A trader who forecasts a large price decrease and increasing volatility on a stock position that cannot be immediately sold can be protected by **a Collar**. The trader may pay a small debit, receive a small credit, or even open the position for exactly $0.



Suppose stock XYZ is trading at $373 and you own 100 shares. You forecast a large decrease in XYZ price and an increase in volatility, but you want to collect a large dividend that is associated with XYZ in the near future.



**You open a $380 / $365 Collar (selling the $380 Call and buying the $365 Put) for $0. How is this possible?** The $380 Call bid price is $5.35 and the $365 Put ask price is $5.35, so when you sell the Call you receive a $5.35 credit, and you then use $5.35 credit to buy the $365 Put.



Your max loss on the position is $8 per share, or $800, since stock XYZ below $365 is protected by the long $365 Put and the current price is $373: $373 - $365 = $8 (per share). The max profit on the position is $7 per share, or $700, since stock XYZ above $380 will be called away by the short $380 Call and the current price is $373: $380 - $373 = $7 (per share). **There is no "free lunch" here since you had to sacrifice any profit above $7 per share in order to protect yourself from a decline larger than $8.** Because of the nature of this structure, the term "breakeven" can be a bit confusing, but since Collars are usually executed for $0 the "breakeven" of the options is anywhere between the strike prices of the Call and Put.

Collar

A trader who wants to speculate on a large, fast, and volatile price increase can **buy a Call**. The trader pays a debit, called a premium, to buy the Call and has the right (but not the obligation) to buy 100 shares at the strike price.



Suppose stock XYZ is trading at $24. You forecast a large, fast increase in XYZ price and you also forecast an increase in XYZ volatility.



**You buy a $25 Call for $0.50 to express this view. Your breakeven XYZ price at expiry is $25 (strike price) + $0.50 (premium paid) = $25.50**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $25 Call changes.

Long Call

A trader who wants to speculate on an increase in volatility and a large increase or large decrease in price can **buy a Straddle**. The trader pays a debit for the whole position, called a premium.



Suppose stock XYZ is trading at $165. You forecast an increase in XYZ volatility and a large increase or a large decrease in XYZ price.



**You buy a $165 Straddle (buying the $165 Put and buying the $165 Call) for a $11.40 debit to express this view. You have two breakeven prices: either $165 (strike price of the bought Call and bought Put) - $11.40 (premium paid) = $153.60 or $165 (strike price of the bought Call and bought Put) + $11.40 (premium paid) = $166.40**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $165 Straddle changes.

Long Straddle

A trader who wants to speculate on a decrease in volatility and a neutral or slightly-increasing price can **sell a Put**. The trader receives a credit, called a premium, to sell the Put and has the obligation to buy 100 shares at the strike price.



Suppose stock XYZ is trading at $45. You forecast a decrease in volatility and a neutral to slightly-increasing XYZ price.



**You sell a $42 Put for $0.75 to express this view. Your breakeven XYZ price at expiry is $42 (strike price) - $0.75 (premium received) = $41.25**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $42 Put changes. **Because the price of XYZ can decrease to zero in theory, selling a Put without already being short shares as collateral or buying a further OTM Put to create a fixed-risk spread carries a high "risk of ruin".** This means that an adverse price move, like a surprise earnings miss or scandal that decreases price greatly, can cause catastrophic losses.

Short Put

A trader who wants to speculate on a large decrease in price and an increase in volatility can **open a Put Backspread**. The trader may pay a small debit, receive a small credit, or even open the position for exactly $0.



Suppose stock XYZ is trading at $101. You forecast a large increase in XYZ price and an increase in volatility.



**You open a 1x3 $101 / $93 Put Backspread (selling the $101 Put for a $3.75 credit and buying three (3) $93 Puts for $1.25 each) for exactly $0 to express this view. Your breakeven low XYZ price at expiry is any price above $101 (since you entered the position for $0 and all contracts would expire worthless). The low breakeven price is more complex to calculate but adheres to this formula:**



`Strike Price of Long Puts - (Width of Spread / (N - 1)) +/- Debit Paid/Credit Received`



**Where N is the number of Long Puts bought with the credit from the Short Put.**



**The low breakeven for this Put Backspread is $93 - ($8 / (3-1)) + $0 = $89.** However, since the time component of your trade plan may not since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of XYZ prices as the market value of your 1x3 $101 / $93 Put Backspread changes.



