle versus the long term straddle while allowing you the option of
simply keeping the long term straddle without the short term straddle anytime the underlying stock
is expected to stage an explosive breakout.
When To Use Calendar Straddle?
One should use a Calendar Straddle when the underlying stock is expected to remain stagnant in the
short term while expected to stage a breakout in either direction in the longer run. This is especially
useful leading up to a potential volatile event which is due in a few months. Such events may be
important court verdicts or results of an important R&D development. The few months leading up
to such an event would see implied volatility increase steadily, resulting in higher extrinsic values
and steadier price levels which favors short term short straddles. On the month of the volatile event
itself, the short term straddle could be closed and the longer term straddle held on to in order to
profit from the expected breakout due to the volatile event.
How To Use Calendar Straddle?
Calendar Straddles simply consist of a near term short straddle and a longer term long straddle. This
means buying longer term at the money call and put options while shorting the same amount of
nearer term at the money call and put options.
Buy Long Term ATM Call + Buy Long Term ATM Put + Short Near Term ATM Call + Short Near
Term ATM Put
Calendar Straddle Example :
Assuming XYZ trading at $44. It is February and XYZ is awaiting an important court verdict in
June.
Its Jun44Call is quoted at $2.10, its Jun44Put is quoted at $2.00, its Mar44Call is quoted at $1.00
and its Mar44Put is quoted at $0.80.
Buy To Open QQQQ Jun44Call, buy To Open QQQQ Jun44Put
Sell To Open QQQQ Mar44Call, sell To Open QQQQ Mar44Put
Net Effect: ($2.10 + $2.00) - ($1.00 + $0.80) = $2.30 net debit.
In the above example, the Calendar Straddle is used to profit from the rising short term extrinsic
values of the near term short straddles while having a June long straddle in place for the court
verdict in June. In this case, new short term straddles would be written for the month of April and
May while in the end leaving the June long straddle open for the court verdict which will either
explode the stock price upwards or downwards.
Profit Potential of Calendar Straddle:
You would notice above that the Calendar Straddle has the potential to make money in 2 ways; 1,
through the higher rate of time decay between the short straddle and the long straddle. 2, through
the long straddle on a price breakout. Unless the Calendar Straddle is placed based on an expected
volatile event sometime in the future so that eventually the long straddle position can be made used
of for profit, there are better neutral options strategies for use on stocks that are totally not expected
to stage any breakouts.

Profit Calculation of Calendar Straddle:
Maximum Profit = Difference in time decay between short term straddle and long term straddle.
Specific prices needs to be calculated using an options pricing model such as the Black-Scholes
Model.
Maximum Loss Possible = Net Debit Paid
Calendar Straddle Example Continued :
Maximum Loss Possible = $2.30
Risk / Reward of Calendar Straddle:
Maximum Profit: Limited in the short term when near term short straddles are written.
Unlimited in the long term when the position is transformed into a simple long straddle.
Maximum Loss: Limited to net debit. This happens when the underlying stock stages an
explosive breakout in either direction.
Break Even Points (Profitable Range) of Calendar Straddle:
Breakeven points of Calendar Straddle can only be determined through the use of an options pricing
model such as the Black-Scholes Model.
Advantages Of Calendar Straddle:
Able to profit when stock remains stagnant for the short term
Flexibility to transform the position into a long straddle when the stock is expected to stage
a breakout.
Loss is limited.
No margin needed.
Disadvantages of Calendar Straddle:
The position would result in a loss should the stock stage a breakout suddenly.
There are 4 legs to this trade which may require legging into the position in order to ensure
or enhance profitability.
Alternate Actions for Calendar Straddle before Expiration:
If the underlying stock is expected to stage a breakout soon, simply allow the short straddle
to expire without rolling forward or closing out the short straddle. This transforms the
position into a Long Straddle which profits when the underlying stock breaks out to upside
or downside.
Calendar Strangle
Introduction
The Calendar Strangle is a neutral options strategy designed to profit when a stock is expected to
moved within a tight channel in the short term while still keeping the potential for profiting should
the stock stage a breakout. The Calendar Strangle produces this effect by buying a long term
Strangle while writing a short term Strangle.

Indeed, the Calendar Strangle is a Calendar Spread that optimizes profit through the higher rate of
time decay of the short term Strangle versus the long term Strangle while allowing you the option of
simply keeping the long term Strangle by closing the short term Strangle anytime the underlying
stock is expected to stage an explosive breakout. The Calendar Strangle is a cousin of the Calendar
Straddle which works on the same principles but the Calendar Strangle has the advantage of a wider
profitable range on the short term strangle at the cost of a lower.
When To Use Calendar Strangle?
One should use a Calendar Strangle when the underlying stock is expected to remain within a fairly
narrow range in the short term while expected to stage a breakout in either direction in the longer
run. This is especially useful leading up to a potential volatile event which is due in a few months.
Such events may be important court verdicts or results of an important R&D development. The few
months leading up to such an event would see implied volatility increase steadily, resulting in
higher extrinsic values, especially for out of the money options, and steadier price levels which
favours short term short Strangles. On the month of the volatile event itself, the short term Strangle
could be closed and the longer term Strangle held on to in order to profit from the expected
breakout due to the volatile event.

How To Use Calendar Strangle?
Calendar Strangles simply consist of a near term Short Strangle and a longer term long Strangle.
This means buying longer term out of the money call and put options while shorting the same
amount of nearer term out of the money call and put options.
Buy Long Term OTM Call + Buy Long Term OTM Put + Short Near Term OTM Call + Short Near
Term OTM Put
Calendar Strangle Example :
Assuming XYZ trading at $44. It is February and XYZ is awaiting an important court verdict in
June.
Its Jun45Call is quoted at $1.50, its Jun43Put is quoted at $1.30, its Mar45Call is quoted at $0.55
and its Mar43Put is quoted at $0.50.
Buy To Open QQQQ Jun45Call, buy To Open QQQQ Jun43Put
Sell To Open QQQQ Mar45Call, sell To Open QQQQ Mar43Put
Net Effect: ($1.50 + $1.30) - ($0.55 + $0.50) = $1.75 net debit.
In the above example, the Calendar Strangle is used to profit from the rising short term extrinsic
values of the near term short Strangles while having a June long Strangle in place for the court
verdict in June. In this case, new short term Strangles would be written for the month of April and
May while in the end leaving the June long Strangle open for the court verdict which will either
explode the stock price upwards or downwards.
This is the same hypothetic example used in the Calendar Straddle tutorial and as you can see, the
net debit of the Calendar Strangle is much lower than that of the Calendar Straddle.
Profit Potential of Calendar Strangle:
You would notice above that the Calendar Strangle has the potential to make money in 2 ways; 1,
through the higher rate of time decay between the short Strangle and the long Strangle. 2, through
the long Strangle on a price breakout. Unless the Calendar Strangle is placed based on an expected
volatile event sometime in the future so that eventually the long Strangle position can be made used
of for profit, there are better neutral options strategies for use on stocks that are totally not expected
to stage any breakouts.
Profit Calculation of Calendar Strangle:
Maximum Profit = Difference in time decay between short term Strangle and long term Strangle.
Specific prices needs to be calculated using an options pricing model such as the Black-Scholes
Model.
Maximum Loss Possible = Net Debit Paid
Calendar Strangle Example Continued
Maximum Loss Possible = $1.75
Risk / Reward of Calendar Strangle:
Maximum Profit: Limited in the short term when near term short Strangles are written.
Unlimited in the long term when the position is transformed into a simple long Strangle.
Maximum Loss: Limited to net debit. This happens when the underlying stock stages an
explosive breakout in either direction.
Break Even Points (Profitable Range) of Calendar Strangle:
Breakeven points of Calendar Strangle can only be determined through the use of an options pricing
model such as the Black-Scholes Model.
Advantages Of Calendar Strangle:
Able to profit when stock remains stagnant for the short term
Flexibility to transform the position into a long Strangle when the stock is expected to stage
a breakout.
Loss is limited.
No margin needed.
Disadvantages Of Calendar Strangle:
The position would result in a loss should the stock stage a breakout suddenly.
There are 4 legs to this trade which may require legging into the position in order to ensure
or enhance profitability.
Alternate Actions for Calendar Strangle Before Expiration:
If the underlying stock is expected to stage a breakout soon, simply allow the short Strangle to
expire without rolling forward or closing out the short Strangle. This transforms the position into a
Long Strangle which profits when the underlying stock breaks out to upside or downside.

