Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 13

Strike One . . .

Yes?” “Well, see, it looks to me like the strike price works one way for calls and exactly the opposite way for puts. Look at the chart again that we created for call options.”

Stock Price: $40

“In this chart, which we created for Plum, the lower the strike price, the higher the debit/credit involved in making the deal. That’s because, in the long call position, you want to be in a position to buy low and sell high, and you do so in that sequence. When the strike price is lower than the market price, you can buy my shares at that lower strike price (after all, you paid for the right to do that), and you can then turn around and sell them on the open market at the higher market price. So, as we learned, it’s the lower strike prices that are worth money to you right out of the gate.”

FIGURE 13.1 The Relationship of Strike Price to Market Price for Puts

“I see where you’re headed,” interrupted Lon. “In the case of long puts, it’s just the opposite: it’s the higher strike prices that have monetary value to me right out of the gate. I want the market price of the stock to move lower than the strike price. The idea here is that I pay you a debit for the right to sell you my shares at the strike price of $40. Then, if the stock moves lower, say to $30, I still ...