**The max loss on this position at expiry is the width of the spread ($101 - $93 = $8), which occurs if price is exactly the strike of the long Puts ($93).** The max gain of a Put Backspread is theoretically calculated if XYZ price decreases to $0 and grows rapidly if the price of XYZ drops below the long Put strike, especially if that price decrease occurs in advance of expiry. The PnL of a Put Backspread relies heavily on XYZ price decreasing significantly, approximately 12% in this example, and can be very costly if XYZ price decreases less than your forecasted amount.



Let's walk through another example, this time with a 1x2 Put Backspread, to solidify this "large price decrease required" concept.



Suppose stock ABC is trading at $43. You forecast a large increase in XYZ price and an increase in volatility as well.



**You open a 1x2 $45 / $40 Put Backspread (selling the $45 Put for a $4.20 credit and buying two (2) $40 Puts for $1.90 each) for a $0.20 credit to express this view. At expiry, if ABC price is above $45, all contracts expire worthless and your keep the $0.20 credit received. Your breakeven ABC downside price at expiry is $35.20 ($40 - $5/1 + $0.20 = $35.20)**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of ABC prices as the market value of your 1x2 $45 / $40 Put Backspread changes. **The max loss on this position at expiry is $4.80 (the width of the spread plus any credit received or minus any debit paid, $45 - $40 +$0.20 = $4.80), which occurs if ABC price is the same as the long Put strike of $40.**

Put Backspread

A trader who wants to speculate on a large increase in price and an increase in volatility can **open a Call Backspread**. The trader may pay a small debit, receive a small credit, or even open the position for exactly $0.



Suppose stock XYZ is trading at $56. You forecast a large increase in XYZ price and an increase in volatility.



**You open a 1x3 $55 / $62 Call Backspread (selling the $55 Call for a $4.20 credit and buying three (3) $62 Calls for $1.40 each) for exactly $0 to express this view. Your breakeven low XYZ price at expiry is any price below $55 (since you entered the position for $0 and all contracts would expire worthless). The high breakeven price is more complex to calculate but adheres to this formula:**



`(Width of Spread / (N - 1)) + Strike Price of Long Calls +/- Debit Paid/Credit Received`



**Where N is the number of Long Calls bought with the credit from the Short Call.**



**The high breakeven for this Call Backspread is $7 / (3-1) + $62 + $0 = $65.50.** However, since the time component of your trade plan may not since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of XYZ prices as the market value of your 1x3 $55 / $62 Call Backspread changes.



**The max loss on this position at expiry is the width of the spread ($62 - $55 = $7), which occurs if price is exactly the strike of the long Calls ($62).** The max gain of a Call Backspread is theoretically infinite and grows rapidly if the price of XYZ exceeds the long Call strike, especially if that price increase occurs in advance of expiry. The PnL of a Call Backspread relies heavily on XYZ price increasing significantly, approximately 17% in this example, and can be very costly if XYZ price increases less than your forecasted amount.



Let's walk through another example, this time with a 1x2 Call Backspread, to solidify this "large price increase required" concept.



Suppose stock ABC is trading at $39. You forecast a large increase in XYZ price and an increase in volatility as well.



**You open a 1x2 $40 / $45 Call Backspread (selling the $40 Call for a $3.40 credit and buying two (2) $45 Calls for $1.75 each) for a $0.10 debit to express this view. At expiry, if ABC price is below $40, you lose only the $0.10 debit paid to open the position. Your breakeven ABC upside price at expiry is $50.10 ($5/1 + $45 + $0.10 = $50.10)**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of ABC prices as the market value of your 1x2 $40 / $45 Call Backspread changes. **The max loss on this position at expiry is $5.10 (the width of the spread plus any debit paid or minus any credit received, $45 - $40 + $0.10 = $5.10), which occurs if ABC price is the same as the long Call strike of $45.**

Call Backspread

A trader who wants to speculate on decreasing price and increasing volatility can **open a Synthetic Short**. The trader may pay a small debit, receive a small credit, or open the trade for exactly $0.



Suppose stock XYZ is trading at $25.50. You forecast a decrease in price and an increase in volatility.



**You open a $25 Synthetic Short at exactly $0.00, no cost, to express this view. How is this possible?** The $25 Call bid price is $3.00 and the $25 Put ask price is also $3.00, so when you sell the $25 Call you receive exactly $3.00 and you use that credit to pay for the $25 Put. 



