WIXLIB

MONTRÉAL EXCHANGEOptionsStrategiesQuick Guide

TABLE OF CONTENTSHow to use this book4Terms and definitions5Bullish Strategy7Long callBull call spreadBull put spreadCovered call / Buy writeProtective / Married putCash-secured short put8910111213Bearish Strategy14Long putBear put spreadBear call spread151617Neutral Strategy18CollarShort straddleShort strangleIron condorCalendar spreadCovered combination / Covered strangleLong call butterfly19202122232425Volatility Strategy26Long straddleLong strangleCall backspreadPut backspread272829303

HOW TO USE THIS BOOK Each strategy has an accompanying graph showing profitand loss at expiration. The vertical axis shows the profit/loss scale. When the strategy line is below the horizontal axis, it assumesyou paid for the position or had a loss. When it is above the horizontal axis, it assumes you receiveda credit for the position or had a profit. The dotted line indicates the strike price. The intersection of the strategy line and the horizontal axisis the break-even point (BEP) not including transaction costs,commissions, or margin (borrowing) costs. These graphs are not drawn to any specific scale and are meantonly for illustrative and educational purposes. The risks/rewards described are generalizations and may belesser or greater than indicated.ProfitStrikePriceBEPStockPriceLoss4

TERMS AND DEFINITIONSBreak-Even Point (BEP): The stock price(s) at which an optionstrategy results in neither a profit nor loss.Call: An option contract that gives the holder the right to buy theunderlying security at a specified price for a certain, fixed periodof time.In-the-money: A call option is in-the-money if the strike price isless than the market price of the underlying security. A put optionis in-the-money if the strike price is greater than the market priceof the underlying security.Long position: A position wherein an investor is a net holder ina particular options series.Out-of-the-money: A call option is out-of-the-money if the strikeprice is greater than the market price of the underlying security.A put option is out-of-the-money if the strike price is less than themarket price of the underlying security.Premium: The price a put or call buyer must pay to a put or callseller (writer) for an option contract. Market supply and demandforces determine the premium.Put: An option contract that gives the holder the right to sell theunderlying security at a specified price for a certain, fixed periodof time.Ratio Spread: A multi-leg option trade of either all calls or allputs whereby the number of long options to short options issomething other than 1:1. Typically, to manage risk, the numberof short options is lower than the number of long options(i.e. 1 short call: 2 long calls).5

Short position: A position wherein the investor is a net writer(seller) of a particular options series.Strike price or exercise price: The stated price per share for whichthe underlying security may be purchased (in the case of a call) orsold (in the case of a put) by the option holder upon exercise of theoption contract.Synthetic position: A strategy involving two or more instrumentsthat has the same risk/reward profile as a strategy involving onlyone instrument.Time decay or erosion: A term used to describe how the timevalue of an option can “decay” or reduce with the passage of time.Volatility: A measure of the fluctuation in the market price of theunderlying security. Mathematically, volatility is the annualizedstandard deviation of returns.6

BULLISHSTRATEGY7

BULLISH STRATEGYLONG CALLExample: Buy callMarket Outlook: BullishRisk: LimitedReward: UnlimitedIncrease in Volatility: Helps positionTime Erosion: Hurts positionBEP: Strike price plus premium paidProfitStockPriceLoss8

BULLISH STRATEGYBULL CALLSPREADExample: Buy 1 call; sell 1 call at higher strikeMarket Outlook: BullishRisk: LimitedReward: LimitedIncrease in Volatility: Helps or hurts dependingon strikes chosenTime Erosion: Helps or hurts dependingon strikes chosenBEP: Long call strike plus net premium paidProfitStockPriceLoss9

BULLISH STRATEGYBULL PUTSPREADExample: Sell 1 put; buy 1 put at lower strikewith same expiryMarket Outlook: Neutral to bullishRisk: LimitedReward: LimitedIncrease in Volatility: Typically hurtsposition slightlyTime Erosion: Helps positionBEP: Short put strike minus credit receivedProfitStockPriceLoss10

BULLISH STRATEGYCOVERED CALL /BUY WRITEExample: Buy stock; sell callson a share-for-share basisMarket Outlook: Neutral to slightly bullishRisk: Limited, but substantial(risk is from a fall in stock price)Reward: LimitedIncrease in Volatility: Hurts positionTime Erosion: Helps positionBEP: Starting stock price minuspremium receivedProfitStockPriceLoss11

BULLISH STRATEGYPROTECTIVE /MARRIED PUTExample: Own 100 shares of stock; buy 1 putMarket Outlook: Cautiously bullishRisk: LimitedReward: UnlimitedIncrease in Volatility: Helps positionTime Erosion: Hurts positionBEP: Starting stock price plus premium paidProfitStockPriceLoss12

BULLISH STRATEGYCASH-SECUREDSHORT PUTExample: Sell 1 put; hold cash equal to strikeprice x 100Market Outlook: Neutral to slightly bullishRisk: Limited, but substantialReward: LimitedIncrease in Volatility: Hurts positionTime Erosion: Helps positionBEP: Strike price minus premium receivedProfitStockPriceLoss13

BEARISHSTRATEGY14

BEARISH STRATEGYLONG PUTExample: Buy putMarket Outlook: BearishRisk: LimitedReward: Limited, but substantialIncrease in Volatility: Helps positionTime Erosion: Hurts positionBEP: Strike price minus premium paidProfitStockPriceLoss15

