Learn options ebook

Setup: Own the stock and Sell short a call and Buy long a put Bias: Neutral to Slightly Bullish If the underlying sky rockets in price you will be forced to sell at the strike price mi

BACK TO BASICS

HISTORY OF OPTIONS

WHAT DOES AN OPTION LOOK LIKE?

COMMON OPTION DEFINITIONS

7 FACTORS THAT AFFECT AN OPTION'S PRICE

BULL CALL SPREAD

BEAR PUT SPREAD

BEAR CALL SPREAD

BULL PUT SPREAD

RATIO VERTICAL SPREAD WITH CALLS

RATIO VERTICAL SPREAD WITH PUTS

BACK SPREAD WITH CALLS

BACK SPREAD WITH PUTS

LONG CALENDAR SPREAD WITH CALLS

LONG CALENDAR SPREAD WITH PUTS

DIAGONAL SPREAD WITH CALLS

DIAGONAL SPREAD WITH PUTS

LONG BUTTERFLY SPREAD WITH CALLS

LONG BUTTERFLY SPREAD WITH PUTS

33 4 5 81212 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

IRON BUTTERFLY SKIP STRIKE BUTTERFLY WITH CALLS SKIP STRIKE BUTTERFLY WITH PUTS INVERSE SKIP STRIKE BUTTERFLY WITH CALLS INVERSE SKIP STRIKE BUTTERFLY WITH PUTS CHRISTMAS TREE BUTTERFLY WITH CALLS CHRISTMAS TREE BUTTERFLY WITH PUTS LONG CONDOR SPREAD WITH CALLS LONG CONDOR SPREAD WITH PUTS IRON CONDOR

ADVANCED TOPICS

THE GREEKS THE GREEK CHEAT SHEET USING OPTIONS TO PICK UP STOCK TOP 8 MISTAKES PEOPLE MAKE TRADING OPTIONS (SET) AND INDEX OPTION EXPIRATION

64 66 68 70 72 74 76 78 80 82

84

84 89 90 93 99

BACK TO BASICS

HISTORY OF OPTIONS

WHAT DOES AN OPTION LOOK LIKE?

COMMON OPTION DEFINITIONS

7 FACTORS THAT AFFECT AN OPTION'S PRICE

BULL CALL SPREAD

BEAR PUT SPREAD

BEAR CALL SPREAD

BULL PUT SPREAD

RATIO VERTICAL SPREAD WITH CALLS

RATIO VERTICAL SPREAD WITH PUTS

BACK SPREAD WITH CALLS

BACK SPREAD WITH PUTS

LONG CALENDAR SPREAD WITH CALLS

LONG CALENDAR SPREAD WITH PUTS

DIAGONAL SPREAD WITH CALLS

DIAGONAL SPREAD WITH PUTS

LONG BUTTERFLY SPREAD WITH CALLS

LONG BUTTERFLY SPREAD WITH PUTS

33 4 5 81212 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62

IRON BUTTERFLY SKIP STRIKE BUTTERFLY WITH CALLS SKIP STRIKE BUTTERFLY WITH PUTS INVERSE SKIP STRIKE BUTTERFLY WITH CALLS INVERSE SKIP STRIKE BUTTERFLY WITH PUTS CHRISTMAS TREE BUTTERFLY WITH CALLS CHRISTMAS TREE BUTTERFLY WITH PUTS LONG CONDOR SPREAD WITH CALLS LONG CONDOR SPREAD WITH PUTS IRON CONDOR

ADVANCED TOPICS

THE GREEKS THE GREEK CHEAT SHEET USING OPTIONS TO PICK UP STOCK TOP 8 MISTAKES PEOPLE MAKE TRADING OPTIONS (SET) AND INDEX OPTION EXPIRATION

64 66 68 70 72 74 76 78 80 82

84

84 89 90 93 99

History of Op ons

The US op ons exchange started with the founding of the CBOE (Chicago Board Op ons

Exchange) in 1973 At the beginning there were a total of 16 equi es that had only call

op ons In 1977 they began to trade put op ons There are now over 5 different exchanges

ac vely trading op ons

In 1975 the SEC (Securi es and Exchange Commission) approved the OCC (Op ons Clearing

Corpora on) with the sole purpose of clearing all US based op ons A clearing firm’s job is to

facilitate execu on by transferring funds, assigning deliveries, and guaranteeing the contracts

Op ons were a hit when they first appeared In 1975 18 million contracts traded By 1978 that

number had more than tripled to 60 million contracts The increase in contracts con nued to

climb un l the 1987 stock market crash A er the stock market crash investors were s ll

uneasy In 1991 only 2/3 of the peak level contracts were traded In 1983 we saw the first

op ons traded on an index, the S&P 500 This was a big development since it was from this

that led to the forma on of the VIX The VIX is the vola lity index, fear index, based on the

prices of S&P 500 op ons

Enthusiasm for the op ons market didn’t return un l the 1990s During these mes we saw

the introduc on of LEAPS (Long-term An cipa on Securi es) which allowed investors to buy

op ons that expired over a year We also saw the forma on of the OIC (Op ons Industry

Council) which is a non-profit organiza on developed to educate people on the risk and

benefits of op ons

What Does An Op on Look Like?