**The breakeven price for this trade is the exact price of the underlying when you entered since this structure behaves almost exactly like shorting 100 shares of XYZ: theta, vega, and gamma are all roughly zero and delta is roughly -100.**



**The max loss on this position at expiry is theoretically unlimited, since XYZ price can increase indefinitely.** The max gain of a Synthetic Short is large but theoretically capped, since XYZ price can only decrease to $0.  **Since the loss on a Synthetic Short is theoretically unlimited, this structure carries a high "risk of ruin".** The unlimited loss can be mitigated by buying a further OTM Call, which caps upside losses but makes the position more expensive to open (i.e. the debit becomes larger) and removes some of the similarities to shorting 100 shares: theta becomes negative, vega and gamma become positive, and delta drops below -100.

Synthetic Short

A trader who wants to speculate on increasing price and increasing volatility can **open a Synthetic Long**. The trader may pay a small debit, receive a small credit, or open the trade for exactly $0.



Suppose stock XYZ is trading at $27. You forecast an increase in price and an increase in volatility.



**You open a $27 Synthetic Long at exactly $0.00, no cost, to express this view. How is this possible?** The $27 Put bid price is $3.25 and the $27 Call ask price is also $3.25, so when you sell the $27 Put you receive exactly $3.25 and you use that credit to pay for the $27 Call. 



**The breakeven price for this trade is the exact price of the underlying when you entered since this structure behaves almost exactly like owning 100 shares of XYZ: theta, vega, and gamma are all roughly zero and delta is roughly +100.**



**The max loss on this position at expiry is theoretically very high but capped, since XYZ price can only decrease to zero.** The max gain of a Synthetic Long is theoretically unlimited, since XYZ price can increase indefinitely.  **Since the loss on a Synthetic Long is theoretically very high (but not technically unlimited), this structure carries a high "risk of ruin".** The unlimited loss can be mitigated by buying a further OTM Put, which caps downside losses but makes the position more expensive to open (i.e. the debit becomes larger) and removes some of the similarities to owning 100 shares: theta becomes negative, vega and gamma become positive, and delta drops below +100.

Synthetic Long

A trader who wants to speculate on a decrease in volatility and a neutral to small decrease in price can **open a Put Frontspread**. The trader receives a small credit for opening the position.



Suppose stock XYZ is trading at $133. You forecast a decrease in volatility and a neutral to small decrease in XYZ price.



**You open a 1x2 $130 / $125 Put Frontspread (buying the $130 Put for a $4.25 debit and selling two (2) $135 Puts for $2.60 each) for a $0.95 credit to express this view. Your breakeven high XYZ price at expiry is any price above $130 (since you entered the position for a credit and all contracts would expire worthless). The low breakeven price is more complex to calculate but adheres to this formula:**



`Strike Price of Short Puts - (Width of Spread / (N - 1)) - Credit Received`



**Where N is the number of Short Puts whose credit is used to buy the Long Put.**



**The low breakeven for this Put Frontspread is $125 - ($5 / (2-1)) - $0.95 = $119.05.** However, since the time component of your trade plan may not since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of XYZ prices as the market value of your 1x2 $130 / $125 Put Frontspread changes.



**The max loss on this position at expiry is theoretically very high but capped, since XYZ price can only decrease to zero.** The max gain of a Put Frontspread occurs at expiry if XYZ price increases to the exact Short Put strike, where you would make the width of the spread plus the credit received ($130 - $125 + $0.95 = $5.95 in this example).  **Since the loss on a Put Frontspread is theoretically very high (but not technically unlimited), this structure carries a high "risk of ruin".** The unlimited loss can be mitigated by buying a further OTM Put(s), which morphs this structure into a Long Put Broken Wing Butterfly; unfortunately, this turns the trade into a debit transaction rather than a credit transaction and removes the gains associated with an XYZ price increase.

Put Frontspread

A trader who wants to speculate on a decrease in volatility and a neutral to small increase in price can **open a Call Frontspread**. The trader receives a small credit for opening the position.



Suppose stock XYZ is trading at $99. You forecast a decrease in volatility and a neutral to small increase in XYZ price.



