put ratio spread20 Video Lessons

Put Ratio Spread

A put ratio spread (backspread) is similar to a long put option as far as your outlook on the underlying stock but you use the sale and purchase of different ratios of options.

This strategy usually follows a 1x2 spread combination factor; one short put and two long puts with a lower strike. All options have the same expiration date. It's the combination of a bull put spread and a long put, where the strike of the long put is equal to the lower strike of the bull put spread.

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bear put spread20 Video Lessons

Bear Put Spread

The bear put debit spread is a risk defined option buying strategy that is designed to profit mainly from a one-way directional move in the underlying stock lower before expiration.

This strategy is a type of vertical spread. It consists of buying one put in hopes of profiting from a decline in the underlying stock, and writing another put with the same expiration, but with a lower strike price, as a way to offset some of the trade cost. Because of the way the strike prices are selected, this strategy requires a net debit to enter.

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call broken wing butterfly20 Video Lessons

Call Broken Wing Butterfly

A call broken wing butterfly (BWB) spread is an advanced strategy whereby you take a traditional butterfly spread above the market and skip one strike to create an unbalanced spread.

These strategies are typically done for a net credit with the goal of having no risk to the downside. Skipping a strike allows you do to this because you buy a further OTM call option at a cheaper price which reduces the overall cost of the strategy.

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call diagonal spread20 Video Lessons

Call Diagonal Spread

The call diagonal spread combines the directional nature of bear call spread with the volatility impact of a calendar spread and skews the payoff diagram more in the favor of a directional move lower.

Long call diagonal spreads profit from a lower move up in the underlying stock in a given range. This trade is best used when implied volatility is low and when there is implied volatility "skew" between the months used, specifically when the near-month sold has a higher implied volatility than the later-month bought.

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put calendar20 Video Lessons

Put Calendar Spread

The put calendar spread is a bearish strategy that profits from either move lower in the stock and/or the implied volatility and time decay price differential between two options contract months.

To enter into a long put calendar spread, an investor sells one near-term put option and buys a second put option with a more distant expiration. The strategy most commonly involves puts with the same strike price, but can also be done with different strikes (see diagonal spread).

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bear call spread20 Video Lessons

Bear Call Spread

The bear call credit spread is a risk defined option selling strategy that is designed to profit from both implied volatility's over-expectation and time decay while maintaining a slightly neutral to bearish outlook.

A bear call spread is a type of vertical spread. It contains two calls with the same expiration but different strikes. The strike price of the short call is below the strike of the long call, which means this strategy will always generate a net credit when entered.

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Covered Put20 Video Lessons

Covered Put

The covered put is another favorite option strategy for investors who often sell stock short. The options strategy has a slightly bearish to neutral outlook and increase their overall probability of success by adding the options strategy.

With this position the trader is looking to "cover" their short stock position with a short OTM put contract below the value of the stock. This will generate cash equal to the value of the option contract and in exchange creates a slightly higher break-even price on the short stock.

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short call20 Video Lessons

Short Call

A short call is a bearish, undefined risk option selling strategy where a trader simply sells a single naked call option above the current stock price anticipating both a drop in implied volatility or the stock to remain low.

An investor who writes or sells a short (naked or uncovered) call option without owning the underlying stock is expecting a flat to slightly bearish outlook. The further OTM a trader sells the short call option, the higher the probability of keeping the entire premium at expiration as a profit.

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covered call20 Video Lessons

Covered Call

The covered call is a popular options strategies for stock investors that can help enhance the equity performance of a traditional portfolio by selling short (covered) call options OTM above the current stock price.

An investor who buys or owns stock and writes call options in the equivalent amount (100 shares per 1 option contract) can earn additional income without taking on additional risk. The premium received reduces the costs basis ownership of the stock which increase the overall probability of success in the position.

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protective put20 Video Lessons

Protective Put

The protective put option strategy utilizes a long OTM put option in conjunction with a long equity stock position and is designed to act like an insurance contract against market meltdowns.

