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Appendix:  : Option Trading Strategies

Appendix. Option Trading Strategies

Following is a summary of the strategies presented in this book.

  1. Basic long call

    1. as a purely speculative position

    2. used to take advantage of price declines in stock

    3. as a form of contingent purchase

  2. Basic long put

    1. as a purely speculative position

    2. used to take advantage of price rise in stock (insurance for paper profits)

    3. as a form of contingent sale of stock

  3. Basic uncovered call

    1. a highly speculative position with unlimited risk

    2. as part of a ratio write

  4. Basic uncovered put

    1. as a form of contingent purchase

    2. as part of a rescue strategy

  5. Put insurance (buying long puts to insure current long-stock profits)

  6. Contingent-purchase strategies

    1. long calls purchased as alternative to buying stock

    2. puts sold to create a credit as well as contingent purchase

    3. the covered long call with higher strike price, shorter expiring short calls

  7. Rolling strategies

    1. rolling forward to defer expiration while creating a credit

    2. rolling short calls forward and up to defer or avoid expiration and to increase potential exercise price

    3. rolling short puts forward and down to defer or avoid expiration and to reduce potential exercise price

    4. rolling back—exchanging a current option position for one expiring sooner

  8. Ratio write

    1. creating partially covered positions with some degree of risk

    2. modified to eliminate all risk by buying high calls to offset short exposure

  9. Rescue strategies

    1. short puts to create a credit and, if exercised, to reduce average basis

    2. covered calls to reduce paper loss

    3. two-part combination of short puts and, when exercised, converting to covered calls

  10. Forced exercise (intentional exercise using covered calls)

  11. Spread strategies

    1. long spread, high risk requiring adequate price movement

    2. short spread with uncovered positions—high risk

    3. short spread involving covered call and uncovered put—conservative when fundamental criteria and assumptions are present

  12. Straddle strategies

    1. long straddle, high risk requiring substantial price movement

    2. short straddle with uncovered positions—extremely high risk

    3. short straddle combining covered call and uncovered put—ultimate conservative strategy with higher-than-average returns, assuming that basic fundamental criteria and assumptions are present


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