An op on gives the buyer the right to buy or sell the underlying at a specified price and

me At the same me, the seller has the obliga on to take the opposite side and fulfill the

op on upon exercise That means that the buyer can choose if they want to exercise the

op on, but the seller has to live up to the contract if the buyer does exercise

170 is our strike price The strike price sets the price of the underlying if it were exercised This

is not the price you would pay to buy the op on

Call specifies if this is a call or put A call is the right to buy or call the stock away from someone else Too long a call you are making a bet the underlying will appreciate in price

A put is the right to sell or put the stock to someone else Too long a put you are predic ng deprecia on in price

A put and call can be traded long and short or also in combina on with other puts/calls to create spreads (more informa on on combina ons to follow)

History of Op ons

The US op ons exchange started with the founding of the CBOE (Chicago Board Op ons

Exchange) in 1973 At the beginning there were a total of 16 equi es that had only call

op ons In 1977 they began to trade put op ons There are now over 5 different exchanges

ac vely trading op ons

In 1975 the SEC (Securi es and Exchange Commission) approved the OCC (Op ons Clearing

Corpora on) with the sole purpose of clearing all US based op ons A clearing firm’s job is to

facilitate execu on by transferring funds, assigning deliveries, and guaranteeing the contracts

Op ons were a hit when they first appeared In 1975 18 million contracts traded By 1978 that

number had more than tripled to 60 million contracts The increase in contracts con nued to

climb un l the 1987 stock market crash A er the stock market crash investors were s ll

uneasy In 1991 only 2/3 of the peak level contracts were traded In 1983 we saw the first

op ons traded on an index, the S&P 500 This was a big development since it was from this

that led to the forma on of the VIX The VIX is the vola lity index, fear index, based on the

prices of S&P 500 op ons

Enthusiasm for the op ons market didn’t return un l the 1990s During these mes we saw

the introduc on of LEAPS (Long-term An cipa on Securi es) which allowed investors to buy

op ons that expired over a year We also saw the forma on of the OIC (Op ons Industry

Council) which is a non-profit organiza on developed to educate people on the risk and

benefits of op ons

What Does An Op on Look Like?

An op on gives the buyer the right to buy or sell the underlying at a specified price and

me At the same me, the seller has the obliga on to take the opposite side and fulfill the

op on upon exercise That means that the buyer can choose if they want to exercise the

op on, but the seller has to live up to the contract if the buyer does exercise

170 is our strike price The strike price sets the price of the underlying if it were exercised This

is not the price you would pay to buy the op on

Call specifies if this is a call or put A call is the right to buy or call the stock away from someone else Too long a call you are making a bet the underlying will appreciate in price

A put is the right to sell or put the stock to someone else Too long a put you are predic ng deprecia on in price

A put and call can be traded long and short or also in combina on with other puts/calls to create spreads (more informa on on combina ons to follow)

Common Op on Defini ons

In-the-Money (ITM): For a call op on this means that the underlying is trading above the strike

price For example ABC is trading at 30 and the call op on has a strike price of 25 This call

op on is ITM For a put op on this means the underlying is trading below the strike price For

example ABC is trading at 45 and the put op on has a strike of 50 This put op on is ITM

At-the-Money (ATM): This indicates the underlying price is around the strike price For

example ABC is trading at 50 and the op on strike is 50 This goes for both puts and calls If

you cannot tell which strike is closer than look for the strike with a delta closer to 50

Out-of-the-Money (OTM): For a call op on this means the underlying is trading below the

strike price For example ABC is trading at 15 with the call op on strike at 20 This call op on is

OTM For a put op on this means the underlying is trading above the strike price For example

ABC is trading at 75 and the put op on has a strike of 70 This put op on is OTM

Intrinsic Value: The amount the op on is in-the-money Only In-the-Money (ITM) op ons carry

intrinsic value

Time Value: Sets the value of me ll expira on An op on that is Out-of-the-Money (OTM)

only has me value If an op on is In-the-Money (ITM) it is made up of both Intrinsic Value and

Time Value

Exercise: To exercise an op on contract means you are fulfilling the contract and closing it

out If you exercise a call op on you are buying the shares at the strike price If you exercise a

put you are selling the shares at the strike price

Assignment: An op on assignment is the other side of the op on being exercised In this case

you are not the buyer of the op on instead you are the seller or writer of the op on When a buyer exercises an op on the writer gets assigned If you are a writer of a call op on that gets exercised then you have to give the buyer your shares If you are a writer of a put op on then you will receive the shares when assigned

Op on Chain: An op on chain displays all the necessary informa on for the underlying

asset The op ons are listed by the expira on month and then broken down by all the strikes available Usually Calls are listed on the le side and Puts listed on the right side Op on Chains can provide a wide variety of informa on from something basic such as the bid/ask to more specific informa on such as the op on Greeks

Common Op on Defini ons

In-the-Money (ITM): For a call op on this means that the underlying is trading above the strike

price For example ABC is trading at 30 and the call op on has a strike price of 25 This call

op on is ITM For a put op on this means the underlying is trading below the strike price For

example ABC is trading at 45 and the put op on has a strike of 50 This put op on is ITM

At-the-Money (ATM): This indicates the underlying price is around the strike price For

example ABC is trading at 50 and the op on strike is 50 This goes for both puts and calls If

you cannot tell which strike is closer than look for the strike with a delta closer to 50

Out-of-the-Money (OTM): For a call op on this means the underlying is trading below the

strike price For example ABC is trading at 15 with the call op on strike at 20 This call op on is

OTM For a put op on this means the underlying is trading above the strike price For example

ABC is trading at 75 and the put op on has a strike of 70 This put op on is OTM

Intrinsic Value: The amount the op on is in-the-money Only In-the-Money (ITM) op ons carry

intrinsic value

Time Value: Sets the value of me ll expira on An op on that is Out-of-the-Money (OTM)

only has me value If an op on is In-the-Money (ITM) it is made up of both Intrinsic Value and

Time Value

Exercise: To exercise an op on contract means you are fulfilling the contract and closing it

out If you exercise a call op on you are buying the shares at the strike price If you exercise a

put you are selling the shares at the strike price

Assignment: An op on assignment is the other side of the op on being exercised In this case

you are not the buyer of the op on instead you are the seller or writer of the op on When a buyer exercises an op on the writer gets assigned If you are a writer of a call op on that gets exercised then you have to give the buyer your shares If you are a writer of a put op on then you will receive the shares when assigned