**You open a 1x2 $100 / $102.5 Call Frontspread (buying the $100 Call for a $2.45 debit and selling two (2) $102.5 Calls for $1.50 each) for a $0.55 credit to express this view. Your breakeven low XYZ price at expiry is any price below $100 (since you entered the position for a credit and all contracts would expire worthless). The high breakeven price is more complex to calculate but adheres to this formula:**



`Strike Price of Short Calls + (Width of Spread / (N - 1)) +/- Credit Received/Debit Paid`



**Where N is the number of Short Calls whose credit is used to buy the Long Call.**



**The high breakeven for this Call Frontspread is $102.5 - ($2.5 / (2-1)) + $0.50 = $105.50.** However, since the time component of your trade plan may not since the time component of your trade plan may not extend all the way to expiration you should be prepared to to close at a variety of XYZ prices as the market value of your 1x2 $100 / $102.5 Call Frontspread changes.



**The max loss on this position at expiry is theoretically infinite, since XYZ price can increase indefinitely above the high breakeven.** The max gain of a Call Frontspread occurs at expiry if XYZ price increases to the exact Short Call strike, where you would make the width of the spread plus the credit received ($102.5 - $100 + $0.50 = $3.00 in this example).  **Since the loss on a Call Frontspread is theoretically unlimited, this structure carries a high "risk of ruin".** The unlimited loss can be mitigated by buying a further OTM Call(s), which morphs this structure into a Long Call Broken Wing Butterfly; unfortunately, this turns the trade into a debit transaction rather than a credit transaction and removes the gains associated with an XYZ price decrease.

Call Frontspread

A trader who is short 100 shares of stock may buy a **Call**. The trader pays a debit, called a premium, to buy the Call and has the right (but not the obligation) to buy 100 shares at the strike price. **The trader is "protecting" those 100 short shares from a large, volatile price increase with the Call.**



Suppose you short 100 shares of XYZ stock at $50 per share and, over the course of 3 months, the price of XYZ decreases to $45. Great trade! However, you forecast a potentially-large, fast price increase and increase in volatility, so you buy a $47 strike Call for $1.



You now have the right to buy 100 shares of XYZ at $47 per share, guaranteeing you a minimum profit of $2 per share on the whole position: $50 (cost basis) - $47 (strike price) - $1 (the premium paid for the Put) = $2 x 100 shares = $200.

Protective Call

A trader who wants to speculate on a decrease in volatility and a neutral price can **sell a Short Iron Butterfly**. The trader receives a large credit, called a premium, to sell both the Put Credit Spread and the Call Credit Spread.



Suppose stock XYZ is trading at $145. You forecast a decrease in volatility and a neutral XYZ price.



**You sell a $140 / $145 (x2) / $150 Short Iron Butterfly (selling the $145 Put and buying the $140 Put, selling the $145 Call and buying the $150 Call) and receive a $4.10 credit to express this view. Your breakeven prices at expiry are $140.90, the short Put strike minus the credit received, and $149.10, the short Call strike plus the credit received.** The max loss at expiry occurs if price is outside of the breakeven prices of $140.90 and $149.10 and is equal to the width of the spreads minus the credit received ($5 - $4.90 = $0.90 in this example). The max profit at expiry occurs if price is precisely at $145, the strike price of the short Put and short Call, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $140 / $145 (x2) / $150 Short Iron Butterfly changes. **It is important to remember that this max profit occurs at expiry only, since most of the value of the Short Iron Butterfly is realized as the sold Call and sold Put decay into expiration.** Compared to other structures, the Iron Butterfly is rigid with respect to time, since price needs to be as close as possible to the sold strike. **The Short Iron Butterfly is a fixed-risk "version" of the Short Straddle because "buying the wings" (the $140 Put and the $150 Call) sets a max loss in case of an extreme price move outside of your profitable range.**

Short Iron Butterfly

A trader who wants to speculate on a decrease in volatility and a neutral price can **sell a Short Iron Condor**. The trader receives a credit, called a premium, to sell both the Put Credit Spread and the Call Credit Spread.



Suppose stock XYZ is trading at $280. You forecast a decrease in volatility and a neutral XYZ price.



