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An option strategy is implemented by combining one or more option positions and possibly an underlying stock position. Options are financial instruments which give the buyer the right to buy (for a call option) or sell (for a put option) the underlying security at some specific point of time in the future (European Option) or until some specific point of time in the future (American Option) for a price (strike price) which is fixed in advance (when the option is bought). In finance, an underlying is an investment from which a derivative security is derived. ...
This article is about options traded in financial markets. ...
Calls increase in value as the underlying stock increases in value. Likewise puts increase in value as the underlying stock decreases in value. Buying both a call and a put means that if the underlying stock moves up the call increases in value and likewise if the underlying stock moves down the put increases in value. The combined position can increase in value if the stock moves in either direction. (The position loses money if the stock stays at the same price or within a range of the price when the position was established.) This strategy is called a straddle. It is one of many options strategies that investors can employ.
Options strategies can favor movements in the underlying stock that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. The option positions used can be long and/or short positions in calls and/or puts at various strikes. In finance, a long position in a security, such as a stock or a bond, or equivalently to be long a security, means the holder of the position owns the security and will profit if the price of the security goes up. ...
In finance, short selling or shorting is the practice of selling securities the seller does not then own, in the hope of repurchasing them later at a lower price. ...
This article is about financial options. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
Bullish strategies
Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. It is necessary to assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimum trading strategy.
The most bullish of options trading strategies is the simple call buying strategy used by most novice options traders.
In most cases, stocks seldom go up by leaps and bounds. Moderately bullish options traders usually set a target price for the bull run and utilize bull spreads to reduce risk. While maximum profit is capped for these strategies, they usually cost less to employ. The bull call spread and the bull put spread are common examples of moderately bullish strategies. The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...
The bull put spread is a limited profit, limited risk options strategy that can be used when the options trader is moderately bullish on the underlying security. ...
Mildly bullish trading strategies are options strategies that make money as long as the underlying stock price do not go down on options expiration date. These strategies usually provide a small downside protection as well. Writing out-of-the-money covered calls is a good example of such a strategy. In the money redirects here; for the poker term, see In the money (poker). ...
Bearish strategies Bearish options strategies are employed when the options trader expects the underlying stock price to move downwards. It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy.
The most bearish of options trading strategies is the simple put buying strategy utilised by most novice options traders.
In most cases, stock prices seldom make steep downward moves. Moderately bearish options traders usually set a target price for the expected decline and utilise bear spreads to reduce risk. While maximum profit is capped for these strategies, they usually cost less to employ. The bear call spread and the bear put spread are common examples of moderately bearish strategies. The bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. ...
The bear put spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. ...
Mildly bearish trading strategies are options strategies that make money as long as the underlying stock price does not go up on options expiration date. These strategies usually provide a small upside protection as well as .
Neutral or non-directional strategies Neutral strategies in options trading are employed when the options trader does not know whether the underlying stock price will rise or fall. Also known as non-directional strategies, they are so named because the potential to profit does not depend on whether the underlying stock price will go upwards or downwards. Rather, the correct neutral strategy to employ depends on the expected volatility of the underlying stock price.
Examples of neutral strategies are:
- Guts - sell in the money put and call
- Butterfly - buy at the money and out of the money call, sell two in the money puts, or vice versa
- Condor - sell out of the money call and buy call with higher strike price, while simultaneously selling out of the money put and buying put with lower strike price
- Straddle - holding a position in both a call and put with the same strike price and expiration. The position is profitable if the underlying stock changes value in a significant way, either higher or lower. If the options have been bought, the holder has a long straddle. If the options were sold, the holder has a short straddle.
- Strangle - the simultaneous buying or selling of out-of-an-money put and an out-of-the-money call, with the same expirations. Strangles can be considered special cases of the straddle
- Risk Reversal
In finance, a straddle is an investment strategy involving the purchase or sale of particular derivatives. ...
The long straddle is a non-directional options trading strategy that involves the simultaneous buying of a put and a call of the same underlying stock, striking price and expiration date. ...
To straddle is to sit, stand or walk with the legs spread wide. ...
In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. ...
Risk reversal refers to the manner in which similar out-of-the-money call and put options, usually foreign exchange options, are quoted by Finance dealers. ...
Bullish on volatility Neutral trading strategies that are bullish on volatility profit when the underlying stock price experiences big moves upwards or downwards. They include the long straddle, long strangle, short condor and short butterfly. The long straddle is a non-directional options trading strategy that involves the simultaneous buying of a put and a call of the same underlying stock, striking price and expiration date. ...
The long strangle is a neutral-outlook options trading strategy that involve the simultaneous buying of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying security and expiration date. ...
Bearish on volatility Neutral trading strategies that are bearish on volatility profit when the underlying stock price experiences little or no movement. Such strategies include the short straddle, short strangle, ratio spreads, long condor and long butterfly. To straddle is to sit, stand or walk with the legs spread wide. ...
The short strangle is a neutral-outlook options trading strategy that involves the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying security and expiration date. ...
See also “Spread option†redirects here. ...