Op on Chain: An op on chain displays all the necessary informa on for the underlying

asset The op ons are listed by the expira on month and then broken down by all the strikes available Usually Calls are listed on the le side and Puts listed on the right side Op on Chains can provide a wide variety of informa on from something basic such as the bid/ask to more specific informa on such as the op on Greeks

7 Factors That Affect An Op on's Price

1 Stock Price

If a call op on allows you to buy a stock at a certain price in the future than the higher that price goes the more the op on will be worth

Which op on would have a higher value:

A call op on allows you to buy The Op on Prophet (sym: TOP) for $100 while it is trading at $80 OR

A call op on allows you to buy TOP for $100 while it is trading at $120

Obviously no one is going to pay $100 for something they can buy on the open market for $80, so our op on in Choice 1 will have a low value

What is more appealing is Choice 2, an op on to buy TOP for $100 when its value is $120 In this situa on our op on value will be higher

2 Strike Price

Strike price follows along the same lines as stock price When we classify strikes we do it as money, at-the-money or out-of-the-money When a call op on is in-the-money it means the stock price is greater than the strike price When a call is out-of-the-money the stock price is less than the strike price

in-the-A TOP call has a strike of 50 while TOP is currently trading at $60, this op on is in-the-money

On the flip side of that coin a put op on is in-the-money when the stock price is less than the strike price A put op on is out-of-the-money when the stock price is greater than the strike price

A TOP put has a strike of 20 while TOP is currently trading at $40, this op on is out-of-the-money

Op ons that are in-the-money have a higher value compared to op ons that are out-of-the-money.Example of an op on chain:

7 Factors That Affect An Op on's Price

1 Stock Price

If a call op on allows you to buy a stock at a certain price in the future than the higher that price goes the more the op on will be worth

Which op on would have a higher value:

A call op on allows you to buy The Op on Prophet (sym: TOP) for $100 while it is trading at $80 OR

A call op on allows you to buy TOP for $100 while it is trading at $120

Obviously no one is going to pay $100 for something they can buy on the open market for $80, so our op on in Choice 1 will have a low value

What is more appealing is Choice 2, an op on to buy TOP for $100 when its value is $120 In this situa on our op on value will be higher

2 Strike Price

Strike price follows along the same lines as stock price When we classify strikes we do it as money, at-the-money or out-of-the-money When a call op on is in-the-money it means the stock price is greater than the strike price When a call is out-of-the-money the stock price is less than the strike price

in-the-A TOP call has a strike of 50 while TOP is currently trading at $60, this op on is in-the-money

On the flip side of that coin a put op on is in-the-money when the stock price is less than the strike price A put op on is out-of-the-money when the stock price is greater than the strike price

A TOP put has a strike of 20 while TOP is currently trading at $40, this op on is out-of-the-money

Op ons that are in-the-money have a higher value compared to op ons that are out-of-the-money.Example of an op on chain:

The higher the interest rate the more a rac ve the second op on becomes Thus, when interest rates go up calls are a be er investment so their price also increases.

On the flip side of that coin if we look at a long put versus a long call we can see a disadvantage We have two op ons when we want to play an underlying to the downside

You can short 100 shares of the stock which would generate cash into the brokerage and allow us to earn interest on that cash

You long a put which will cost you less money overall but not put extra cash into your brokerage that generates interest income

The higher the interest rate the more a rac ve the first op on becomes Thus, when interest rates rise the value of put op ons drops

6 Dividends

Op ons do not receive dividends so their value fluctuates when dividends are released When a company releases dividends they have an ex-dividend date If you own the stock on that date you will be awarded the dividend Also on this date the value of the stock will decrease by the amount of dividend As dividends increase a put op on's value also increases and a calls' value decreases

3 Type Of Op on

This is probably the easiest factor to understand An op on is either a put or a call and the value of

the op on will change accordingly

A call op on gives the holder the right to buy the underlying at a specified price within a specific

me period

A put op on gives the holder the right to sell the underlying at a specified price within a specific

me period

If you are long a call or short a put your op on value increases as the market moves higher If you

are long a put or short a call your op on value increases as the market moves lower

4 Time To Expira on

Op ons have a limited life span thus their value is affected by the passing of me As the me to

expira on increases the value of the op on increases As the me to expira on gets closer the

value of the op on begins to decrease The value begins to rapidly decrease within the last thirty

days of an op on's life The more me an op on has ll expira on, the more me the op on has to

move around

5 Interest Rates

Interest rates have a very small effect on an op on's value When interest rates rise a call op on's

value will also rise and a put op on's value will fall

To drive this concept home let's look at the decision making process of trying to invest in TOP while

it is trading at $50

We can buy 100 shares of the stock outright which would cost us $5,000

Instead of buying the stock outright we can long an at the money call for $5.00 Our total cost here

would be $500 Our ini al outlay of cash would be smaller and this would leave us $4,500 le over

Plus, we will have the same reward poten al for half the risk Now we can take that le over cash

and invest it elsewhere such as Treasury Bills This would generate a guaranteed return on top of

our investment in TOP

The higher the interest rate the more a rac ve the second op on becomes Thus, when interest rates go up calls are a be er investment so their price also increases.