**You sell a $260 / $265 / $295 / $300 Short Iron Condor (selling the $265 Put and buying the $260 Put, selling the $295 Call and buying the $300 Call) and receive a $1.80 credit to express this view. Your breakeven prices at expiry are $263.20, the short Put strike minus the credit received, and $296.80, the short Call strike plus the credit received.** The max loss at expiry occurs if price is outside of the breakeven prices of $263.20 and $296.80 and is equal to the width of the spreads minus the credit received ($5 - $1.80 = $3.20 in this example). The max profit at expiry occurs if price is higher than $265 and lower than $295, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $260 / $265 / $295 / $300 Short Iron Condor changes. **The Short Iron Condor is a fixed-risk "version" of the Short Strangle because "buying the wings" (the $260 Put and the $300 Call) sets a max loss in case of an extreme price move outside of your profitable range.**

Short Iron Condor

A trader who wants to speculate on a large increase or decrease in price and a large increase in volatility can **buy a Long Strangle**. The trader pays a debit, called a premium, to buy both the Put and the Call and has the right, but not the obligation, to buy 100 shares at the Call strike price and sell 100 shares at the Put strike price.



Suppose stock XYZ is trading at $43. You forecast a large increase or decrease in price and a large increase in volatility.



**You buy a $41 / $45 Long Strangle (buying the $41 Put and buying the $45 Call) and pay a $1.76 debit to express this view. Your breakeven prices at expiry are $39.24, the long Put strike minus the debit paid, and $46.76, the long Call strike plus the debit paid.** The theoretical max profit is unlimited as XYZ price may increase infinitely or decrease to zero, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $41 / $45 Long Strangle changes.

Long Strangle

A trader who wants to speculate on a decrease in volatility and a neutral price can **sell a Short Strangle**. The trader receives a credit, called a premium, to sell both the Put and the Call and has the obligation to buy 100 shares at the Call strike price as well as the obligation to sell 100 shares at the Put strike price.



Suppose stock XYZ is trading at $55. You forecast a decrease in volatility and a neutral XYZ price.



**You sell a $51 / $58 Short Strangle (selling the $51 Put and selling the $58 Call) and receive a $1.78 credit to express this view. Your breakeven prices at expiry are $49.22, the short Put strike minus the credit received, and $59.78, the short Call strike plus the credit received.** The max profit at expiry occurs if price is higher than $51 and lower than $58, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $51 / $58 Short Strangle changes. **Because the price of XYZ can, in theory, increase infinitely or decrease to $0, Short Strangles carry a high "risk of ruin".** This means that an adverse price move, like a surprise earnings miss or buyout offer, can cause catastrophic losses. The fixed-risk "version" of a Short Strangle is a Short Iron Condor.

Short Strangle

A trader who forecasts a precise decrease to a certain range but fears price may "overshoot" (decrease beyond that range) and flat to decreasing volatility can **buy a Long Put Broken-Wing Butterfly**. The trader pays a debit for the whole position, called a premium.



Suppose stock XYZ is trading at $32. You forecast a decrease in XYZ price to between $30 and $26 with high confidence that it will be at $28 at the next monthly expiration, and you forecast no change to volatility. However, you suspect that if your forecast is incorrect, XYZ price will decrease beyond $28.



**You open a $30 / $28 / $27 Long Put Broken-Wing Butterfly (buying the $30 Put, selling two (2) $28 Puts, and buying the $27 Put) for a $0.30 debit.** Your breakeven price at expiry is $29.70, the nearest Put minus the debit paid. Your max profit is $1.70 at expiry, the distance from the closest OTM Put "wing" to the "body" of the sold OTM Puts, minus the debit paid. If the price "overshoots" past $27, your profit is $0.70 at expiry, the distance from the furthest OTM Put "wing" to the "body" of the sold OTM Put minus the debit paid. **It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Put Broken-Wing Butterfly is realized as the sold Puts decay into expiration.** Compared to other structures, the Long Put Broken-Wing Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming. In contrast to a Long Put Butterfly, the Long Put Broken-Wing Butterfly still yields a profit if price "overshoots" the furthest OTM Put strike, where a Long Put Butterfly does not.

Bearish Broken-Wing Butterfly

A trader who forecasts a precise increase to a certain range but fears price may "overshoot" (increase beyond that range) and flat to decreasing volatility can **buy a Long Call Broken-Wing Butterfly**. The trader pays a debit for the whole position, called a premium.



Suppose stock XYZ is trading at $240. You forecast an increase in XYZ price to between $250 and $270 with high confidence that it will be at $260 at the next monthly expiration, and you forecast no change to volatility. However, you suspect that if your forecast is incorrect, XYZ price will increase beyond $270.



