Derivatives Markets and Analysis

CHAPTER 7Option Strategies

In Chapter 5, we defined the six fundamental option strategies and the straddle and spread in terms of their profit and security price relationships near expiration. As we noted in Chapter 5, one of the important features of an option is that it can be combined with positions in the underlying security and other options to generate a number of different investment strategies. For example, a speculator who expected a stock to increase in the future but didn’t want to assume the risk inherent in a call purchase position could form a bull call spread. In contrast, a speculator who expected a stock to be stable over the near term could, in turn, try to profit by forming a straddle write. Thus, by combining different ...