CHAPTER 35

Option Trading Strategies

Brokers are fond of pointing out to possible buyers of options that they are a splendid thing to buy, and pointing out to sellers that they are a splendid thing to sell. They believe implicitly in this paradox. Thus the buyer does well, the seller does well, and it is not necessary to stress the point that the broker does well enough. Many examples can be cited showing all three of them emerging from their adventures with a profit. One wonders why the problem of unemployment cannot be solved by having the unemployed buy and sell each other options, instead of mooning around on those park benches.

—Fred Schwed

Where Are the Customers’ Yachts?

Comparing Trading Strategies

The existence of options greatly expands the range of possible trading strategies. For example, in the absence of an option market, a trader who is bullish can either go long or initiate a bull spread (in those markets in which spread movements correspond to price direction). However, if option-related trading approaches are included, the bullish trader can consider numerous alternative strategies including: long out-of-the-money calls, long in-the-money calls, long at-the-money calls, short out-of-the-money puts, short in-the-money puts, short at-the-money puts, “synthetic” long positions, combined positions in futures and options, and a variety of bullish option spreads. Frequently, one of these option-related strategies will offer significantly better profit potential ...

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