On the flip side of that coin if we look at a long put versus a long call we can see a disadvantage We have two op ons when we want to play an underlying to the downside

You can short 100 shares of the stock which would generate cash into the brokerage and allow us to earn interest on that cash

You long a put which will cost you less money overall but not put extra cash into your brokerage that generates interest income

The higher the interest rate the more a rac ve the first op on becomes Thus, when interest rates rise the value of put op ons drops

6 Dividends

Op ons do not receive dividends so their value fluctuates when dividends are released When a company releases dividends they have an ex-dividend date If you own the stock on that date you will be awarded the dividend Also on this date the value of the stock will decrease by the amount of dividend As dividends increase a put op on's value also increases and a calls' value decreases

3 Type Of Op on

This is probably the easiest factor to understand An op on is either a put or a call and the value of

the op on will change accordingly

A call op on gives the holder the right to buy the underlying at a specified price within a specific

me period

A put op on gives the holder the right to sell the underlying at a specified price within a specific

me period

If you are long a call or short a put your op on value increases as the market moves higher If you

are long a put or short a call your op on value increases as the market moves lower

4 Time To Expira on

Op ons have a limited life span thus their value is affected by the passing of me As the me to

expira on increases the value of the op on increases As the me to expira on gets closer the

value of the op on begins to decrease The value begins to rapidly decrease within the last thirty

days of an op on's life The more me an op on has ll expira on, the more me the op on has to

move around

5 Interest Rates

Interest rates have a very small effect on an op on's value When interest rates rise a call op on's

value will also rise and a put op on's value will fall

To drive this concept home let's look at the decision making process of trying to invest in TOP while

it is trading at $50

We can buy 100 shares of the stock outright which would cost us $5,000

Instead of buying the stock outright we can long an at the money call for $5.00 Our total cost here

would be $500 Our ini al outlay of cash would be smaller and this would leave us $4,500 le over

Plus, we will have the same reward poten al for half the risk Now we can take that le over cash

and invest it elsewhere such as Treasury Bills This would generate a guaranteed return on top of

our investment in TOP

Name: Long Call

Descrip on: The long call gives the buyer the right to buy the underlying at the strike

price The long call is used to simulate buying the underlying since you try to profit from the underlying going up in price Unlike buying the underlying outright the long call gives you a cap for losses since you can only lose the price of the call Be careful though, it is easy to

overleverage yourself using calls

Setup: Buy (long) a call Bias: Bullish

Break-Even: Strike A + Price paid for call Max Profit: Unlimited: Looking for the underlying to go as high as the sky

The higher the implied vola lity the more people think the stock's price will move Stocks listed on the

Dow Jones are value stocks so a lot of movement is not expected, thus, they have a lower implied

vola lity

Growth stocks or small caps found on the Russell 2000, conversely, are expected to move around a lot so

they carry a higher implied vola lity

Name: Long Call

Descrip on: The long call gives the buyer the right to buy the underlying at the strike

price The long call is used to simulate buying the underlying since you try to profit from the underlying going up in price Unlike buying the underlying outright the long call gives you a cap for losses since you can only lose the price of the call Be careful though, it is easy to

overleverage yourself using calls

Setup: Buy (long) a call Bias: Bullish

Break-Even: Strike A + Price paid for call Max Profit: Unlimited: Looking for the underlying to go as high as the sky

The higher the implied vola lity the more people think the stock's price will move Stocks listed on the

Dow Jones are value stocks so a lot of movement is not expected, thus, they have a lower implied

vola lity

Growth stocks or small caps found on the Russell 2000, conversely, are expected to move around a lot so

they carry a higher implied vola lity

Name: Long Put

Descrip on: The long put gives the buyer the right to sell the underlying at the strike price This is the

equivalent to selling a stock short The buyer of the long put will profit if the underlying drops in price Unlike selling stock short, which can have unlimited losses, a long put has a cap on the losses since you can only lose the price of the put

Setup: Buy (long) a put

Bias: Bearish Break-Even: Strike A - Price paid for put

Max Profit: Limited: Underlying cannot fall below $0.00

Max Loss: Limited: Price paid for the put

Margin: No margin needed since put is bought outright

Max Loss: Limited: Price paid for the call

Margin: No margin needed since call is bought outright

Time Decay: As me passes the call will drop in value To offset rapid me decay typically call op ons are

purchased 60-150 days from expira on

Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the

price of your op on A decrease in implied vola lity will lower the price of your op on

Notes: Purchasing calls deep out-of-the-money because they are cheap will typically result in losses.

Name: Long Put

Descrip on: The long put gives the buyer the right to sell the underlying at the strike price This is the

equivalent to selling a stock short The buyer of the long put will profit if the underlying drops in price Unlike selling stock short, which can have unlimited losses, a long put has a cap on the losses since you can only lose the price of the put

Setup: Buy (long) a put

Bias: Bearish Break-Even: Strike A - Price paid for put

Max Profit: Limited: Underlying cannot fall below $0.00

Max Loss: Limited: Price paid for the put

Margin: No margin needed since put is bought outright

Max Loss: Limited: Price paid for the call

Margin: No margin needed since call is bought outright

Time Decay: As me passes the call will drop in value To offset rapid me decay typically call op ons are

purchased 60-150 days from expira on

Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the

price of your op on A decrease in implied vola lity will lower the price of your op on

Notes: Purchasing calls deep out-of-the-money because they are cheap will typically result in losses.