Condor Spread
Introduction
The Condor Spread is an advanced neutral option trading strategy which profits from stocks that are
stagnant or trading within a tight price range (Range Bound). It is a cousin of the butterfly spread
but involves 4 strike prices instead of 3 strike prices, resulting in a much wider profitable range at
the cost of a lower maximum profit.
The Condor Spread is an option strategy that is still confusing many option traders and option
trading information websites. Almost 90% of the websites out there today (March 2007) still
confused Condor Spreads with Iron Condor Spreads. Iron Condor Spreads are credit spreads while
Condor Spreads are debit spreads.

The Condor Spread belongs to the family of complex neutral option strategies, similar to the
Butterfly Spread, Iron Butterfly Spread and Iron Condor Spread.
Each of them has their own strengths and weaknesses. Here is a table explaining the differences:
Condor Spread Iron Condor Spread Butterfly Spread Iron Butterfly Spread
Debit/Credit Debit Credit Debit Credit
Max Profit Low High Higher Highest
Max Loss Highest Higher High Low
Cost of Position High Nil Low Nil
Profitable Range Wide Widest Narrow Wider

As you can see from the table above, all of the above complex neutral option strategies comes with
their own strengths and weaknesses. Option trading strategies are all about trade-offs. There are no
single option trading strategy that has the best of all worlds. From a reward/risk ratio point of view,
a Condor Spread would be inferior to the rest of the complex neutral strategies as it has the lowest
maximum profit potential while having the highest maximum loss potential.
When To Use Condor Spread?
One should use a Condor Spread when one expects the price of the underlying asset to change very
little or within a very tight trading range over the life of the option contracts.
How To Use Condor Spread?
There are two ways to establish a Condor Spread. One way is to use only call options. We call this a
"Call Condor Spread". The other way is to use only put options. We call that a "Put Condor
Spread". Either way performs the same as long as the underlying asset remains within the profitable
price range upon option expiration.
Either way, the composition of the Condor Spread is the same. It involves buying to open 1 far In
The Money (ITM) option, selling to open 1 In The Money option, selling to open 1 Out of The
Money (OTM) option and buying to open 1 further Out of The Money (OTM) option.
(a)Buy One Far ITM + (b)Sell One ITM + (c)Sell One OTM + (d)Buy One Far OTM
Establishing Call Condor Spread
Establishing a Call Condor Spread involves buying to open 1 far ITM call option, selling to open 1
ITM call option, selling to open 1 OTM call option and then finally buying to open a further OTM
call option.
Veteran or experienced option traders would identify at this point that the Condor spread actually
consists of a Bull Call Spread and a Bear Call Spread. This is similar to a Butterfly Spread except
for the fact that the middle strike price has been splitted up into 2 different strike prices in order to
set up a wider profitable range. A Condor Spread is really a Butterfly Spread with a wider profitable
range (and hence a lower max profit).
The choice of which strike prices to buy the long legs (trades a and d above) at depends on the
range within which the underlying asset is expected to trade in. The further away from the money
the 2 long legs are, the lower the risk (as the underlying stock needs to move further in order to exit
the breakeven range), and the lower the potential profits (as the further in the money options will
cost a lot more to buy).
Furthermore, the choice of which strike prices to buy the two short legs (trades b and c above) at
depends on how wide you want the range within which the maximum profit will occur. The further
from each other the two short legs are, the wider the price range will be where you will get the
maximum profit potential of the Condor Spread at the cost of a lower maximum profit.
A Condor Spread is therefore an extremely advanced neutral strategy where a trader gets to control
the range within which the Condor Spread is profitable as well as the range within which the
Condor Spread will hit its maximum profit potential. You can also skew the risk/reward profile of
the Condor spread so that the position makes a loss only on one side of the trade, not both, through
the use of a Call Broken Wing Condor Spread or Put Broken Wing Condor Spread.
Call Condor Spread Example
Assuming QQQQ trading at $43.57.
Buy To Open 1 contract of Jan $42 Call at $2.38
Sell To Open 1 contract of Jan $43 Call at $1.63
In the above example, we are expecting the QQQQ to trade within a price range of between $42 to
$45 upon expiration and achieving the maximum profit potential of the Condor Spread when
QQQQ is within $43 to $44.
Establishing Put Condor Spread
Establishing a Put Condor Spread is exactly the same as establishing a Call Condor Spread except
that put options are used instead. The resultant net debit and profitable range of a Put Condor
Spread are theoretically the same as you would use call options in a Call Condor Spread, however,
in practise, Call options and Put options do not cost the same to put on. In stocks that are likely to
be more bullish, its call options will be more expensive than its put options and vice versa.
Therefore, a trader needs to calculate whether a Call Condor Spread or a Put Condor Spread is
cheaper to establish based on the prevailing prices.
Put Condor Spread Example
Assuming QQQQ trading at $43.57
Buy To Open 1 contract of Jan $42 Put at $0.59
Sell To Open 1 contract of Jan $43 Put at $0.85
We see that the Call Condor Spread is cheaper to establish than the Put Condor Spread today, so the
Call Condor Spread should be used instead.
Trading Level Required For Condor Spread:
Condor Spread. There are also brokers that require level 4 or 5 accounts.
Profit Potential of Condor Spread:
Condor spreads achieve their maximum profit potential at expiration if the price of the underlying
asset is within the 2 middle strike prices. The profitability of a condor spread can also be enhanced
or better guaranteed by legging into the position properly.
Profit Potential of Condor Spread:
Condor spreads achieve their maximum profit potential at expiration if the price of the underlying
asset is within the 2 middle strike prices. The profitability of a condor spread can also be enhanced
or better guaranteed by legging into the position properly.
Profit Calculation of Condor Spread:
Maximum Profit = (Net Extrinsic Value in the position) x 100
Profit % = (Max Profit - Net Debit) / Net Debit
Profit Calculation of Condor Spread
From the above Call Condor Spread example :
Maximum Profit = (1.06 + 1.03) - (0.81 + 0.60) = 2.09 - 1.41 = $0.68 x 100 = $68
Profit % = ($68 - $32) / $32 = 115%
Risk / Reward of Condor Spread:
Maximum Loss: Limited to net debit paid
Break Even Point (Profitable Range) of Condor Spread:
A Condor Spread is profitable if the underlying asset expires within the profitable range bounded by
the upper and lower breakeven points.
1. Lower Breakeven Point: Net Debit + Lower Strike Price
Condor Spread Calculation
Net Debit = $0.32 , Lower Strike Price = $42.00
Lower Breakeven Point = $0.32 + $42.00 = $42.32.
2. Upper Breakeven Point : Higher Strike Price - Net Debit
Condor Spread Calculation
Net Debit = $0.32 , Higher Strike Price = $45.00
Profitable Range = $44.68 to $42.32 therefore a $2.36 range.
Advantages Of Condor Spread:
Large profit percentage due to low cost involve in executing the position.
Limited risk should the underlying asset rally or ditch unexpectedly. (unlike the Short
Straddle)
Maximum loss and profits are predictable.
Wider profitable range than a Butterfly Spread.
Have customisable profitable range as well as maximum profit range.
Able to profit on stocks that are completely stagnant or trading within a tight range.
Disadvantages of Condor Spread:
Larger commissions involved than simpler strategies with lesser trades.
Has a lower maximum profit potential than the other complex neutral option strategies.
Has a higher maximum loss potential than the other complex neutral option strategies.
Alternate Actions for Condor Spreads Before Expiration:
If the underlying asset has gained in price and is expected to continue rising, you could buy
back the short call options and hold the long call options.
If the underlying asset has dropped in price and is expected to continue dropping, you could
sell the long call options and hold the short call options. This action is only possible if your
broker allows you to sell naked options.
Advanced option traders may also close out the short or long leg and then buy or short the
Underlying asset in order to achieve a delta neutral position in order to protect whatever
profit is left.
Iron Condor Spread
Introduction
The Iron Condor Spread is without doubt the most popular neutral options trading strategy. Its
ability to profit from stocks that are trading within a relatively tight price range has made it a legend
to most options trading beginners. The Iron Condor Spread is a complex, advanced neutral option
trading strategy built upon the foundation of a Condor Spread and is a high probability and safe way
of profiting from a stock that is expected to stay stagnant or trade within a narrow price range.