A synthetic underlying position synthetically duplicates the payoff of a long underlying position with a long call and short put at the same strike and expiration. ...
Arbitrage trades are commonly performed by floor traders in the options market to earn small profits with very little or zero risk. ...
References - McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., Prentice Hall. ISBN 0-7352-0197-8.
External links | Derivatives market | | | Derivative (finance) | | | Options | Terms: Strike price · Expiration · Volatility · Open interest · Pin risk
The derivatives markets are the financial markets for derivatives. ...
Derivatives traders at the Chicago Board of Trade. ...
This article is about options traded in financial markets. ...
The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...
For an option contract, expiration is the date on which the contract expires. ...
Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ...
Open interest is the number of open contracts of derivatives like futures and options that have a time limit after which they expire. ...
Pin risk occurs when the underlier of an option contract settles close to the options strike value at expiration. ...
Vanilla options: Option styles · Call · Put · Warrants · Fixed income · Employee stock option · FX
In finance, a vanilla option is a type of derivative security. ...
In finance, the style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. ...
This article is about financial options. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
For other uses of the term Warrant, see Warrant (disambiguation) In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issue. ...
This article does not cite any references or sources. ...
An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. ...
In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ...
Exotic options: Asian · Lookback · Barrier · Binary · Swaption · Mountain range
In finance, an exotic option is a derivative which has features making it more complex than commonly traded products (vanilla options). ...
The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ...
The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ...
A barrier option is a type of financial option where the option to exercise depends on the underlying crossing or reaching a given barrier level. ...
A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. ...
To meet Wikipedias quality standards, this article or section may require cleanup. ...
Mountain ranges are exotic options originally marketed by Société Générale in 1998. ...
Options strategies: Covered call · Naked put · Collar · Straddle · Strangle · Butterfly · Iron condor
Payoffs and profits from buying stock and writing a call. ...
A naked put is a put option where the option writer does not have a short position in the stock. ...
A collar is an investment strategy that uses options to limit the possible range of positive or negative returns on an investment in an underlying asset to a specific range. ...
In finance, a straddle is an investment strategy involving the purchase or sale of particular derivatives. ...
In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. ...
In options trading, a butterfly is a combination trade resulting in the following net position: Long 1 call at (X - a) strike Short 2 calls at X strike Long 1 call at (X + a) strike all with the same expiration date. ...
Options spreads: Bull spread · Bear spread · Calendar spread · Vertical spread · Debit spread · Credit spread
“Spread option†redirects here. ...
In options trading, a bull spread is a spread position that is designed to profit from a rise in the price of the underlying security. ...
In options trading, a bear spread is a spread position that is designed to profit from a drop in the price of the underlying security. ...
There are very few or no other articles that link to this one. ...
The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...
In finance, a debit spread, AKA net debit spread, results when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium. ...
In finance, a credit spread, or net credit spread, involves a purchase of one option and a sale of another option in the same class and expiration. ...
Valuation of options: Moneyness · Option time value · Put-call parity · Black-Scholes · Black · Binomial · Simulation Option contracts are complex to value. ...
In the money redirects here; for the poker term, see In the money (poker). ...
Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ...
In financial mathematics, put-call parity defines a relationship between the price of a European call option and a European put option - both with the identical strike price and expiry. ...
The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ...
The Black model (sometimes known as the Black-76 model) is a variant the Black-Scholes option pricing model. ...
In finance, the binomial options pricing model provides a generalisable numerical method for the valuation of options. ...
A Monte Carlo model, in its most general description, includes any method of estimating a value by the random generation of numbers and statistical principles. ...
| | | Swaps | Interest rate swap · Total return swap · Equity swap · Credit default swap · Forex swap · Currency swap · Constant maturity swap · Basis swap · Volatility swap · Variance swap For the Thoroughbred horse racing champion, see: Swaps (horse). ...
An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another partys stream of cash flows. ...
Total return swap, or TRS (especially in Europe), or total rate of return swap, or TRORS, is a contract in which one party receives interest payments on a reference asset, plus any capital gains and losses over the payment period, while the other receives a specified fixed or floating cash...
An equity swap, a branch of derivative security, is a swap in which at least one party pays the return on a stock or stock index. ...
A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. ...
Forex swap is an over the counter short term interest rate derivative instrument. ...
A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. ...
Constant Maturity Swaps are used in the financial markets to have a reference yield curve. ...
A basis swap is an interest rate swap which involves the exchange of two floating rate financial instruments denominated in the same currency. ...
In finance, a volatility swap is a forward contract on the future realised volatility of a given underlying asset. ...
A variance swap is a financial derivative whose payoff is the realised volatility squared of the underlier based on a prespecified set of sampling points. ...
| | | Other derivatives | Credit derivative · Equity derivative · Interest rate derivative · Inflation derivatives // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ...
The term equity derivative describes a class of financial instruments whose value is at least partly derived from one or more underlying equity securities. ...
To meet Wikipedias quality standards, this article may require cleanup. ...
Inflation Derivatives or inflation-indexed derivatives refer to OTC and exchange traded derivatives that are used to transfer inflation risk from one counterparty to another. ...
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