Options Trading for the Institutional Investor: Managing Risk in Financial Institutions

11. Combination Conservative Techniques

The most impressive returns available using options involve combination strategies: spreads and straddles. With short straddles, you can achieve higher-than-average current returns. However, when utilizing these more advanced strategies, you need to remember two important points. First, the complex tax rules for such positions could jeopardize your long-term capital gains status. Second, the risks involved are conservative only when the basic assumptions continue to apply. These assumptions include your willingness to acquire more shares of stock and to accept exercise if it occurs, and your continued belief that the fundamental value of the underlying companies remains strong.

Options traders employ a ...