Differences between Condor Spread and Iron Condor Spread:
1. A Condor Spread consists of only either call options or put options while the Iron Condor Spread
consists of both call and put options.
2. The Iron Condor Spread differs from the Condor Spread also in that the Iron Condor Spread
results in a net credit whereas executing a Condor Spread results in a net debit. As a complex credit
Spread strategy, most online option trading brokers will not allow beginner option traders to put on
an Iron Condor Spread due to margin and trading level requiremets. Only veteran traders with high
trading levels and a fund big enough to fulfill margin requirements are allowed to put on Iron
Condor Spreads. Traders need to check with own brokers as to the criteria needed to allow the
trading of credit Spreads or Iron Condor Spreads.
3. As the Iron Condor Spread buys only OTM call and put options, whereas the Condor Spread
buys an ITM option, it's profits is higher and with a lower potential loss.
Overall, the Iron Condor Spread is a more advanced option strategy than a Condor Spread that
results in better profitability, higher probability of profit and a lower maximum possible loss with
the trade off being having to run into margin requirement (You need to have a lot of spare cash in
your account before a broker allows you to enter a credit spread such as the Iron Condor Spread).
Here is a table that compares the Iron Condor Spread against similar complex neutral option
strategies:
single option trading strategy that has the best of all worlds.
When To Use Iron Condor Spread?
One should use a Iron Condor Spread when one expects the price of the underlying asset to change
very little over the life of the options.
How To Use Iron Condor Spread?
There are 4 option trades to establish for this strategy : 1. Buy To Open X number of far Out Of The
Money Call Options. 2. Sell To Open X number of Out Of The Money Call Options. 3. Buy To
Open X number of far Out Of The Money Put Options. 4. Sell To Open X number of Out Of The
Money Put Options.
Buy Far OTM Call + Sell OTM Call + Buy Far OTM Put + Sell OTM Put
Veteran or experienced option traders would identify at this point that the Iron Condor Spread
actually consists of a Bear Call Spread and a Bull Put Spread.
The choice of which strike prices to buy the long legs (trades 1 and 3 above) at depends on the
range within which the underlying asset is expected to trade in (Profitable Range). The further away
from the money the 2 long legs are, the lower the risk (as the underlying stock needs to move
further in order to exit the profitable range), but the higher the maximum loss would be should the
profitable range be exited. Again, this is a trade-off that all option traders need to decide and accept
when trading any kind of option strategies.
The difference between the strike price of the short call option and the short put option determines
the range within which the position will result in its maximum profit potential. The wider the
difference, the lower the maximum profit potential but the higher the probability that the stock will
end up within that range upon expiraiton. The narrower the difference, the higher the maximum
profit potential but the less likely the Iron Condor Spread will yield that maximum profit. Again,
another trade-off.
At this point, however, option traders must truly appreciate the level of customisation that the Iron
Condor Spread allows. One could literally pre-determine its maximum profit, maximum profit
range and maximum risk level in order to attain a position that best suit one's expectations.
Iron Condor Spread Example:
Example : Assuming QQQQ trading at $43.57
Net Credit = (($1.03 - $0.60) + ($0.85 - $0.59)) x 100 = $69.00 per position
Note:
Contrast this example with the example in Condor Spread. These examples are made using the same
QQQQ on the same strike price and real values. You will see that instead of having to pay $30 per
position to put on the spread (in the case of a Condor spread), you actually get $69 for putting on
the Iron Condor Spread.
Trading Level Required For Iron Condor Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Iron
Condor Spread.
Profit Potential of Iron Condor Spread:
Iron Condor Spreads achieve their maximum profit potential at expiration if the price of the
underlying asset falls within the strike price range bounded by the short call and put options.
Maximum profit for the Iron Condor Spread is equal to the net credit gained when the position is
put on.
From the above example: Assuming QQQQ close within $44 and $43 at expiration.
All 4 legs will expire Out Of The Money and you keep the entire net credit amount.
The profitability of an iron condor spread can also be enhanced or better guaranteed by legging into
the position properly.
Profit Calculation of Iron Condor Spread:
Maximum Profit = Net Credit.
Profit % = (Credit Gained From Short Legs / Greatest Difference In Strike) x 100
Maximum Loss Possible = Difference in strike between long and short strikes - Net Credit
From the above example : Assuming QQQQ close at $43.57 at expiration.
Maximum Profit = $69.00 per position.
Profit % = [($1.03 + $0.85) / ($43 - $42)] x 100 = 188%
Maximum Loss Possible = ($45 - $44) - $0.69 = $0.31 x 100 = $31 per position.
Note:
Notice at this point again that profit is also slightly higher than a Condor Spread with a tighter
maximum possible loss. Notice that we are using a $1 strike difference in these examples, giving us
a reward/risk ratio of 2.2:1. ($69 max profit versus $31 max loss) However, if we should use a
greater strike difference in order to better ensure our profitability up to maybe a 40,44,48, our
maximum loss will be much higher and our reward risk ratio will be much lower. That is the trade-
off we mentioned earlier on.
Risk / Reward of Iron Condor Spread:
Upside Maximum Profit: Limited to net credit gained
Maximum Loss: Limited to calculated maximum loss
Break Even Points (Profitable Range) of Iron Condor Spread:
An Iron Condor Spread is profitable as long as the price of the underlying stock stays within the
Profitable Range bounded by the Upper and Lower BreakEven points.
Upper Break Even Point = Short Call Strike + Net Credit
Net Credit = $0.69 , Short Call Strike = $44.00
Upper Breakeven Point = $44.00 + $0.69 = $44.69.
Lower Break Even = Short Put Strike - Net Credit
Net Credit = $0.69 , Short Put Strike = $43.00
Lower Breakeven Point = $43.00 - $0.69 = $42.31.
In this case, the Iron Condor Spread position in our example remains profitable as long as the
QQQQ close between $42.31 to $44.69 at option expiration day with maximum profit attained if
QQQQ closed at $43.57.
Note:
Notice that the Profitable Range of an Iron Condor Spread ($2.38 range) is also wider than that of a
Condor spread ($2.36 range).
Advantages Of Iron Condor Spread:
Able to profit on stagnant stocks.
Being a credit spread, it reduces overall risk with a higher probability of ending in a profit
than a debit spread.
Very versatile as position can be transformed into a Bear Call Spread or Bull Put Spread
easily.
Disadvantages Of Iron Condor Spread:
Not a strategy that traders with low trading levels can execute.
Alternate Actions for Iron Condor Spreads Before Expiration:
If the underlying asset has gained in price and is expected to continue rising, you could close
out all the call options and transform the position into a Bull Put Spread.
close out all the put options and transform the position into a Bear Call Spread. Such
transformations can be automatically performed without monitoring using Contingent
Orders.
Broken Wing Condor Spread
Introduction
The Broken Wing Condor Spread, also known as a Skip Strike Condor Spread, is neutral options
strategy and is a variant of the Condor Spread options trading strategy. The Broken Wing Condor
Spread is simply a Condor Spread which has risk inclined to one side. This means that rather than
an equal risk when the stock breaks out to topside or downside, the Broken Wing Condor Spread
transfers all the risk in one direction onto the other in order to create a options trading risk profile
with limited loss when the stock goes either upwards or downwards and totally safe when the stock
goes in the protected direction.
The Broken Wing Condor Spread also differs from the Condor Spread in that it is usually put on as
a zero cost spread or credit spread.
Broken Wing Condor Spread - Risk Adjusted Condor Spread:
The main purpose of a Broken Wing Condor Spread options trading strategy is simply to adjust the
risk profile of a regular Condor Spread. A regular Condor Spread makes a loss when the stock
breaks out to either direction. A Broken Wing Condor Spread enables you to totally transfer the risk
of one direction onto the other. This is useful when you wish to speculate on a stock being stagnant
but that you are confident that if the stock should break out, it will do so only in a certain direction.
The Broken Wing Condor Spread options trading strategy does this by simply buying out of the
money options with a further strike price from the short strike than the in the money leg. A regular
Condor Spread would have both out of the money options and in the money options at an
equidistance strike price from their short strikes.
Because the Broken Wing Condor Spread transfers the risk from the in the money side to the out of
the money side, the Call Broken Wing Condor spread would have to be used to protect against the
stock breaking downwards and the Put Broken Wing Condor Spread would have to be used to
protect against the stock breaking upwards.
Here's a table summarizing the differences between a regular Condor Spread and the Broken Wing
Condor Spread:
Regular Condor Spread Broken Wing Condor Spread
Two long strikes at equidistance from short
strikes
Out of the money strike is further from the short
OTM strike
Debit Spread Zero Cost or Credit Spread
Lower margin requirement Higher margin requirement
Lower Maximum Loss/Profit Higher Maximum Loss/Profit

