Option Spread Trading: A Comprehensive Guide to Strategies and Tactics

Preface xi

Acknowledgments xiii

CHAPTER 1 Essential Option Knowledge 1

The Option Basics 1

In-At-Out of the Money 5

Intrinsic and Time Value 6

Spread Basics 8

The Greeks 9

Payoff Tables and Diagrams 10

Option Pricing Calculators 12

CHAPTER 2 Spreads Using an Underlying Security 15

Covered Call 15

Covered Call Using LEAPSQR 22

Systematic Covered Call Strategies 25

Cash-Secured Put 26

Systematic Cash-Secured Put 31

Protective Put 32

The Collar 33

CHAPTER 3 Synthetic Positions 37

Put-Call Parity 39

Synthetic Long Positions 40

Synthetic Short Positions 44

Arbitrage in Put-Call Parity 50

Individuals Using Put-Call Parity 52

CHAPTER 4 The Greeks 55

Price-Related Greeks 55

Time-Related Greek 61

Volatility-Related Greek 65

Interest Rate-Related Greek 67

Conclusion 69

CHAPTER 5 Straddles 71

Long Straddle Mechanics 72

Short Straddle 81

CHAPTER 6 Strangles 89

Long Strangle Mechanics 89

Short Strangle Mechanics 98

CHAPTER 7 Bull Spreads 107

Bull Put Spread 107

Bull Call Spread 114

CHAPTER 8 Bear Spreads 121

Bear Call Spread 121

Bear Put Spread 127

CHAPTER 9 Butterfly Spreads 135

Introduction to Butterfly Spreads 136

Long Call Butterfly 136

Long Put Butterfly 139

Iron Butterfly 142

Short Straddle Comparison 146

Short Call Butterfly 149

Short Put Butterfly 152

Reverse Iron Butterfly 154

Reverse Iron Butterfly versus Straddle 156

CHAPTER 10 Condor Spreads 159

Introduction to Condor Spreads 159

Long Call Condor 160

Long Put Condor 163

Iron Condor 166

Iron Condor versus Short Strangle 170

Short Condor Spreads 172

Reverse Iron Condor 176

Reverse Iron Condor versus Long Strangle 179

CHAPTER 11 Ratio Spreads 183

Call Ratio Spread 184

Put Ratio Spread 189

Ratio Spread Comparisons 192

CHAPTER 12 Backspreads 199

Call Backspread 199

Put Backspread 203

Backspread Comparisons 207

CHAPTER 13 The Stock Repair Strategy 213

Doubling Down on a Position 214

The Stock Repair Trade 215

CHAPTER 14 Calendar Spreads 219

Time Value Effect 220

Long Call Calendar 221

Long Put Calendar 224

Combined Calendar Spread 227

CHAPTER 15 Diagonal Spreads 231

Call Diagonal Spread 231

LEAPS Call Diagonal Spread 234

Put Diagonal Spread 237

LEAPS Put Diagonal Spread 239

Double Diagonal Spread 241

CHAPTER 16 Delta Neutral Trading 245

Delta Review 245

Delta-Neutral Positions 246

Gamma 250

Market Maker Trading 251

CHAPTER 17 Executing a Spread Trade 255

Executing a Stock or Option Trade 256

A Single Option Spread 258

A Spread with Two Options 260

A Spread with Multiple Legs 261

Legging into a Spread Trade 265

About the Author 269

Index 271