5. Complex Trades—Part 2

Until this point our focus has been structures composed of puts or calls spanning different strike prices and/or expiration dates. This chapter extends those themes with more complex trades that contain three or more components. These structures, because of their complexity, offer additional advantages with regard to hedging and risk management. For example, using the ratios of the previous chapter as a springboard, we can structure a position containing three strikes that caps both the maximum gain and the maximum loss. These structures, commonly referred to as “butterfly trades,” are quite popular among private investors.

This chapter also builds on previous discussions with trades that involve both puts and calls. ...

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