Financial Tutorial
 

Options: Advanced Strategies - Limited Risk

Long Straddle

Technique: purchase a call and a put at the same striking and at the same maturity date.
To be used when a sharp movement of the underlying security price is expected but the direction unknown (higher volatility).
Maximum risk: limited to premium paid.
Maximum profit: unlimited.

Long Strangle

Technique: purchase a call (E2) and a put at a lower striking (E1) and at the same maturity date. This is a less expensive variant of the straddle.
To be used when a sharp movement of the underlying security price is expected but the direction unknown (higher volatility).
Maximum risk: limited to premium paid.
Maximum profit: unlimited.

BULL SPREAD

Technique: 

• With Call: purchase a call at strike E1 and sell a call at a higher strike E2 and at the same maturity date.
• With put: purchase a put at strike E2 and sell a put at a lower strike E1 and at the same maturity date.

To be used when moderate increase of the underlying security price is expected (between E1 and E2).
Maximum risk: limited to net premium paid.
Maximum profit: difference between strike E2 and strike E1 minus the net premium paid.

BEAR SPREAD

Technique: 

• With Call: purchase a call at strike E2 and sell a call at a lower strike E1 and at the same maturity date.
• With put: purchase a put at strike E1 and sell a put at a higher striking E2 and at the same maturity date.

To be used when moderate decrease of the underlying security price is expected (between E1 and E2). Call in red, Put in black.
Maximum risk: limited to net premium paid.
Maximum profit: difference between strike E2 and strike E1 minus the net premium paid.

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