Name: Short Call

Descrip on: The short call obligates you to sell the stock at the strike price If the underlying finishes

below the strike price your call will expire worthless allowing you to keep the credit This play carries unlimited risk so cau on is advised when pu ng this play on

Setup: Sell (short) a call

Bias: Neutral to Bearish

Break-Even: Strike A + Credit received for the sale of the call

Max Profit: Limited: To credit received

Max Loss: Unlimited: If the underlying rises above your strike price - loses will occur as long as the

underlying con nues to rise

Time Decay: As me passes the put will drop in value To offset rapid me decay typically put op ons are

purchased 60-150 days from expira on

Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the

price of your op on A decrease in implied vola lity will lower the price of your op on

Notes: Purchasing puts deep out-of-the-money because they are cheap will typically result in losses The

purchase of puts is also used as protec on against long stock If you are currently long stock and want to

protect or lock in gains from future decline you can purchase a put that will cover any downward

movement below the strike price

Name: Short Call

Descrip on: The short call obligates you to sell the stock at the strike price If the underlying finishes

below the strike price your call will expire worthless allowing you to keep the credit This play carries unlimited risk so cau on is advised when pu ng this play on

Setup: Sell (short) a call

Bias: Neutral to Bearish

Break-Even: Strike A + Credit received for the sale of the call

Max Profit: Limited: To credit received

Max Loss: Unlimited: If the underlying rises above your strike price - loses will occur as long as the

underlying con nues to rise

Time Decay: As me passes the put will drop in value To offset rapid me decay typically put op ons are

purchased 60-150 days from expira on

Implied Vola lity: Over the life of the op on you want implied vola lity to increase, thus increasing the

price of your op on A decrease in implied vola lity will lower the price of your op on

Notes: Purchasing puts deep out-of-the-money because they are cheap will typically result in losses The

purchase of puts is also used as protec on against long stock If you are currently long stock and want to

protect or lock in gains from future decline you can purchase a put that will cover any downward

movement below the strike price

Name: Short Put

Descrip on: The short put obligates you to buy the underlying at the strike price If the underlying

finishes above the strike price your put will expire worthless allowing you to keep the credit This play carries high risk so cau on is advised when pu ng this play on

Setup: Sell (short) a put

Bias: Neutral to Bullish

Break-Even: Strike A - Credit received for the sale of the put

Max Profit: Limited: To Credit received

Max Loss: Limited: If the underlying falls below your strike price losses will occur - but are limited due to

the fact the underlying cannot fall below $0.00

Margin: Short call requires no cash outlay so margin is used Margin is calculated by taking the greater

of:

25% of the underlying security value minus the out-of-the-money amount plus the premium

received or

10% of the underlying security value plus the premium received

Time Decay: As me passes the call will drop in value which is what you want You want your short call to

lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the

price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Short calls can profit no ma er which direc on the underlying moves Losses will only occur

above break-even Selling deep out-of-the-money calls can return high probability plays

Name: Short Put

Descrip on: The short put obligates you to buy the underlying at the strike price If the underlying

finishes above the strike price your put will expire worthless allowing you to keep the credit This play carries high risk so cau on is advised when pu ng this play on

Setup: Sell (short) a put

Bias: Neutral to Bullish

Break-Even: Strike A - Credit received for the sale of the put

Max Profit: Limited: To Credit received

Max Loss: Limited: If the underlying falls below your strike price losses will occur - but are limited due to

the fact the underlying cannot fall below $0.00

Margin: Short call requires no cash outlay so margin is used Margin is calculated by taking the greater

of:

25% of the underlying security value minus the out-of-the-money amount plus the premium

received or

10% of the underlying security value plus the premium received

Time Decay: As me passes the call will drop in value which is what you want You want your short call to

lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the

price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Short calls can profit no ma er which direc on the underlying moves Losses will only occur

above break-even Selling deep out-of-the-money calls can return high probability plays

Name: Covered Call

Descrip on: A covered calls means you are buying or already own shares of the underlying and you are

going to sell a call on it People will do this because this posi on is rela vely safe If the underlying increases in price you will sell the shares and keep the premium If the underlying drops then you will keep the premium

Setup: Sell (short) a call and Own or Buy (long) equal amount of shares

Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the

strike price missing out on the extra gains)

Break-Even: Underlying Price - Credit received for the sale of the call

Max Profit: Limited: To credit received; if the underlying price goes above strike price then profit

increases to premium received + sale of the underlying

Margin: Short put requires no cash outlay so margin is used Margin is calculated by taking the greater

of:

25% of the underlying security value minus the out-of-the-money amount plus the premium

received or

10% of the underlying security value plus the premium received

Time Decay: As me passes the put will drop in value which is what you want You want your short put

to lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing

the price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Short puts can profit no ma er which direc on the underlying moves Losses will only occur

below break-even Selling deep out-of-the-money puts can return high probability plays Short puts can

also be turned into cash-secured puts This is setup by holding enough cash to buy the shares if the

underlying falls below the strike price This is a good way to pick up shares at a reduced price For

example if the underlying is currently trading at $65 and you are willing to purchase the stock at $60

then you could sell the put on the 60 strike If the underlying falls below 60 you will be assigned the

shares and now have a long stock posi on This is more typical for picking up long-term holdings

Name: Covered Call

Descrip on: A covered calls means you are buying or already own shares of the underlying and you are

going to sell a call on it People will do this because this posi on is rela vely safe If the underlying increases in price you will sell the shares and keep the premium If the underlying drops then you will keep the premium

Setup: Sell (short) a call and Own or Buy (long) equal amount of shares

Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the

strike price missing out on the extra gains)

Break-Even: Underlying Price - Credit received for the sale of the call

Max Profit: Limited: To credit received; if the underlying price goes above strike price then profit

increases to premium received + sale of the underlying

Margin: Short put requires no cash outlay so margin is used Margin is calculated by taking the greater

of:

25% of the underlying security value minus the out-of-the-money amount plus the premium

received or

10% of the underlying security value plus the premium received

Time Decay: As me passes the put will drop in value which is what you want You want your short put

to lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing

the price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Short puts can profit no ma er which direc on the underlying moves Losses will only occur

below break-even Selling deep out-of-the-money puts can return high probability plays Short puts can

also be turned into cash-secured puts This is setup by holding enough cash to buy the shares if the

underlying falls below the strike price This is a good way to pick up shares at a reduced price For

example if the underlying is currently trading at $65 and you are willing to purchase the stock at $60

then you could sell the put on the 60 strike If the underlying falls below 60 you will be assigned the

shares and now have a long stock posi on This is more typical for picking up long-term holdings

