Options Strategy

Question 1

Describe a Bearish Call Spread

Answer 1

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.

Question 2

How do you fix a Bearish Call Spread when the price is going up (3 tactics)?

Answer 2

1. Cash out for a loss and buy another one with a further out expiry
2. Buy 100 shares so your call is covered (wtf?)
3. Buy leaps options and convert into a modified calendar/diagonal spread

Question 3

What happens when earnings is approaching?

Answer 3

Volatility increases, which is better for options sellers. IV is higher.

Question 4

What is time decay?

Answer 4

Decay in the premium due to passage of time. this accelerates as expiry approaches

Question 5

What is theta?

Answer 5

The amount an option will decay each day.

Question 6

What is a positive theta trade?

Answer 6

The position earns more money as time decay accelerates.

Question 7

What is vega?

Answer 7

IV: Indicates how the option price will move for every 1% change in EV (expected volatility).

Question 8

Describe a Bear Put Spread.

Answer 8

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.

Question 9

In what scenario do you lose $$ in a Bear Put Spread?

Answer 9

If the stock price expires above both put strike prices.

Question 10

What is theta? What happens as you approach the expiration date?

Answer 10

A measure of how much the option price decreases as time passes. Theta accelerates as you reach the expiration date.

Question 11

Given a constant price, how does theta affect options you sold as time passes?

Answer 11

Theta increase your position value because it becomes cheaper to buy the option back to close your position.

Question 12

What does delta mean?

Answer 12

Estimate of how much an option price will move up or down when the underlying asset moves $1.

Question 13

What is a price indifferent strategy?

Answer 13

Bullish on volatility - doesn’t matter where the price goes as long as it goes.

Question 14

What is a range bound strategy?

Answer 14

Price needs to stay within a certain range, bearish on volatility.

Question 15

How do you use a butterfly spread to long volatility?

Answer 15

Buy ATM and Sell OTM and ITM. Either puts or calls

Question 16

How do you use a butterfly spread to create a range bound strategy?

Answer 16

Sell ATM and Buy OTM and ITM. Either puts or calls.

Question 17

What is the difference between a credit spread and a debit spread?

Answer 17

A credit spread gives you money up front, a debit spread costs money up front.

Question 18

What’s the general goal of a credit spread?

Answer 18

For options to expire worthless and to keep the premium.

Question 19

Describe a put credit spread.

Answer 19

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.

Question 20

How do you react if the price threatens the strike price in a credit spread?

Answer 20

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.

Question 21

What is a synthetic put?

Answer 21

When you are short a stock and buy an atm call to hedge against the price increasing.

Question 22

What’s the simplest way to profit off theta?

Answer 22

Sell either a call or put. All thinks left equal, the option price will decay over time.

Question 23

What is a married call?

Answer 23

Same as a synthetic put: short a stock and buy a call atm for hedging.

Question 24

What is a protective call?

Answer 24

Same as a synthetic put: short a stick and buy a call atm for hedging.