**You open a $250 / $260 / $265 Long Call Broken-Wing Butterfly (buying the $250 Call, selling two (2) $260 Calls, and buying the $265 Call) for a $2.25 debit.** Your breakeven price at expiry is $252.25, the nearest Call plus the debit paid. Your max profit is $7.75 at expiry, the distance from the closest OTM Call "wing" to the "body" of the sold OTM Calls, minus the debit paid. If the price "overshoots" past $265, your profit is $2.75 at expiry, the distance from the furthest OTM Call "wing" to the "body" of the sold OTM Calls minus the debit paid. **It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Call Broken-Wing Butterfly is realized as the sold Calls decay into expiration.** Compared to other structures, the Long Call Broken-Wing Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming. In contrast to a Long Call Butterfly, the Long Call Broken-Wing Butterfly still yields a profit if price "overshoots" the furthest OTM Call strike, where a Long Call Butterfly does not.

Long Call Broken-Wing Butterfly

A trader who forecasts a precise decrease to a certain price range and flat to decreasing volatility can **buy a Long Put Butterfly**. The trader pays a small debit for the whole position, called a premium.



Suppose stock XYZ is trading at $238. You forecast a decrease in XYZ price to between $230 and $210 with high confidence that it will be at $220 at the next monthly expiration, and you forecast no change to volatility.



**You open a $230 / $220 / $210 Long Put Butterfly (buying the $230 Put, selling two (2) $220 Puts, and buying the $210 Put) for a $0.93 debit.** Your breakeven prices at expiry are $229.07, the nearest long Put minus the debit, and $210.93, the farthest long Put plus the debit. Your max profit is $9.07, the distance from the "wing" to the "body" of the Long Put Butterfly, minus the debit paid. **It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Put Butterfly is realized as the sold Puts decay into expiration.** Compared to other structures, the Long Put Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming.

Long Put Butterfly

A trader who forecasts a precise increase to a certain price range and flat to decreasing volatility can **buy a Long Call Butterfly**. The trader pays a small debit for the whole position, called a premium.



Suppose stock XYZ is trading at $139. You forecast an increase in XYZ price to between $145 and $155 with high confidence that it will be at $150 at the next monthly expiration, and you forecast no change to volatility.



**You open a $145 / $150 / $155 Long Call Butterfly (buying the $145 Call, selling two (2) $150 Calls, and buying the $155 Call) for a $0.57 debit.** Your breakeven prices at expiry are $145.57, the nearest long Call plus the debit, and $154.43, the farthest long Call minus the debit. Your max profit is $4.43, the distance from the "wing" to the "body" of the Long Call Butterfly, minus the debit paid. **It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Call Butterfly is realized as the sold Calls decay into expiration.** Compared to other structures, the Long Call Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming.

Long Call Butterfly

A trader who wants to speculate on a large increase in price and flat to increasing volatility can **open a Bearish Risk Reversal**. The trader may pay a small debit, receive a small credit, or even open the position for exactly $0.



Suppose stock XYZ is trading at $45. You forecast a large decrease in XYZ price and an increase (or no decrease) in volatility.



**You open a $47 / $43 Bearish Risk Reversal (selling the $47 Call and buying the $43 Put) for exactly $0.00, no cost, to express this view. How is this possible?** The $47 Call bid price is $0.80 and the $43 Put ask price is $0.80, so when you sell the Call you receive am $0.80 credit, and you then use that $0.80 credit to buy the Put, netting out to $0.



This trade breaks even if XYZ price remains between $43 and $47, since the trade was entered for $0. Above $47, your PnL becomes negative quickly as the sold Call works against you and the bought Put approaches zero value. Below $43, your PnL becomes positive quickly as the bought Put gains value and the sold Call loses value. The time component of your trade plan may not extend all the way to expiration, so you should be prepared to close at a variety of XYZ prices as the market value of your $47 / $43 Bearish Risk Reversal changes. **Because the price of XYZ can theoretically decrease down to $0, Bearish Risk Reversals carry a high "risk of ruin".** _However, a trader can reduce this risk by selling a Call Credit Spread, which has a defined max loss, rather than just selling a Call._

Bearish Risk Reversal

A trader who wants to speculate on a large increase in price and flat to increasing volatility can **open a Risk Reversal**. The trader may pay a small debit, receive a small credit, or even open the position for exactly $0.



Suppose stock XYZ is trading at $26. You forecast a large increase in XYZ price and an increase (or no decrease) in volatility.