Name: Collar

Descrip on: This strategy creates security around your underlying posi on When you long the put you

use the short call to pay for it With this play you have protected your downside movement and capped your upside poten al

Setup: Own the stock and Sell (short) a call and Buy (long) a put

Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the

strike price missing out on the extra gains)

Break-Even: Two breakeven points could exist:

If the play is established for a net credit (cash inflow) the break-even is the current underlying price - the credit received

If the play is established for a net debit (cash ou low) the break-even is the current underlying price + the debit paid

Max Loss: Downside risk happens only if the stock price falls to low

Margin: The short call is covered by the purchase or ownership of the stock - no margin needed

Time Decay: As me passes the call will drop in value which is what you want You want your short call

to lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the

price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Covered Calls are typically referred to as beginner plays because the op on cannot take a loss so

the posi on is rela vely safe Selling calls on shares already owned is a good way to increase/boost profit

on long-term posi ons Only establish covered calls if you are comfortable with ge ng assigned, if you

are okay with losing the shares because they are called away Pu ng on a covered call when you are not

willing to give up the shares will only bring headaches and future losses

Name: Collar

Descrip on: This strategy creates security around your underlying posi on When you long the put you

use the short call to pay for it With this play you have protected your downside movement and capped your upside poten al

Setup: Own the stock and Sell (short) a call and Buy (long) a put

Bias: Neutral to Slightly Bullish (If the underlying sky rockets in price you will be forced to sell at the

strike price missing out on the extra gains)

Break-Even: Two breakeven points could exist:

If the play is established for a net credit (cash inflow) the break-even is the current underlying price - the credit received

If the play is established for a net debit (cash ou low) the break-even is the current underlying price + the debit paid

Max Loss: Downside risk happens only if the stock price falls to low

Margin: The short call is covered by the purchase or ownership of the stock - no margin needed

Time Decay: As me passes the call will drop in value which is what you want You want your short call

to lose value so it expires worthless or allows you to buy it back (close it) for a lower price

Implied Vola lity: Over the life of the op on you want implied vola lity to decrease, thus decreasing the

price of your op on An increase in implied vola lity will increase the price of your op on

Notes: Covered Calls are typically referred to as beginner plays because the op on cannot take a loss so

the posi on is rela vely safe Selling calls on shares already owned is a good way to increase/boost profit

on long-term posi ons Only establish covered calls if you are comfortable with ge ng assigned, if you

are okay with losing the shares because they are called away Pu ng on a covered call when you are not

willing to give up the shares will only bring headaches and future losses

Name: Bull Call Spread or Ver cal Spread

Descrip on: The bull call spread has the same intent as the long call However, instead of just buying the

long call you also short a call This short call reduces your cost, reduces your risk, but also reduces your profit poten al

Setup: Buy (long) Strike A call and Sell (short) Strike B call - same expira on month for both

Bias: Bullish with a target at the short strike

Break-Even: Strike A + debit paid

Max Profit: Limited: Strike A - Strike B - Debit Paid

Max Loss: Limited: Equal to the debit paid Margin: No margin required

Max Profit: Limited: The strike of the short call - the current underlying price + the credit or - the debit

paid

Max Loss: Losses will equal the current underlying price - the strike of the long put + the debit paid or -

the credit received

Margin: The short call is covered by the purchase or ownership of the stock - no margin needed

Time Decay: As me passes the call will drop in value and the put will also drop in value This is a

neutral effect

Implied Vola lity: Movement in implied vola lity will also be neutral.

Name: Bull Call Spread or Ver cal Spread

Descrip on: The bull call spread has the same intent as the long call However, instead of just buying the

long call you also short a call This short call reduces your cost, reduces your risk, but also reduces your profit poten al

Setup: Buy (long) Strike A call and Sell (short) Strike B call - same expira on month for both

Bias: Bullish with a target at the short strike

Break-Even: Strike A + debit paid

Max Profit: Limited: Strike A - Strike B - Debit Paid

Max Loss: Limited: Equal to the debit paid Margin: No margin required

Max Profit: Limited: The strike of the short call - the current underlying price + the credit or - the debit

paid

Max Loss: Losses will equal the current underlying price - the strike of the long put + the debit paid or -

the credit received

Margin: The short call is covered by the purchase or ownership of the stock - no margin needed

Time Decay: As me passes the call will drop in value and the put will also drop in value This is a

neutral effect

Implied Vola lity: Movement in implied vola lity will also be neutral.

Name: Bear Put Spread or Ver cal Spread

Descrip on: The bear put spread has the same intent as the long put However, instead of just buying

the long put you also short a put This short put reduces your cost, reduces your risk, but also reduces your profit poten al

Setup: Buy (long) Strike A put and Sell (short) Strike B put - same expira on month for both

Bias: Bearish with a target at the short strike

Break-Even: Strike B - debit paid

Max Profit: Limited: Strike A - Strike B - Debit Paid

Max Loss: Limited: Debit paid

Time Decay: A neutral effect - the passing of me hurts the long call and the passing of me helps the

short call

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short call then you want implied vola lity to decrease If the

underlying is near the long call then you want the implied vola lity to increase

Name: Bear Put Spread or Ver cal Spread

Descrip on: The bear put spread has the same intent as the long put However, instead of just buying

the long put you also short a put This short put reduces your cost, reduces your risk, but also reduces your profit poten al

Setup: Buy (long) Strike A put and Sell (short) Strike B put - same expira on month for both