Call Broken Wing Condor Spread
Introduction
The Call Broken Wing Condor Spread, also known as the Broken Wing Call Condor Spread or Skip
Strike Condor Spread, is a variant of the Condor Spread options trading strategy. Similar to the
Condor Spread, it is a neutral options strategy but unlike the Condor Spread, it transfers all the risk
of loss when the stock breaks downwards onto the upwards side. This means that the Call Broken
Wing Condor Spread does not lose money when the stock ditches downwards but will lose more
money than a regular Condor Spread if the stock rallies. This is particularly useful when the stock is
expected to either stay stagnant or break downwards.

Yes, Broken Wing Condor Spreads are Condor Spreads that transfer the risk of loss on one leg onto
the other. This creates an assymetric risk graph that favors the stock moving in a certain direction.
The Call Broken Wing Condor Spread protects against the stock breaking downwards while the Put
Broken Wing Condor Spread protects against the stock breaking upwards.
Call Broken Wing Condor Spread - Classification
Strategy : Neutral | Outlook : Loose Neutral | Spread : Vertical Spread | Debit or Credit : Credit
Main Difference Between Call Broken Wing Condor Spread and Condor Spread:
The main difference between the call broken wing Condor Spread and the Condor Spread is that the
call broken wing Condor Spread transfers the potential downside losses onto the upside. The Call
Broken Wing Condor Spread achieves this simply by buying further out of the money call options
instead of call options at the same distance from the short option strike price as the in the money
call options.
In a regular Condor Spread options trading strategy, both in the money options and out of the
money options are bought at an equidistance from the short options strike prices. This creates a
symmetrical risk graph with equal risk of loss on both upside and downside as you can see in the
risk graph below:

By moving the out of the money call options further away from the short strike price than the in the
money call options, the Broken Wing Condor Spread reduces the debit of the position to the extend
that the position is either a zero cost position or a credit spread. The result of such an adjustment is
that if the stock goes downwards, the position gains the net credit if it is a credit spread or simply
makes no loss if the position is a zero cost one.
Example: Assuming QQQQ trading at $43.57.
Regular Condor Spread
Net Debit = (($2.38 + $0.60) - ($1.63 + $1.03)) x 100 = $32.00 per position
Net Credit = (($2.38 + $0.20) - ($1.63 + $1.03)) x 100 = $8.00 per position
The Call Broken Wing Condor Spread options trading strategy is so named because one "wing" is
shorter than the other. Risk can also be transferred to upside so that when the stock rallies, the
position makes no loss through using a Put Broken Wing Condor Spread. Both Call Broken Wing
Condor Spread and Put Broken Wing Condor Spreads are variants of the Condor Spread which
options traders can use to better tailor the position to a multi-directional expectation.
When To Use Call Broken Wing Condor Spread?
One should use a Call Broken Wing Condor Spread when one expects the price of the underlying
asset to move within a tight channel over the life of the option contracts and speculates that even if
the underlying asset should stage a breakout, the breakout will most likely be downwards.
How To Use Call Broken Wing Condor Spread?
A call broken wing condor spread is actually made up of two different spreads. An In The Money
Bull Call Spread and an Out of the money Bear Call Spread. There are 4 trades to make: Sell To
Open In The Money call options + Buy to Open Deeper in the money call options (ITM Bull call
spread) + Sell to Open Out of the Money call options + Buy to open further out of the money call
options with strike difference greater than in the ITM bull call spread (OTM Bear Call Spread).
Buy Further ITM Call + Sell ITM Call + Sell OTM Call + Buy Even Further OTM Call
The profitable range of the call broken Wing condor spread is largely determined by the difference
in strike between the two short call options. The wider the strike difference, the lower the maximum
profit becomes but the larger the profitable price range which increases the probability of making a
profit. So, its a trade off between the probability of profiting and the amount of potential profit. This
is the kind of trade off that you will see in options trading all the time.
As the out of the money call option determines the point beyond which the position will stop
making a loss when the stock rallies, buying a further out of the money call option means a higher
maximum potential loss than a regular condor spread that would have bought the out of the money
call option at the same strike difference as the in the money wing.
The profitability of a call broken wing condor spread can be enhanced or better guaranteed by
legging into the position properly.
Profit Potential of Call Broken Wing Condor Spread:
Call Broken Wing Butterfly spreads achieve their maximum profit potential at expiration if the
price of the underlying asset is equal to the middle strike price.
From the above example: As long as QQQQ closes between $43 and $44, the maximum profit can
be attained.
Trading Level Required For Call Broken Wing Condor Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Call
Broken Wing Condor Spread.
Profit Calculation of Call Broken Wing Condor Spread:
Maximum Profit = [(Difference between two lowest strikes) + Net Credit] x 100
Maximum Loss = ((highest strike - skipped strike) - net credit) x 100
From the above example :
Maximum Profit = [(43 - 42) + 0.08] x 100 = 1.08 x 100 = $108 per position
Maximum Loss = ((46 - 45) - 0.08) x 100 = 0.92 x 100 = $92 per position
Risk / Reward of Call Broken Wing Condor Spread:
Losing Point (Break even point) of Call Broken Wing Condor Spread:
A Call Broken Wing Condor Spread makes a loss only when the stock rallies above the losing
point.
Losing point = skipped strike + net credit
Losing Point = $45 + $0.08 = $45.08.
Advantages Of Call Broken Wing Condor Spread:
Transfer downside risk totally into the upside leg.
Higher maximum profit than a regular Condor Spread.
Disadvantages Of Call Broken Wing Condor Spread:
Higher margin requirement than a regular Condor Spread.
Higher maximum loss than a regular Condor Spread.
Alternate Actions for Call Broken Wing Condor Spreads Before Expiration:
If the underlying asset has gained in price and is expected to continue rising, you could buy
back the short call options and hold the long call options.
Put Broken Wing Condor Spread
Introduction
The Put Broken Wing Condor Spread, also known as the Broken Wing Put Condor Spread or Skip
Strike Condor Spread, is a variant of the Put Condor Spread options trading strategy. Similar to the
Put Condor Spread, it is a neutral options strategy but unlike the Put Condor Spread, it transfers all
the risk of loss when the stock breaks upwards onto the downwards side. This means that the Put
Broken Wing Condor Spread does not lose money when the stock rallies upwards but will lose
more money than a Put Condor Spread if the stock ditches. This is particularly useful when the
stock is expected to either stay stagnant or rally.