With this strategy, the choice of strike prices determines where the downside protection starts and how much further the stock price has to go up to help cover the cost of insurance. However, the closer the strike price is to the current stock price the more costly the value of the long put option becomes since the investor is hedge and protected from even the slightest moves lower in the stock.

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call ratio spread20 Video Lessons

Call Ratio Spread

A call ratio spread (backspread) is similar to a long call option as far as your outlook on the underlying stock but you use the sale and purchase of different ratios of options.

These strategies combines one short call and long two calls of the same expiration but with a higher strike price. By using this ratio the options trader could, when entered for a credit, eliminate or reduce the downside exposure. It essentially acts similar to a bear call spread and a long call, where the strike of the long call is equal to the upper strike of the bear call spread.

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bull call spread20 Video Lessons

Bull Call Spread

The bull call debit spread is a risk defined option buying strategy that is designed to profit mainly from a one-way directional move in the underlying stock higher before expiration.

These are generally low probability trades because that end up being 50-50 bets on the underlying direction. As a result we do not trade these types of strategies often in our portfolio and will occasionally use them for rebalancing purposes or to hedge other correlated positions were are currently trading.

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put broken wing butterfly20 Video Lessons

Put Broken Wing Butterfly

A put broken wing butterfly (BWB) spread is an advanced strategy whereby you take a traditional butterfly spread below the market and skip one strike to create an unbalanced spread.

These strategies are typically done for a net credit with the goal of having no risk to the upside. Skipping a strike allows you do to this because you buy a further OTM put option at a cheaper price which reduces the overall cost of the strategy.

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put diagonal spread20 Video Lessons

Put Diagonal Spread

The put diagonal spread combines the directional nature of bull put spread with the volatility impact of a calendar spread and skews the payoff diagram more in the favor of a directional move higher.

Long put diagonal spreads profit from a higher move up in the underlying stock in a given range. This trade is best used when implied volatility is low and when there is implied volatility "skew" between the months used, specifically when the near-month sold has a higher implied volatility than the later-month bought.

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call calendar20 Video Lessons

Call Calendar Spread

The call calendar spread is a bullish strategy that profits from either move higher in the stock and/or the implied volatility and time decay price differential between two options contract months.

Calendar spreads lose if the underlying moves too far in either direction. This trade is best used when implied volatility is low and when there is implied volatility "skew" between the months used, specifically when the near-month sold has a higher implied volatility than the later-month bought.

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bull put spread20 Video Lessons

Bull Put Spread

The bull put credit spread is a risk defined option selling strategy that is designed to profit from both implied volatility's over-expectation and time decay while maintaining a slightly neutral to bullish outlook.

These are high probability strategies where you are a net a seller of options below the stock price, and you are looking for those options to decay in value and become worthless at expiration. It's also one of the core building blocks to trading iron condors and other option selling systems.

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short put20 Video Lessons

Short Put

A short put is a bullish, undefined risk option selling strategy where a trader simply sells a single naked put option below the current stock price anticipating both a drop in implied volatility or the stock to remain high.

Single short puts are one of the key building blocks for income and premium selling strategies because you collect a credit for entering the trade and typically have a very high probability of success depending on how far out your strike price is. Thought perceived as risky by traditional investors, the short put is more of the most profitable option strategies for neutral to bullish market setups.

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short butterfly20 Video Lessons

Short Butterfly

The short butterfly is a neutral option buying strategy whereby the trader believes that the underlying stock will have a large move either up or down before expiration but also wants to reduce the cost of the position.

The strategy can be built with either call options or put options and can also be skewed if the trader as a directional bias. The key is that both the upper and lower strikes or wings must both be equidistant from the middle strike price, and all the options must have the same expiration date.