Bias: Bearish with a target at the short strike

Break-Even: Strike B - debit paid

Max Profit: Limited: Strike A - Strike B - Debit Paid

Max Loss: Limited: Debit paid

Time Decay: A neutral effect - the passing of me hurts the long call and the passing of me helps the

short call

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short call then you want implied vola lity to decrease If the

underlying is near the long call then you want the implied vola lity to increase

Name: Bear Call Spread or Ver cal Spread

Descrip on: The bear call spread has the same intent as the short call However, instead of just shor ng

the call you also long a call The long call reduces your risk, but also reduces your credit received

Setup: Sell (short) Strike A call and Buy (long) Strike B call - same expira on month for both

Bias: Neutral to bearish Break-Even: Strike A + credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Strike A - Strike B - Credit received

Margin: Margin is equal to the Max Loss: Strike A - Strike B - Credit received

Margin: No margin required

Time Decay: A neutral effect - the passing of me hurts the long put and the passing of me helps the

short put

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short put then you want implied vola lity to decrease If

the underlying is near the long put then you want the implied vola lity to increase

Name: Bear Call Spread or Ver cal Spread

Descrip on: The bear call spread has the same intent as the short call However, instead of just shor ng

the call you also long a call The long call reduces your risk, but also reduces your credit received

Setup: Sell (short) Strike A call and Buy (long) Strike B call - same expira on month for both

Bias: Neutral to bearish Break-Even: Strike A + credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Strike A - Strike B - Credit received

Margin: Margin is equal to the Max Loss: Strike A - Strike B - Credit received

Margin: No margin required

Time Decay: A neutral effect - the passing of me hurts the long put and the passing of me helps the

short put

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short put then you want implied vola lity to decrease If

the underlying is near the long put then you want the implied vola lity to increase

Name: Bull Put Spread or Ver cal Spread

Descrip on: The bull put spread has the same intent as the short put However, instead of just shor ng

the put you also long a put The long put reduces your risk, but also reduces your credit received

Setup: Buy (long) Strike A put and Sell (short) Strike B put

Bias: Neutral to Bullish

Break-Even: Strike B - credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Strike A - Strike B - Credit received

Margin: Margin equal the Max Loss: Strike A - Strike B - Credit received

Time Decay: Time decay is a posi ve effect as you want both sides of the spread to expire worthless

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short call then you want implied vola lity to decrease If the

underlying is near the long call then you want the implied vola lity to increase

Name: Bull Put Spread or Ver cal Spread

Descrip on: The bull put spread has the same intent as the short put However, instead of just shor ng

the put you also long a put The long put reduces your risk, but also reduces your credit received

Setup: Buy (long) Strike A put and Sell (short) Strike B put

Bias: Neutral to Bullish

Break-Even: Strike B - credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Strike A - Strike B - Credit received

Margin: Margin equal the Max Loss: Strike A - Strike B - Credit received

Time Decay: Time decay is a posi ve effect as you want both sides of the spread to expire worthless

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short call then you want implied vola lity to decrease If the

underlying is near the long call then you want the implied vola lity to increase

Name: Long Straddle

Descrip on: The long straddle gives you the opportunity to profit if the stock goes up or goes down

While this may seem like an ideal play the underlying has to move enough to cover the cost of both

op ons

Setup: Buy (long) Strike A put and Buy (long) Strike A call

Bias: Bullish and Bearish - expec ng a big move but unsure of direc on

Break-Even: Two break-even points:

Strike A + Debit paid Strike A - Debit paid

Max Profit: Unlimited

Time Decay: Time decay is a posi ve effect You are looking for both sides of your spread to expire

worthless

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short put then you want implied vola lity to decrease If the

underlying is near the long put then you want the implied vola lity to increase

Name: Long Straddle

Descrip on: The long straddle gives you the opportunity to profit if the stock goes up or goes down

While this may seem like an ideal play the underlying has to move enough to cover the cost of both

op ons

Setup: Buy (long) Strike A put and Buy (long) Strike A call

Bias: Bullish and Bearish - expec ng a big move but unsure of direc on

Break-Even: Two break-even points:

Strike A + Debit paid Strike A - Debit paid

Max Profit: Unlimited

Time Decay: Time decay is a posi ve effect You are looking for both sides of your spread to expire

worthless

Implied Vola lity: The effect of implied vola lity depends on where the underlying is in rela on to the

strikes If the underlying is trading near the short put then you want implied vola lity to decrease If the

underlying is near the long put then you want the implied vola lity to increase

Name: Short Straddle

Descrip on: The short straddle is a good play if you think the underlying will remain neutral or a

decrease in vola lity This play has the advantage of bringing you double the credit However, you will be exposed to a lot of risk Risk will be unlimited on the upside and substan al on the downside

Setup: Sell (short) Strike A put and Sell (short) Strike A call

Bias: Neutral

Break-Even: Two break-evens exist:

Strike A - Credit received Strike A + Credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Debit paid

Margin: No margin required

Time Decay: Time decay is an extreme nega ve effect since it will drop the value of both of your op ons

Implied Vola lity: A er you establish the posi on you want implied vola lity to increase so the value of

your op ons increase and to make the necessary move you originally planned for

Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make

before your posi on gets beaten down by me decay Even if you are expec ng move such as an

earnings announcement or report coming out the op ons could already be priced so high that it cannot

capture the move Always make sure you find the price of an at-the-money (ATM) straddle to see how

big of a move the market is expec ng You can use gamma scalping to protect and increase your gains

with long straddles

Name: Short Straddle

Descrip on: The short straddle is a good play if you think the underlying will remain neutral or a

decrease in vola lity This play has the advantage of bringing you double the credit However, you will be exposed to a lot of risk Risk will be unlimited on the upside and substan al on the downside

Setup: Sell (short) Strike A put and Sell (short) Strike A call

Bias: Neutral

Break-Even: Two break-evens exist:

