Ten Basic Options Strategies

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Alaron

02 Nov, 2005

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Synthetic Short Futures

(Split strike)

Example:
Nov Soybean Futures             521 ¼
Buy 1 Nov 500 Put                 22
Sell 1 Nov 520 Call                23 ¼

Position Description:  Long one Put and Short a higher Strike price Call option. Generally the Long Put is “out of the money” and the short Call is “at-the-money” or just slightly out, so it can be set up for a credit.

When to Use:  When you are bearish, as this has the same risk/reward characteristics as a short futures position, with the exception of the small flat area.

Usually this strategy is initiated as a follow-up to another strategy.  For example, selling naked calls, then after a break, buying a put option to take advantage of further downward move, as a naked call has the same risk, yet limited reward.

Risk/Reward:  Unlimited Risk/Unlimited Reward

This strategy has the same characteristics as a futures contract: unlimited risk and reward! The profit increases – tick for tick – after the market falls below the long put option strike price, and losses amount – tick for tick - if the market increases above the short Call strike price. If the position is set-up for a credit – and it usually is – then the area between the two strike prices is a flat profitable area.

Time Decay: Decay depends upon the underlying futures; if the futures are below long Put option strike, then time decay works against you. If the futures are above the long call option strike price, then time decay works in your favor. If futures prices are between the strike prices, generally time decay helps in the upper price range and hurts in the lower price range.

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