POPULAR STRATEGIES

Note: These strategies are described from the viewpoint of the buyer. The seller’s payoff is the inverse.

Covered Call: long the underlying and short a call. The payoff is normally identical to being short a put.

Covered Put: short the underlying and short a put. The payoff is normally identical to being short a call.

Bull Spread: long a call at a low strike price and short a call at a higher strike price. This strategy requires appreciation of the underlying. Above the higher strike price, the buyer will be neutral with any gains from the bought call being lost through the sold call.

Bear Spread: long a put at a higher strike price and short a put at a lower strike price. This is the downside version of the bear spread.

Straddle: Long the put and call of the same strike price. The strike price chosen is normally close to the current price of the underlying. This strategy requires relatively large price movements away from the strike price to be profitable. As the payoff is not slanted in either direction, it is essentially a buy of volatility, i.e. speculating that the underlying’s price will be more volatile than the market is predicting.

Strangle: Long a call and put but at different out-of-the-money strike prices. Similar to the straddle, it is essentially a buy of volatility.                 Links

Call or Put Butterfly: For the call variant a butterfly is long 1 call at a low strike price, short 2 calls at a middle strike price and long 1 call at a high strike price. The call at the higher strike price provides insurance against the mid strike price short. The put variant is similar, being long 1 put at a high and low strike price and short 2 puts at a mid strike price. It is perfectly plausible for a butterfly buyer or seller to receive premium, depending on the relative values of the strike prices.

Call or Put Condor: Similar to the butterfly, except that the 2 shorts in the middle of the spread will be at different strike prices, but still between the 2 longs.