Strike A - Credit received Strike A + Credit received

Max Profit: Limited: Credit received

Max Loss: Limited: Debit paid

Margin: No margin required

Time Decay: Time decay is an extreme nega ve effect since it will drop the value of both of your op ons

Implied Vola lity: A er you establish the posi on you want implied vola lity to increase so the value of

your op ons increase and to make the necessary move you originally planned for

Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make

before your posi on gets beaten down by me decay Even if you are expec ng move such as an

earnings announcement or report coming out the op ons could already be priced so high that it cannot

capture the move Always make sure you find the price of an at-the-money (ATM) straddle to see how

big of a move the market is expec ng You can use gamma scalping to protect and increase your gains

with long straddles

Name: Long Strangle

Descrip on: The long strangle gives you the opportunity to profit if the stock goes up or goes down The

op ons you buy will be out of the money which reduces the cost over the long straddle However it will split the strikes apart which increase your breakeven levels The underlying has to move enough to cover the cost of both op ons

Setup: Buy (long) Strike A put and Buy (long) Strike B call

Bias: Extreme Bullish and Extreme Bearish

Break-Even: Two break-even points:

Strike A - Debit paid Strike B + Debit paid

Max Loss: Unlimited

Margin: Margin is the greater out of the Short Put or the Short Call + the premium received from the

other side

Time Decay: Time decay is a posi ve effect You are looking for both sides of your spread to expire

worthless

Implied Vola lity: A er the posi on has been put on you want implied vola lity to decrease thus

lowering your op on prices

Notes: This posi on carries a lot of risk since you are naked two op ons in either direc on Playing

direc on is not as important as playing the implied vola lity here Look for the underlying to have a lot

of vola lity and put the posi on on when you believe it will decrease

Name: Long Strangle

Descrip on: The long strangle gives you the opportunity to profit if the stock goes up or goes down The

op ons you buy will be out of the money which reduces the cost over the long straddle However it will split the strikes apart which increase your breakeven levels The underlying has to move enough to cover the cost of both op ons

Setup: Buy (long) Strike A put and Buy (long) Strike B call

Bias: Extreme Bullish and Extreme Bearish

Break-Even: Two break-even points:

Strike A - Debit paid Strike B + Debit paid

Max Loss: Unlimited

Margin: Margin is the greater out of the Short Put or the Short Call + the premium received from the

other side

Time Decay: Time decay is a posi ve effect You are looking for both sides of your spread to expire

worthless

Implied Vola lity: A er the posi on has been put on you want implied vola lity to decrease thus

lowering your op on prices

Notes: This posi on carries a lot of risk since you are naked two op ons in either direc on Playing

direc on is not as important as playing the implied vola lity here Look for the underlying to have a lot

of vola lity and put the posi on on when you believe it will decrease

Name: Short Strangle

Descrip on: The short strangle allows you to make a neutral bet on the underlying By selling both a put

and strike you receive a larger credit However, there is s ll substan al risk involved because you can incur unlimited losses to the upside and substan al losses to the downside

Setup: Sell (short) Strike A put and Sell (short) Strike B call

Bias: Neutral

Break-Even: Two break-even points:

Strike A - Credit received Strike B + Credit received

Max Profit: Limited: Credit received

Max Loss: Unlimited

Max Profit: Unlimited

Max Loss: Debit paid

Margin: No margin requirement

Time Decay: Time decay has an extreme nega ve effect since it will lower the value of both of your

op ons

Implied Vola lity: A er the posi on has been established you want implied vola lity to increase This

will increase the value of your op ons plus help make the an cipated move

Notes: A Long Strangle posi on is a hard posi on to profit from You will need a big move that the

market hasn't accounted for in a quick period before me decay eats the value from your op ons

Name: Short Strangle

Descrip on: The short strangle allows you to make a neutral bet on the underlying By selling both a put

and strike you receive a larger credit However, there is s ll substan al risk involved because you can incur unlimited losses to the upside and substan al losses to the downside

Setup: Sell (short) Strike A put and Sell (short) Strike B call

Bias: Neutral

Break-Even: Two break-even points:

Strike A - Credit received Strike B + Credit received

Max Profit: Limited: Credit received

Max Loss: Unlimited

Max Profit: Unlimited

Max Loss: Debit paid

Margin: No margin requirement

Time Decay: Time decay has an extreme nega ve effect since it will lower the value of both of your

op ons

Implied Vola lity: A er the posi on has been established you want implied vola lity to increase This

will increase the value of your op ons plus help make the an cipated move

Notes: A Long Strangle posi on is a hard posi on to profit from You will need a big move that the

market hasn't accounted for in a quick period before me decay eats the value from your op ons

Name: Synthe c Long

Descrip on: This is called a synthe c long because the profit graph is iden cal to going long on the

underlying The advantage of choosing this posi on over the underlying is the increase in leverage You can pick up more op ons than stock The disadvantage is that the op ons have expira on while the underlying does not

Setup: Buy (long) Strike A call and Sell (short) Strike A put - same expira on month for both

Bias: Bullish

Break-Even: Strike + Debit paid

Max Profit: Unlimited

Max Loss: Limited - Even though it is limited it can s ll be substan al in that the underlying can fall to

$0.00

Margin: The margin requirement is the greater margin between the short put or the short call plus the

credit received Time Decay: Time decay is a posi ve effect You are looking for both sides of your spread

to expire worthless

Implied Vola lity: A er the play has been established you want implied vola lity to decrease thus

lowering the value of your op ons This will also lower the chance of seeing a large move in either

direc on

Notes: Short Strangle is a good play to put on when you expect a decrease in implied vola lity Be careful

when placing this play because you are exposed to unlimited risk