Yes, Broken Wing Condor Spreads are Condor Spreads that transfer the risk of loss on one leg onto
the other. This creates an assymetric risk graph that favors the stock moving in a certain direction.
The Put Broken Wing Condor Spread protects against the stock rallying while the call Broken Wing
Condor Spread protects against the stock breaking downwards.
Main Difference Between Put Broken Wing Condor Spread and Condor Spread:
The main difference between the Put Broken wing Condor Spread and the Condor Spread is that the
Put Broken wing Condor Spread transfers the potential upside losses onto the downside. The Put
Broken Wing Condor Spread achieves this simply by buying further out of the money put options
instead of put options at the same distance from the short strike price as the in the money Put
Options.
In a regular Condor Spread options trading strategy, both in the money options and out of the
money options are bought at an equidistance from the short strike price. This creates a symmetrical
risk graph with equal risk of loss on both upside and downside.
By moving the out of the money Put Options further away from the short strike price than the in the
money Put Options, the Broken Wing Condor Spread reduces the debit of the position to the extend
that the position is either a zero cost position or a credit spread. The result of such an adjustment is
that if the stock goes upwards, the position gains the net credit if it is a credit spread or simply
makes no loss if the position is a zero cost one.
Put Broken Wing Condor Spread Example
Regular Put Condor Spread
Net Debit = (($2.38 + $0.60) - ($1.63 + $1.03)) x 100 = $32.00 per position
When To Use Put Broken Wing Condor Spread?
One should use a Put Broken Wing Condor Spread when one expects the price of the underlying
asset to change very little over the life of the option contracts and speculates that even if the
underlying asset should stage a breakout, the breakout will most likely be upwards.
How To Use Put Broken Wing Condor Spread?
A Put broken wing condor spread is actually made up of two different spreads. An Out of The
Money Bull Put Spread and an In the money Bear Put Spread. There are 4 trades to make: Sell To
Open In The Money put options + Buy to Open Deeper in the money put options (ITM Bear Put
spread) + Sell to Open Out of the Money put options + Buy to open further out of the money put
options with strike difference greater than in the ITM bear put spread (OTM Bull Put Spread).
The profitable range of the put broken Wing condor spread is largely determined by the difference
in strike between the two short put options. The wider the strike difference, the lower the maximum
profit becomes but the larger the profitable price range which increases the probability of making a
profit. So, its a trade off between the probability of profiting and the amount of potential profit. This
is the kind of trade off that you will see in options trading all the time.
As the out of the money put option determines the point beyond which the position will stop
making a loss when the stock drops, buying a further out of the money put option means a higher
maximum potential loss than a regular put condor spread that would have bought the out of the
money put option at the same strike difference as the in the money wing.
Put Broken Wing Condor Spread Example
The Put Broken Wing Condor Spread options trading strategy is so named because one "wing" is
shorter than the other. Risk can also be transferred to downside so that when the stock ditches, the
position makes no loss through using a Call Broken Wing Condor Spread. Both Put Broken Wing
Condor Spread and Call Broken Wing Condor Spreads are variants of the Condor Spread which
options traders can use to better tailor the position to a multi-directional expectation.
Profit Potential of Put Broken Wing Condor Spread:
Put Broken Wing Condor Spreads achieve their maximum profit potential at expiration if the price
of the underlying asset is between the two short strike prices.
Assuming QQQQ close between $44 and $43 at expiration. You will profit from the value of the 2
short Put Options and you will lose the value of the long out of the money put option and the
extrinsic value of the in the money put option.
Trading Level Required For Put Broken Wing Condor Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Put
Broken Wing Condor Spread.
Profit Calculation of Put Broken Wing Condor Spread:
Maximum Profit = [(Difference between two highest strikes) + Net Credit] x 100
Maximum Loss = ((Skipped strike - lowest strike) - net credit) x 100
Maximum Profit = [(45 - 44) + 0.08] x 100 = 1.08 x 100 = $108 per position
Maximum Loss = ((42 - 41) - 0.08) x 100 = 0.92 x 100 = $92 per position
Risk / Reward of Put Broken Wing Condor Spread:
Losing Point (Break even point) of Put Broken Wing Condor Spread:
A Put Broken Wing Condor Spread makes a loss only when the stock drops below the losing point.
Losing point = skipped strike - net credit
Losing Point = $42 - $0.08 = $41.92.
Advantages Of Put Broken Wing Condor Spread:
Transfer downside risk totally into the upside leg.
Higher maximum profit than a regular Put Condor Spread.

Disadvantages Of Put Broken Wing Condor Spread:
Higher margin requirement than a regular Put Condor Spread.
Higher maximum loss than a regular Put Condor Spread.
Alternate Actions for Put Broken Wing Condor Spreads Before Expiration:
buy back the short Put Options and hold the long Put Options.
Butterfly Spread
Introduction
The Butterfly Spread is an advanced neutral option trading strategy which profits from stocks that
are stagnant or trading within a very tight price range.

A Butterfly Spread derived its name from the fact that it consists of 3 option trades at once, just like
the 2 wings built on the body of a butterfly. This is an options trading strategy where a very large
profit is realised if the stock is at or very near the middle strike price on expiration day. When
implemented properly, the potential gain is higher than the potential loss, but both the potential gain
and loss will be limited.
Unlike many basic option trading strategies, you can put on a butterfly spread for a much lesser
price than most other strategies due to the fact that one leg or "wing" of the position is a credit
spread that offsets much of the price of the other leg or "wing".
Butterfly Spread - Classification
Strategy: Neutral | Outlook : Tight Neutral | Spread : Vertical Spread | Debit or Credit : Debit
The Butterfly Spread differs from the Iron Butterfly Spread in that the iron butterfly spread consists
of 4 stock options trades instead of just 3 with a larger potential profit and that executing an Iron
Butterfly Spread results in a net credit whereas executing a Butterfly Spread results in a net debit.
As Butterfly Spread is a complex options trading strategy comprising of a credit spread on one leg,
most brokers will not allow beginner option traders to execute Butterfly Spreads. Only veteran
traders with high trading levels are allowed to execute butterfly spreads. You need to check with
your broker for the criteria needed to allow the trading of credit spreads or butterfly spreads.
The Butterfly Spread belongs to the family of complex neutral option strategies, similar to the
Condor Spread, Iron Butterfly Spread and Iron Condor Spread. Each of them has their own
strengths and weaknesses. Here is a table explaining the differences:

