Option Strategies

Can someone quickly remind me of which stratgies are used when? - Which strategy gains when volatility is high, low, underlier is up, down, etc. I had this thing down a month ago, but I am drawing a blank on it when I try to remember it today. I am at work with no books to refer, please help.


Bull Spread -

Bear spread -

Buttlerfly Spread -

Long Straddle -

Box Spread -

Please confirm :slight_smile:

long butterfly - low volatility

short butterfly - higher than expected volatility

long straddle - higher than expected volatility.

difference between short butterfly and straddle -> straddle the amount of losses / gains are not capped.

box spread - if all the options are properly priced - will earn risk free rate of return.

bull spread - makes sense when you are expecting the underlying to go up.

bear spread - underlying expected to go down.

Long Strip = a straddle with an extra put

Long Strap = a straddle with extra call

Strangle = a straddle where put and call strikes do not equal each other.

Sorry, I just wanted to show off a little.

CPK your descriptions look good!

I feel like doing a long strip on a strap now !

Thanks CP!


bull spread - makes sense when you are expecting the underlying to go up.

bear spread - underlying expected to go down.

Bull spead : long x1 and short x2

the investor expect that underlying will go up, i agree. Did he think that price not go pass X2, so he short at x2 to get some more (X2 short premium).

If he simply think that the price go up, why he short at x2 to limit his potential unlimited profit ?

also bear…

would suggest you look at the graph for a Bull Spread.

Vt = Max(0,St-X1) - Max(0, St-X2)

Max Profit is when the price = X2

beyond X2 he is topped out… look at the graph please.

St < X1 - he pays the difference between premiums - Max Loss case

X1 < St <= X2

Vt = St - X1

X2 < St … Vt =X2 - X1 provides a 2nd break even X2 - X1 - (c1-c2)

but he gets capped at that point… he will not get anything from that point on.

actualy i agree with all CFAI said.

pls start with a simple strategy. (I do not mention a bull spread)

What I mean is that if he think price will go up, he just go long at X1 to get unlimited profit.

I said that, because he think price will never pass X2, so he short at X2 to get some more. And now it become a bull spread strategy.

And the answer for “when it used” is that price going up and not pass an expected price (X2)

Dump some craps from my head.

Collar (zero-cost colar) Interest rate call/put, cap/floor and etc. Interest rate collar(crazy computation) Binary credit put options Treasury futures options (hedge sh*t like MBS volatility) Currency options(bluebox or EOC) Swaption (Receiver swaption to add call) Real Options(oil futures’ backwardation?) Unbalanced collar(similar to variable prepaid forward?)

Can’t find out where the psychological call option is. Please let me know. Thanks.

Derivatives has been the bane of my existence since Level 1. God awful section.

that is not what the curriculum says.

the reason why going LONG a Call option does not make sense is because if your expectation goes wrong - and you end up going the other way - you LOSE big time. So you sell the Call option at X2 - so you limit your losses.

The selling of the X2 call is not for profit but to limit your losses.

This is the first statement for the Bull Spread in the book:

A bull spread is designed to make money when the market goes up.


Just my private opinion for discussing, exactly anwer what curriculum says when we do the test. I just think of sommthing like a butterfly strategy with low volatility (unknow direction). In case of bull spread, he expect a going up moving…

:slight_smile: thanks for ur discussions