**You open a $24 / $28 Risk Reversal (selling the $24 Put and buying the $28 Call) for exactly $0.00, no cost, to express this view. How is this possible?** The $24 Put bid price is $0.81 and the $28 Call ask price is $0.81, so when you sell the Put you receive a $0.81 credit, and you then use that $0.81 credit to buy the Call, netting out to $0.



This trade breaks even if XYZ price remains between $24 and $28, since the trade was entered for $0. Below $24, your PnL becomes negative quickly as the sold Put works against you and the bought Call approaches zero value. Above $28, your PnL becomes positive quickly as the bought Call gains value and the sold Put loses value. The time component of your trade plan may not extend all the way to expiration, so you should be prepared to close at a variety of XYZ prices as the market value of your $24 / $28 Risk Reversal changes. **Because the price of XYZ can theoretically decrease down to $0, Risk Reversals carry a high "risk of ruin".** _However, a trader can reduce this risk by selling a Put Credit Spread, which has a defined max loss, rather than just selling a Put._

Risk Reversal

A trader who wants to speculate on a decrease in volatility and a slightly-increasing to slightly-decreasing price can **sell (write) a Straddle**. The trader receives a credit for the position, called a premium, and has the obligation to either buy 100 shares or sell 100 shares at the strike price.



Suppose stock XYZ is trading at $357. You forecast a decrease in XYZ volatility and a small increase or small decrease in XYZ price.



**You sell a $357 Straddle (selling the $357 Call and selling the $357 Put) for a $20 credit to express this view. You have two breakeven prices: either $357 (strike price of both contracts) - $20 (premium received) = $337 or $357 (strike price of both contracts) + $20 (premium received) = $377**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $357 Straddle changes. **Because the price of XYZ can theoretically increase to infinity or decrease down to $0, selling a Straddle carries a high "risk of ruin".** This means that an adverse price move in **EITHER** direction, like a surprise earnings miss or buyout, can cause catastrophic losses.

Short Straddle

A trader who wants to speculate on a neutral to slightly-decreasing price with a neutral to slightly-decreasing volatility can **sell (write) a Call Credit Spread**. The trader receives a credit for the whole position, called a premium, though this credit is smaller than the credit associated with selling a Call alone. In exchange for this reduction, the max loss of a Call Credit Spread is limited to the width of the spread plus the credit received.



Suppose stock XYZ is trading at $129. You forecast a small decrease in XYZ price and a small decrease in volatility.



**You sell a $131 / $132 Call Credit Spread (selling the $131 Call and buying the $132 Call) for a $0.40 credit to express this view. Your breakeven XYZ price at expiry is $131 (short Call of the spread) + $0.40 (premium received) = $131.40**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $131 / $132 Call Credit Spread changes.

Call Credit Spread

A trader who wants to speculate on a neutral to slightly-increasing price with a neutral to slightly-decreasing volatility can **sell (write) a Put Credit Spread**. The trader receives a credit for the whole position, called a premium, though this credit is smaller than the credit associated with selling a Put alone. In exchange for this reduction, the max loss of a Put Credit Spread is limited to the width of the spread plus the credit received.



Suppose stock XYZ is trading at $138. You forecast a small increase in XYZ price and a small decrease in volatility.



**You sell a $135 / $130 Put Credit Spread (selling the $135 Put and buying the $130 Put) for a $1.50 credit to express this view. Your breakeven XYZ price at expiry is $135 (short Put of the spread) - $1.50 (premium received) = $133.50**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $135 / $130 Put Credit Spread changes.

Put Credit Spread

A trader who wants to speculate on a decrease in price with a neutral to small increase in volatility can **buy a Put Debit Spread**. The trader pays a debit for the whole position, called a premium, though this debit is smaller than the debit associated with buying a Put alone. In exchange for this price reduction, a Put Debit Spread gives up the theoretically unlimited profit (only limited by the stock going to $0) associated with a Put as the max profit is limited to the width of the spread between the bought Put and the sold Put minus the debit paid.



Suppose stock XYZ is trading at $135. You forecast a decrease in XYZ price but only a small increase in volatility.



**You buy a $130 / $125 Put Debit Spread (buying the $130 Put and selling the $125 Put) for a $1.20 debit to express this view. Your breakeven XYZ price at expiry is $130 (long Put of the spread) - $1.20 (premium paid) = $128.80**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $130 / $125 Put Debit Spread changes.  The Vega associated with a Debit Spread is much smaller than the Vega associated with a Call or Put alone because you are selling a further OTM Call or further OTM Put, and based on what we know about the Volatility Smirk (or Volatility Smirk) in equities, your position benefits from selling higher volatility.