These comparisons are made with the same maximum and minimum strike prices and real values.
single option trading strategy that has the best of all worlds.
When To Use Iron Butterfly Spread?
One should use a Iron Butterfly Spread when one expects the price of the underlying asset to
change very little over the life of the options.
How To Use Iron Butterfly Spread?
There are 4 option trades to establish for this strategy : 1. Buy To Open X number of Out Of The
Money Call Options. 2. Sell To Open X number of At The Money Call Options. 3. Buy To Open X
number of Out Of The Money Put Options. 4. Sell To Open X number of At The Money Put
Options.
Buy OTM Call + Sell ATM Call + Sell ATM Put + Buy OTM Put
Veteran or experienced option traders would identify at this point that the Iron Butterfly Spread
actually consists of a Bear Call Spread and a Bull Put Spread with the short call and put options on
the same strike price (at the money).
The choice of which strike prices to buy the long legs (trades 1 and 3 above) at depends on the
range within which the underlying asset is expected to trade in (Profitable Range). The further away
from the money the 2 long legs are, the lower the risk (as the underlying stock needs to move
further in order to exit the profitable range), but the higher the maximum loss would be should the
profitable range be exited. Again, this is a trade-off that all option traders need to decide and accept
when trading any kind of option strategies.
Iron Butterfly Spread Example
Sell To Open 1 contract of Jan $43 Call at $1.63.
Sell To Open 1 contract of Jan $43 Put at $0.85.
Net Credit = (($1.63 - $1.06) + ($0.85 - $0.59)) x 100 = $83.00 per position
Contrast this example with the example in Butterfly Spread. These examples are made using the
same QQQQ on the same strike price and real values. You will see that instead of having to pay $18
per position to put on the spread (in the case of a butterfly spread), you actually get $83 for putting
on the Iron Butterfly Spread.
Note:
Contrast this example with the example in Butterfly Spread. These examples are made using the
same QQQQ on the same strike price and real values. You will see that instead of having to pay $18
per position to put on the spread (in the case of a butterfly spread), you actually get $83 for putting
on the Iron Butterfly Spread.
Trading Level Required For Iron Butterfly Spread:
A Level 4 options trading account that allows the execution of credit spreads is needed for the Iron
Butterfly Spread.
Profit Potential of Iron Butterfly Spread:
Iron Butterfly Spreads achieve their maximum profit potential at expiration if the price of the
underlying asset is equal to the middle strike price. Maximum profit for the Iron Butterfly Spread is
equal to the net credit gained when the position is put on.
Iron Butterfly Spread Profitability
From the above example : Assuming QQQQ close at $43.00 at expiration.
All 4 legs will expire Out Of The Money and you keep the entire net credit amount.
The profitability of an iron butterfly spread can also be enhanced or better guaranteed by legging
into the position properly.
Profit Calculation of Iron Butterfly Spread:
Maximum Profit = Net Credit.
Profit % = (Credit Gained From Short Legs / Greatest Difference In Strike) x 100
Maximum Loss Possible = Greatest Difference In Strike - Net Credit
Iron Butterfly Spread Calculations
From the above example : Assuming QQQQ close at $43 at expiration.
Maximum Profit = $83.00 per position.
Profit % = [($1.65 + $0.85) / ($44 - $43)] x 100 = 250%
Maximum Loss Possible = ($44 - $43) - $0.83 = $0.17 x 100 = $17 per position.
Note:
Notice at this point again that the profit is also higher than a Butterfly Spread by $1.00 with a
slightly tighter maximum possible loss. Notice that we are using a $1 strike difference in these
examples, giving us a reward/risk ratio of 4.9 : 1. ($83 max profit versus $17 max loss) However, if
we should use a greater strike difference in order to better ensure our profitability up to maybe a
40,44,48, our maximum loss will be much higher and our reward risk ratio will be much lower.
That is the trade-off we mentioned earlier on.
Risk / Reward of Iron Butterfly Spread:
Upside Maximum Profit: Limited to net credit gained
Maximum Loss: Limited to calculated maximum loss
Break Even Points (Profitable Range) of Iron Butterfly Spread:
An Iron Butterfly Spread is profitable as long as the price of the underlying stock stays within the
Profitable Range bounded by the Upper and Lower BreakEven points.
Upper Break Even Point = Short Call Strike + Net Credit
Iron Butterfly Spread Breakeven
Net Credit = $0.83 , Short Call Strike = $43.00
Upper Breakeven Point = $0.83 + $43.00 = $43.83.
Lower Break Even = Short Put Strike - Net Credit
Iron Butterfly Spread Breakeven
Net Credit = $0.83 , Short Put Strike = $43.00
Lower Breakeven Point = $43.00 - $0.83 = $42.17.
In this case, the Iron Butterfly Spread position in our example remains profitable as long as the
QQQQ close between $43.83 to $42.17 at option expiration day with maximum profit attained if
QQQQ closed at $43.
Note:
Notice that the Profitable Range of an Iron Butterfly Spread ($1.66 range) is also wider than that of
a butterfly spread ($1.64 range).
Advantages Of Iron Butterfly Spread:
Able to profit on stagnant stocks.
Being a credit spread, it reduces overall risk with a higher probability of ending in a profit
than a debit spread.
Very versatile as position can be transformed into a Bear Call Spread or Bull Put Spread
easily.
Disadvantages Of Iron Butterfly Spread:
Not a strategy that traders with low trading levels can execute.
Alternate Actions for Iron Butterfly Spreads Before Expiration:
If the underlying asset has gained in price and is expected to continue rising, you could close
out all the call options and transform the position into a Bull Put Spread.
close out all the put options and transform the position into a Bear Call Spread. Such
transformations can be automatically performed without monitoring using Contingent
Orders.
Bull Butterfly Spread
Introduction
The Bull Butterfly Spread is a complex bullish options strategy with limited profit and limited loss.
It makes its maximum profit when the underlying stock rises to a pre-determined higher price. Like
a normal butterfly spread, the Bull Butterfly Spread can be constructed using only call options,
known as the Bull Call Butterfly Spread, or only put options, known as the Bull Put Butterfly
Spread. The Bull Butterfly Spread is really just a normal butterfly spread using a higher middle
strike price, effectively moving the maximum profit point up to a higher strike price.

The Bull Butterfly Spread also has the highest Return on Investment of all the complex bullish
Comparing The Bull Butterfly Spread:
So, how does the Bull Butterfly Spread compare against the other two most popular complex
bullish options strategies, the Bull Call Spread and the Bull Put Spread? Is the Bull Butterfly Spread
worth the time and effort learning? We decided to compare the Maximum Profit, the Capital Outlay
and the resultant Return on Investment to see if the Bull Butterfly Spread is worth using at all.
For this study, we expect the QQQQ to reach the price of $46 by August expiration. As such, we
shall aim for $46 on all three strategies using the minimum number of contracts. The results are
tabulated below:
QQQQ options chain on 9 July 2010. QQQQ trading at $44.20.
Aug44Call = $1.65 , Aug45Call = $1.11 , Aug46Call = $0.68 , Aug47Call = $0.40
Aug44Put = $1.44 , Aug45Put = $1.90 , Aug46Put = $2.47 , Aug47Put = $3.17

