Other Spreads and Combinations

There are any number of additional ways to combine options into spreads and combinations. Some work to make use of the best attributes of other spreads, as a diagonal spread combines the best elements of a vertical spread and the best elements of a calendar spread. Some strive to take advantage of other elements that don’t get much attention in option trading. For example, a box spread, even in the equity world, is really an interest rate play or a way for an option trader to borrow or lend money. Others don’t have much to recommend them. A guts spread is a strangle in which both of the options are in-the-money; there are other ways to get the same or similar exposure without paying the penalty of the bid/ask spread for in-the-money options. And there are some combinations that may or may not be particularly useful but that have intriguing names such as Christmas tree, jelly roll, and stupid. Since every trader, even professionals, will have little call to use some of these, we’ll cover each one briefly.

Married Put

You probably own stock. If you own stock and were worried that the price of that stock might drop, then you might sell a covered call although, as we saw in Chapter 4, that doesn’t provide very much protection. You might buy a put but puts are expensive to always have in place, even if you buy longer-dated puts, which are cheaper than buying a series of shorter-dated puts. How expensive? Historically, if you’d bought ...

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