Options Strategy Flashcards
Learn options trading (24 cards)
Describe a Bearish Call Spread
Sell 1 OTM call, Buy a higher OTM call to hedge the sold one. If price goes down, they expire OTM and you keep the premium.
How do you fix a Bearish Call Spread when the price is going up (3 tactics)?
- Cash out for a loss and buy another one with a further out expiry
- Buy 100 shares so your call is covered (wtf?)
- Buy leaps options and convert into a modified calendar/diagonal spread
What happens when earnings is approaching?
Volatility increases, which is better for options sellers. IV is higher.
What is time decay?
Decay in the premium due to passage of time. this accelerates as expiry approaches
What is theta?
The amount an option will decay each day.
What is a positive theta trade?
The position earns more money as time decay accelerates.
What is vega?
IV: Indicates how the option price will move for every 1% change in EV (expected volatility).
Describe a Bear Put Spread.
Buy a put around the current price, Sell a put below that price to offset your premium cost. The only way to lose is if the stock price goes up.
In what scenario do you lose $$ in a Bear Put Spread?
If the stock price expires above both put strike prices.
What is theta? What happens as you approach the expiration date?
A measure of how much the option price decreases as time passes. Theta accelerates as you reach the expiration date.
Given a constant price, how does theta affect options you sold as time passes?
Theta increase your position value because it becomes cheaper to buy the option back to close your position.
What does delta mean?
Estimate of how much an option price will move up or down when the underlying asset moves $1.
What is a price indifferent strategy?
Bullish on volatility - doesn’t matter where the price goes as long as it goes.
What is a range bound strategy?
Price needs to stay within a certain range, bearish on volatility.
How do you use a butterfly spread to long volatility?
Buy ATM and Sell OTM and ITM. Either puts or calls
How do you use a butterfly spread to create a range bound strategy?
Sell ATM and Buy OTM and ITM. Either puts or calls.
What is the difference between a credit spread and a debit spread?
A credit spread gives you money up front, a debit spread costs money up front.
What’s the general goal of a credit spread?
For options to expire worthless and to keep the premium.
Describe a put credit spread.
Find a strike point the option won’t drop to and sell a put at that price. Buy a slightly lower strike price put to hedge in case the price does drop that much.
How do you react if the price threatens the strike price in a credit spread?
You sell off your position for a loss. Then bounce your debit spread downward to a new range you think the stock won’t hit.
What is a synthetic put?
When you are short a stock and buy an atm call to hedge against the price increasing.
What’s the simplest way to profit off theta?
Sell either a call or put. All thinks left equal, the option price will decay over time.
What is a married call?
Same as a synthetic put: short a stock and buy a call atm for hedging.
What is a protective call?
Same as a synthetic put: short a stick and buy a call atm for hedging.