As you can see above, if you expect the underlying stock to hit a certain definite strike price (and
not beyond that strike price) by expiration, the Bull Butterfly Spread would return a far higher
return on investment than all the other complex bullish options strategies. However, it must be
noted that the Bull Butterfly Spread makes its maximum profit only when the underlying stock
closes exactly at the strike price of the middle strike upon expiration. If the price of the underlying
stock moves way beyond the strike price of the middle strike, the position could make a lot lesser
profit and may even go into a loss. As such, the high ROI of a Bull Butterfly Spread rewards the
precision of your prediction on the movement of the underlying stock. Indeed, options trading is fair
and higher ROI rewards greater precision or compromises in other areas.
When To Use Bull Butterfly Spread?
One should use a Bull Butterfly Spread when one expects the price of the underlying stock to move
up to but not exceeding a certain strike price by options expiration.
How To Use Bull Butterfly Spread?
There are two ways to establish a Bull Butterfly Spread. One way is to use only call options. We
call this a "Bull Call Butterfly Spread". The other way is to use only put options. We call that a
"Bull Put Butterfly Spread". Either way uses the same strike prices and typically cost almost the
The composition of both kinds of Bull Butterfly Spread is the same. It involves selling to open 2
contracts at the strike price which you think the underlying stock will close at by expiration and
Establishing Bull Call Butterfly Spread
Veteran or experienced option traders would identify at this point that the Bull Call Butterfly
Spread actually consists of an OTM Bull Call Spread and an OTM Bear Call Spread.
Bull Call Butterfly Spread Example
Sell To Open 2 contracts of Aug $46 Call at $0.68
In the above Call Bull Butterfly Spread example, we are expecting the QQQQ to reach $46 on
August expiration.
Establishing Bull Put Butterfly Spread
resultant net debit and maximum of a Bull Put Butterfly Spread is theoretically the same as you
calculate whether a Bull Call Butterfly Spread or a Bull Put Butterfly Spread makes more sense in
Bull Put Butterfly Spread Example
In this case, Bull Put Butterfly Spread requires a slightly lower net debit than the Bull Call Butterfly
Spread, so the Bull Put Butterfly Spread should be used instead.
Trading Level Required For Bull Butterfly Spread:
Butterfly Spread.
Profit Potential of Bull Butterfly Spread:
Bull Butterfly Spreads achieve their maximum profit potential when the underlying stock closes
exactly on the middle strike price by expiration. The profitability of a Bull Butterfly Spread can also
be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Bull Butterfly Spread:
Maximum Profit = Strike Difference between Long and Short leg - debit
Maximum Profit = [($46 - $45) - 0.13] x 100 = $87
Maximum Loss = $13
Risk / Reward of Bull Butterfly Spread:
Break Even Points of Bull Butterfly Spread:
A Bull Butterfly Spread is profitable if the price of the underlying stock remains between the higher
From the above Bull Put Butterfly Spread example : Debit = $0.13 , Upper Strike Price = $47.00
In this case, our Bull Put Butterfly Spread makes a maximum profit of $87 if the QQQQ closes
exactly at $46 during August Expiration and remains profitable if the QQQQ closes within the price
range of $45.13 to $46.87.
Advantages Of Bull Butterfly Spread:
Highest ROI of the complex bullish options trading strategies.
Low capital requirement results in the lowest maximum loss of all complex bullish options
strategies.
Disadvantages Of Bull Butterfly Spread:
expiration.
Alternate Actions for Bull Butterfly Spreads Before Expiration:
When it is obvious that the underlying stock is going to go up beyond the middle and higher
strike, you could close out the middle and higher strike legs and then just hold the lower
strike leg, turning it into a long call position. This transformation can be automatically
Bear Butterfly Spread
Introduction
The Bear Butterfly Spread is a complex bearish options strategy with limited profit and limited loss.
It makes its maximum profit when the underlying stock drops to a pre-determined lower price. This
makes the Bear Butterfly Spread ideal for price targeting.

Like a normal butterfly spread, the Bear Butterfly Spread can be constructed using only call
options, known as the Bear Call Butterfly Spread, or only put options, known as the Bear Put
Butterfly Spread.
The Bear Butterfly Spread is really just a normal butterfly spread using a lower middle strike price,
effectively moving the maximum profit point down to a lower strike price.
The Bear Butterfly Spread also has the highest Return on Investment of all the complex bearish
Bear Butterfly Spread Classification:
Comparing The Bear Butterfly Spread:
So, how does the Bear Butterfly Spread compare against the other two most popular complex
bearish options strategies, the Bear Put Spread and the Bear Call Spread? Is the Bear Butterfly
Spread worth the time and effort learning? We decided to compare the Maximum Profit, the Capital
Outlay and the resultant Return on Investment to see if the Bear Butterfly Spread is worth using at
all.
For this study, we expect the QQQ to reach the price of $56 by August expiration. As such, we shall
aim for $56 on all three strategies using the minimum number of contracts. The results are tabulated
below:
QQQ options chain on 24 April 2011. QQQ trading at $58.34.
May58Call = $1.11 , May57Call = $1.85 , May56Call = $2.69 , May55Call = $3.58
May58Put = $0.78 , May57Put = $0.52 , May56Put = $0.32 , May55Put = $0.21

* Bear Call Butterfly Spread was used
** : Maximum loss used as it is a credit spread
As you can see above, the Bear Butterfly Spread is an options trading strategy that rewards the
precision of your prediction on the movement of the underlying stock. As long as the price of the
underlying stock closes exactly on the predicted price, the Bear Butterfly Spread would produce a
much higher Return on Investment (ROI). However, if the price of the underlying stock goes lower
than the predicted price, the other two bearish options strategies would actually perform better.
When To Use Bear Butterfly Spread?
The Bear Butterfly Spread could be used when one expects the price of the underlying stock to
move down to but not exceeding a certain strike price by options expiration.
How To Use Bear Butterfly Spread?
There are two ways to establish a Bear Butterfly Spread. One way is to use only call options. We
call this a "Bear Call Butterfly Spread". The other way is to use only put options. We call that a
"Bear Put Butterfly Spread". Either way uses the same strike prices and typically cost almost the
The composition of both kinds of Bear Butterfly Spread is the same. It involves selling to open 2
contracts at the strike price which you think the underlying stock will close at by expiraiton and
Establishing Bear Call Butterfly Spread:
Veteran or experienced option traders would identify the Bear Call Butterfly Spread as consisting of
an ITM Bear Call Spread and an ITM Bull Call Spread.
Bear Call Butterfly Spread Example
Sell To Open 2 contracts of May $56 Call at $2.69
In the above Call Bear Butterfly Spread example, we are expecting the QQQ to reach $56 on May
expiration.
Establishing Bear Put Butterfly Spread:
Establishing a Bear Put Butterfly Spread is exactly the same as establishing a Bear Call Butterfly
resultant net debit and maximum of a Bear Put Butterfly Spread is theoretically the same as you
calculate whether a Bear Call Butterfly Spread or a Bear Put Butterfly Spread makes more sense in
A Bear Put Butterfly Spread actually consists of an OTM Bear Put Spread and an OTM Bear Call
Spread placed around a central strike price ($56 in this case).
Bear Put Butterfly Spread Example
Sell To Open 2 contracts of May $56 Put at $0.32
In this case, Bear Put Butterfly Spread requires a slightly higher net debit than the Bear Call
Butterfly Spread, so the Bear Call Butterfly Spread should be used instead.
Choosing Strike Price and Expiration Month for Bear Butterfly Spread:
The choice of middle strike price for Bear Butterfly Spread is the price to which you expect the
stock to end up by expiration. The two long legs would then be put on one strike higher and one
strike lower than the middle strike.
The choice of expiration month for Bear Butterfly Spread is typically when you expect the stock to
hit the expected strike price. Such targeting is possible when the stock is expected to hit a certain
price on a certain day due to events such as a buyout. Bear in mind that Bear Butterfly Spreads are
adversely affected by implied volatility the longer the expiration. More on the greeks of Bear
Butterfly Spreads below.
Trading Level Required For Bear Butterfly Spread:
Butterfly Spread.
Profit Potential of Bear Butterfly Spread:
Bear Butterfly Spreads achieve their maximum profit potential when the underlying stock closes
exactly on the middle strike price by expiration. The profitability of a Bear Butterfly Spread can
also be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Bear Butterfly Spread:
Maximum Profit = [($57 - $56) - 0.05] x 100 = $95
Maximum Loss = $5
Risk / Reward of Bear Butterfly Spread:
Break Even Points of Bear Butterfly Spread:
A Bear Butterfly Spread is profitable if the price of the underlying stock remains between the higher
Debit = $0.05, Lower Strike Price = $55.00
Debit = $0.05 , Upper Strike Price = $57.00
In this case, our Bear Call Butterfly Spread makes a maximum profit of $95 if the QQQ closes
exactly at $56 during May Expiration and remains profitable if the QQQ closes within the price
range of $55.05 to $56.95.
Bear Butterfly Spread Greeks:
Delta: Negative
Bear Butterfly Spreads have a slightly negative delta which allows the position to profit as the price
of the underlying stock goes down. This is characteristic of all bearish options strategies.
Gamma: Positive
Being slightly Gamma Positive, the delta of a Bear Butterfly Spread will becoming increasingly
negative as the price of the underlying stock goes down, increasing its profitability downwards.
Vega: Variable
Vega for Bear Butterfly Spreads tend to be neutral or slightly positive with nearer expiration but
slightly negative for longer expiration. As such, Bear Butterfly Spreads placed with longer
expiration tends to be negatively affected with increases in implied volatility.
Theta: Neutral
Bear Butterfly Spreads are not significantly affected by Time Decay as the erosion of extrinsic
value on the long legs are offset by the erosion of extrinsic value on the short leg.
Advantages Of Bear Butterfly Spread:
Low capital requirement results in the lowest maximum loss of all complex bearish options
strategies.
Disadvantages Of Bear Butterfly Spread:
Larger commissions involved than the other bearish option strategies with lesser trades.
expiration.
Alternate Actions for Bear Butterfly Spreads Before Expiration:
When it is obvious that the underlying stock is going to go down beyond the middle and
lower strike and you are holding a Bear Put Butterfly Spread, you could close out the middle
strike short puts and hold on to the long puts for unlimited downside profit. If you are
holding a Bear Call Butterfly Spread, you could close out the two long legs and hold the
short legs to expiration in order to profit from the whole extrinsic value of the short legs.
This will turn the position into a naked call write which will require Margin.
Double Butterfly Spread
Introduction
The Double Butterfly Spread is an advanced butterfly spread that uses a combination of two
butterfly spreads in order to create peak profit across two different strike prices. A normal butterfly
spread is capable of peak profit only when the price of the underlying asset closes exactly on the
middle strike price. However, if the price of the underlying asset is expected to close at either one of
two prices, you can put two separate butterfly spreads targeting each price together to create a
Double Butterfly Spread in order to maximise profit no matter which price it hits with very little
capital commitment.