BEARISH STRATEGYBEAR PUTSPREADExample: Sell 1 put; buy 1 put at higher strikeMarket Outlook: BearishRisk: LimitedReward: LimitedIncrease in Volatility: Helps or hurtsdepending on strikes chosenTime Erosion: Helps or hurts dependingon strikes chosenBEP: Long put strike minus net premium paidProfitStockPriceLoss16

BEARISH STRATEGYBEAR CALLSPREADExample: Sell 1 call; buy 1 call at higher strikeMarket Outlook: Neutral to bearishRisk: LimitedReward: LimitedIncrease in Volatility: Typically hurtsposition slightlyTime Erosion: Helps positionBEP: Short call strike plus credit receivedProfitStockPriceLoss17

NEUTRALSTRATEGY18

NEUTRAL STRATEGYCOLLARExample: Own stock, protect by purchasing1 put and selling 1 call with a higher strikeMarket Outlook: Neutral to slightly bullishRisk: LimitedReward: LimitedIncrease in Volatility: Effect varies,none in most casesTime Erosion: Effect variesBEP: In principle, breaks even if, at expiration,the stock is above/(below) its initial level bythe amount of the debit/(credit)ProfitStockPriceLoss19

NEUTRAL STRATEGYSHORTSTRADDLEExample: Sell 1 call; sell 1 put at same strikeMarket Outlook: NeutralRisk: UnlimitedReward: LimitedIncrease in Volatility: Hurts positionTime Erosion: Helps positionBEP: Two BEPs1. Call strike plus premium received2. Put strike minus premium receivedProfitStockPriceLoss20

NEUTRAL STRATEGYSHORTSTRANGLEExample: Sell 1 call with higher strike;sell 1 put with lower strikeMarket Outlook: NeutralRisk: UnlimitedReward: LimitedIncrease in Volatility: Hurts positionTime Erosion: Helps positionBEP: Two BEPs1. Call strike plus premium received2. Put strike minus premium receivedProfitStockPriceLoss21

NEUTRAL STRATEGYIRONCONDORExample: Sell 1 call; buy 1 call at higher strike;sell 1 put; buy 1 put at lower strike; all optionshave the same expiry. Underlying price typicallybetween short call and short put strikes.Market Outlook: Range bound or neutralRisk: LimitedReward: LimitedIncrease in Volatility: Typically hurts positionTime Erosion: Helps positionBEP: Two BEPs1. Short call strike plus credit received2. Short put strike minus credit receivedProfitStockPriceLoss22

NEUTRAL STRATEGYCALENDARSPREADExample: Sell 1 call; buy 1 call at same strikebut longer expiration; also can be done with putsMarket Outlook: Near term neutral (if strikes stock price); can be slanted bullish (with OTMcall options) or bearish (with OTM put options)Risk: LimitedReward: Limited; substantialafter near term expiryIncrease in Volatility: Helps positionTime Erosion: Helps until near term option expiryBEP: Varies; after near term expiry long callstrike plus debit paid or (if done with puts) longput strike minus debit paidProfitStockPriceLoss23

NEUTRAL STRATEGYCOVERED COMBINATION /COVERED STRANGLEExample: Own stock; sell one call; sell one put;underlying price typically between short calland short put strikesMarket Outlook: Range bound or neutral,moderately bullish; willing to buy moreshares and sell existing sharesRisk: Limited, but substantialReward: LimitedIncrease in Volatility: Typically hurts positionTime Erosion: Typically helps positionBEP: Initial stock price (or average priceif assigned) minus net premium receivedProfitStockPriceLoss24

NEUTRAL STRATEGYLONG CALLBUTTERFLYExample: Sell 2 calls; buy 1 call at nextlower strike; buy 1 call at next higher strike(the strikes are equidistant)Market Outlook: Neutral around strikeRisk: LimitedReward: LimitedIncrease in Volatility: Typically hurts positionTime Erosion: Typically helps positionBEP: Two BEPs1. Lower long call strike plus net premium paid2. Higher long call strike minus net premium paidProfitStockPriceLoss25

VOLATILITYSTRATEGY26

VOLATILITY STRATEGYLONGSTRADDLEExample: Buy 1 call; buy 1 put at same strikeMarket Outlook: Large move in either directionRisk: LimitedReward: UnlimitedIncrease in Volatility: Helps positionTime Erosion: Hurts positionBEP: Two BEPs1. Call strike plus premium received2. Put strike minus premium receivedProfitStockPriceLoss27

VOLATILITY STRATEGYLONGSTRANGLEExample: Buy 1 call with higher strike;buy 1 put with lower strikeMarket Outlook: Large move in either directionRisk: LimitedReward: UnlimitedIncrease in Volatility: Helps positionTime Erosion: Hurts positionBEP: Two BEPs1. Call strike plus premium received2. Put strike minus premium receivedProfitStockPriceLoss28

VOLATILITY STRATEGYCALLBACKSPREADExample: Sell 1 call; buy 2 calls at higher strikeMarket Outlook: BullishRisk: LimitedReward: UnlimitedIncrease in Volatility: Typically helps positionTime Erosion: Typically hurts positionBEP: Varies, depends if established for a creditor debit. If done for a credit, two BEP’s with thelower BEP being the short strike plus the creditProfitStockPriceLoss29

VOLATILITY STRATEGYPUTBACKSPREADExample: Sell 1 put; buy 2 puts at lower strikeMarket Outlook: BearishRisk: LimitedReward: Limited, but substantialIncrease in Volatility: Typically helps positionTime Erosion: Typically hurts positionBEP: Varies, depends if established for a creditor debit. If done for a credit, two BEP’s and thelower BEP is the short strike minus the creditProfitStockPriceLoss30