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Option Strategies
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money at expiration – expire worthless.
Straddle
This strategy consists of purchasing the same number of Call and Put options at the same strike price with the same expiration date. The objective is to take advantage of any sudden movement in the stock price regardless of direction. The maximum risk is equal to the cost of opening this strategy, the maximum gain is unlimited.
Strangle
This strategy consists of purchasing the same number of Call and Put options at different strike prices with the same expiration date. The objective is to take advantage of any sudden movement in the stock price regardless of direction. The maximum risk is equal to the cost of opening this strategy, the maximum gain is unlimited.
Butterfly
This strategy is made up of three sets of either Puts or Calls having the same expiration date but different strikes. For example, with the underlying asset trading at 100, a long butterfly strategy can be built by buying Calls (or Puts) at 95 and 105, and selling twice as many Calls (or Puts) at 100. The objective is to execute a potentially high yielding trade at a low cost where maximum profits occur where the stock finishes at the middle strike price at expiration. This strategy is often used to take advantage of low volatility stocks.
Condors
A condor consists of four options with four different strikes. The options all have the same expiration, and the strike prices are equal distances apart. Condors can be composed of all calls, all puts, or a combination of calls and puts – the latter referred to as an “iron condor”. A condor is very similar to a Butterfly, but the two options located in the center do not have the same strikes. Having a Strangle at the two middle strike prices widens the area for profit, but also lowers the maximum profit potential. |
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