Double Butterfly Spread - Classification
Strategy : Neutral | Outlook : Loose Neutral | Spread : Vertical Spread | Debit or Credit : Debit
When To Use Double Butterfly Spread?
One could use a Double Butterfly Spread when one expects the price of the underlying stock to
close exactly at either one of two different strike prices by expiration.
How To Use Double Butterfly Spread?
A Double Butterfly Spread is simply putting on two separate butterfly spreads with middle strike
prices on two different strike prices. This creates a position with two peak profits on two strike
prices. While a butterfly spread is used for targeting a single strike price, Double Butterfly Spreads
target two different strike prices to increase the chances of peak profitability and are useful when
the price of the underlying asset is expected to hit one of two prices due to factors such as a
potential take-over.
Double Butterfly Spreads are usually used when the targeted prices are more than one strike apart.
If the targetted prices are two consecutive strike prices, a Condor Spread could be used instead with
almost the same profitability and incurring a lot lesser commissions due to fewer trades making up
the position. However, if the targetted prices are more than one strike apart, using a condor spread
would yield a lot lesser maximum profit due to the fact that it is also maintaining peak profit
potential in between the two targetted strike prices.
As such, the Double Butterfly Spread is a huge six legged options position with three legs forming
each butterfly spread. It can also be constructed using only call options (known as a Call Double
Butterfly Spread) or put options (known as a Put Double Butterfly Spread) or even a combination of
both with one Call Butterfly Spread pairing up with a Put Butterfly Spread. The outcome and
capital outlay of all three configurations should not be very different when put call parity is not
severely broken.
Establishing Call Double Butterfly Spread:
Call Double Butterfly Spreads consist of two Call Butterfly Spreads with middle strike price on two
different strike prices which are at least one strike price apart.
Call Double Butterfly Spread Example
Jan55Call $2.27, Jan56Call $1.50, Jan57Call $0.90, Jan58Call $0.44, Jan59Call $0.19
Jan55Put $0.40, Jan56Put $0.63, Jan57Put $1.00, Jan58Put $1.56, Jan59Put $2.30
Assuming we are targetting $56 and $58.
Call Butterfly Spread 1:
Buy 1 Jan55Call, Sell 2 Jan56Call, Buy 1 Jan57Call = (2.27 + 0.9) - (1.50 x 2) = $3.17 - $3.00 =
$0.17
$0.21
Total Debit = $0.17 + $0.21 = $0.38
Establishing Put Double Butterfly Spread:
Put Double Butterfly Spreads consist of two Put Butterfly Spreads with middle strike price on two
different strike prices which are at least one strike price apart. We shall target the same strike prices
as the Call Double Butterfly Spread example above using only put options.
Put Double Butterfly Spread Example
Put Butterfly Spread 1:
Buy 1 Jan55Put, Sell 2 Jan56Put, Buy 1 Jan57Put = (0.4 + 1) - (0.63 x 2) = $1.40 - $1.26 = $0.14
Buy 1 Jan57Put, Sell 2 Jan58Put, Buy 1 Jan59Put = (1 + 2.3) - (1.56 x 2) = $3.3 - $3.12 = $0.18
Total Debit = $0.14 + $0.18 = $0.32
Establishing Mixed Double Butterfly Spread:
Mixed Double Butterfly Spreads consist of a Call Butterfly Spread and a Put Butterfly Spread with
middle strike price on two different strike prices which are at least one strike price apart. Mixed
Double Butterfly Spreads can be setup with the Call Butterfly Spread targetting the lower strike
price and the Put Butterfly Spread targetting the higher strike price and vice versa. We shall target
the same strike prices as the Call Double Butterfly Spread example above using both combinations
of Mixed Double Butterfly Spread.
Mixed Double Butterfly Spread Example
$0.17
Total Debit = $0.17 + $0.18 = $0.35
$0.21
Total Debit = $0.14 + $0.21 = $0.35
In this case, since the Put Double Butterfly Spread requires a lower net debit than the Call Double
Butterfly Spread and the Mixed Double Butterfly Spread, the Put Double Butterfly Spread should
be used instead.
Trading Level Required For Double Butterfly Spread:
Double Butterfly Spread. There are brokers who require level 4 or 5 accounts for Double Butterfly
Spreads as well.
Profit Potential of Double Butterfly Spread:
Double Butterfly Spreads achieve their maximum profit potential when the price of the underlying
asset closes at either one of the two targeted strike prices. The profitability of a Double Butterfly
Profit Calculation of Double Butterfly Spread:
Maximum Profit = $1 - Net Debit
Profit Calculation for Double Butterfly Spread
Following up on the above Put Double Butterfly Spread example:
Maximum Profit = $1.00 - $0.32 = $0.68
Maximum Loss = $0.32
Reward Risk Ratio = $0.68 / $0.32 = 2.13
Risk / Reward of Double Butterfly Spread:
Break Even Points of Double Butterfly Spread:
There are four breakeven points for a Double Butterfly Spread. Each set of two breakeven points
created by each butterfly spread defines a price range within which profit occurs for the Double
Butterfly Spread. Each set of breakeven points are to be calculated separately for each component
butterfly spread using the below formula:
1. Lower Breakeven Point : Total Net Debit + Lower Strike Price
2. Upper Breakeven Point : Higher Strike Price - Total Net Debit
Breakeven Calculation for Double Butterfly Spread
Following up on the above Put Double Butterfly Spread example:
Lower Breakeven : $0.32 + $55 = $55.32
Higher Breakeven : $57 - $0.32 = $56.68
Lower Breakeven : $0.32 + $57 = $57.32
Higher Breakeven : $59 - $0.32 = $58.68
Advantages Of Double Butterfly Spread:
Able to target two different specific strike prices.
Higher profit potential than Condor Spread when either price is hit.
Disadvantages Of Double Butterfly Spread:
Larger commissions involved due to large number of trades making up the position.
Alternate Actions for Double Butterfly Spreads Before Expiration:
When it is obvious that the underlying stock is going to go for one of the two strike prices,
you could close out the other butterfly spread and hold only the butterfly spread that targets
the correct strike price, reducing the position to a regular butterfly spread and increasing
profitability.

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