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reverse iron butterfly20 Video Lessons

Reverse Iron Butterfly

The reverse iron butterfly is a cheaper alternative to a long straddle and is risk defined option buying strategy that looks to profit from a large move in the underlying stock (up or down) anytime before expiration.

An alternative way to think about these low probability trading strategies is the combination of a long straddle with a short strangle outside of it. It could also be considered an ATM bull call spread and an ATM bear put spread. All the options must be of the same expiration.

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reverse iron condor20 Video Lessons

Reverse Iron Condor

The reverse iron condor is a cheaper alternative to a long strangle and is risk defined option buying strategy that looks to profit from a large move in the underlying stock (up or down) anytime before expiration.

An alternative way to think about these low probability trading strategies is the combination of a long strangle with a short strangle outside of it. It could also be considered as a bull call spread and a bear put spread. All the options must be of the same expiration.

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long butterfly20 Video Lessons

Long Butterfly

The long butterfly is a very neutral option buying strategy whereby the trader believes that the underlying stock will not rise or fall much by before expiration but remain flat. It can be built with either call or put option contracts.

Combining two short options at a middle strike, with long options a lower and upper strike outside of the ATM strike prices. The upper and lower strikes or wings must both be equidistant from the middle strike, and all the options must have the same expiration date.

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iron butterfly20 Video Lessons

Iron Butterfly

The iron butterfly is the risk-defined cousins of the short strangle and includes the selling of an ATM straddle (puts and calls) while purchasing far OTM options for protection.

The upper and lower strikes or wings must both be an equal distance from the middle strike price over the stock and all the options must be the same expiration. An alternative way to think about this strategy is the combination of an ATM bear call spread and an ATM bull put spread.

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iron butterfly20 Video Lessons

Iron Butterfly

The iron butterfly is the risk-defined cousins of the short strangle and includes the selling of an ATM straddle (puts and calls) while purchasing far OTM options for protection.

The upper and lower strikes or wings must both be an equal distance from the middle strike price over the stock and all the options must be the same expiration. An alternative way to think about this strategy is the combination of an ATM bear call spread and an ATM bull put spread.

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long straddle20 Video Lessons

Long Straddle

The long straddle is an aggressive option buying strategy that profits from a large move in the underlying stock either up or down before expiration and potentially rising implied volatility.

Unlike it's cousin, the long strangle, by trading the ATM long straddle an investor is looking to profit more from the implied volatility increase in the stock and is willing to invest more money down for a potentially greater payout. This strategy breaks even if, at expiration, the stock price is either above or below the strike price by the amount of premium paid for both contracts.

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iron condor20 Video Lessons

Iron Condor

The iron condor is a neutral, risk defined option selling strategies that include the combined selling of a bull put spread and bear call spread for an overall net credit and profit from rangebound markets.

To build a iron condor, a trader would sell one call option while buying another call with a higher strike. Then, sell one put option while buying another put with a lower strike. Typically, the short call and put strikes are an equal distance from the current stock price and the distance between wings of each spread is the same as well. All the options must be of the same expiration.

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short strangle20 Video Lessons

Short Strangle

The short strangle is a neutral, undefined risk options strategy that includes the sale of OTM calls and OTM puts far out from the current stock price and profits mainly from the implied volatility edge.

One of our most used and favorite trading strategies for monthly income here at Option Alpha, these short premium positions force the market to make significant and consistent moves outside the expected probability range. This strategy breaks even if, at expiration, the stock price is either above the call strike price or below the put strike price by the amount of total premium received initially.

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short straddle20 Video Lessons

Short Straddle

The short straddle is a neutral, undefined risk option selling strategy that includes the simultaneous sale of an ATM call and put at the same strike price in the same contract month.

As the more aggressive cousin to the short strangle, these short premium positions are best entered during periods of extremely high implied volatility so as to maximize the premium received from the sale of ATM options. This strategy breaks even if, at expiration, the stock price is either above or below the short strike price by the amount of total premium received initially.

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