Put Debit Spread

A trader who wants to speculate on an increase in price with a neutral to small increase in volatility can **buy a Call Debit Spread**. The trader pays a debit for the whole position, called a premium, though this debit is smaller than the debit associated with buying a Call alone. In exchange for this price reduction, a Call Debit Spread gives up the theoretically unlimited profit associated with a Call as the max profit is limited to the width of the spread between the bought Call and the sold Call minus the debit paid.



Suppose stock XYZ is trading at $470. You forecast an increase in XYZ price but only a small increase in volatility.



**You buy a $495 / $500 Call Debit Spread (buying the $495 Call and selling the $500 Call) for a $1.35 debit to express this view. Your breakeven XYZ price at expiry is $495 (long Call of the spread) + $1.35 (premium paid) = $496.35**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $495 / $500 Call Debit Spread changes.  The Vega associated with a Debit Spread is much smaller than the Vega associated with a Call or Put alone because you are selling a further OTM Call or further OTM Put, and based on what we know about the Volatility Smirk (or Volatility Smirk) in equities, your position benefits from selling higher volatility.

Call Debit Spread

A trader who wants to speculate on a decrease in volatility and a neutral or slightly-decreasing price can **sell a Call**. The trader receives a credit, called a premium, to sell the Call and has the obligation to sell 100 shares at the strike price.



Suppose stock XYZ is trading at $23. You forecast a decrease in volatility and a neutral to slightly-decreasing XYZ price.



**You sell a $24 Call for $0.50 to express this view. Your breakeven XYZ price at expiry is $24 (strike price) + $0.50 (premium received) = $24.50**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $24 Call changes. **Because the price of XYZ can increase infinitely in theory, selling a Call without owning shares as collateral or buying a further OTM Call to create a fixed-risk spread carries a high "risk of ruin".** This means that an adverse price move, like a surprise earnings beat or buyout that increases price greatly, can cause catastrophic losses.

Short Call

A trader who wants to speculate on a large, fast, and volatile price decrease can **buy a Put**. The trader pays a debit, called a premium, to buy the Put and has the right (but not the obligation) to sell 100 shares at the strike price.



Suppose stock XYZ is trading at $150. You forecast a large, fast decrease in XYZ price and you also forecast an increase in XYZ volatility.



**You buy a $145 Put for $3 to express this view. Your breakeven XYZ price at expiry is $145 (strike price) - $3 (premium paid) = $142**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $145 Put changes.

Long Put

A trader who wants to buy 100 shares of stock if and only if the stock price decreases to a certain price can **short a Put at that price.** The trader receives a credit, called a premium, to sell the Put and has the obligation to buy 100 shares at the strike price.



Suppose stock XYZ is trading at $100. You forecast neutral price changes to XYZ (meaning that price may go up or down a small amount) and you also forecast a decrease in XYZ volatility. You are willing to buy 100 shares of XYZ, but only if the price decreases to $95, and you have $9500 in margin available.



**You sell a $95 Put in XYZ to express this view and receive $3 in premium. Your breakeven XYZ price at expiry is $95 (strike price) - $3 (premium received) = $92**, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $95 Put changes.

Cash Secured Put

A trader who owns 100 shares of stock may buy a **Put**. The trader pays a debit, called a premium, to buy the Put and has the right (but not the obligation) to sell 100 shares at the strike price. **The trader is "protecting" those 100 shares from a large, volatile price decrease with the Put.**



Suppose you bought 100 shares of XYZ stock at $70 per share and, over the course of 2 years, the price of XYZ increased to $105. Great investment! However, you forecast a potentially-large, fast price decrease and increase in volatility, so you buy a $100 strike Put for $5.



You now have the right to buy 100 shares of XYZ at $47 per share, guaranteeing you a minimum profit of $25 per share on the whole position: $100 (strike price) - $70 (cost basis) - $5 (the premium paid for the Put) = $25 x 100 shares = $2500.

Protective Put

A trader who is short 100 shares of stock may sell (or write) a **Covered Put**. The trader receives a credit, called a premium, for selling the Put and is obliged to buy those 100 shares at the strike price of the Put.

Covered Put

A trader who owns 100 shares of stock may sell (or write) a **Covered Call**. The trader receives a credit, called a premium, for selling the Call and is obliged to sell those 100 shares at the strike price of the Call.