The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

PART TWO

The Four Basic Option Strategies

Basic option strategies can be broken down into long call, long put, short call, and short put. Once you understand this framework, you should be able to comprehend any option strategy at a glance, whether it is an outright (single leg) position or a multileg spread. A separate chapter is devoted to each one of these four basic option strategies before we move forward in later chapters to cover more complex strategies.

To make it easy to compare one strategy to another, examples in Part Two, Chapters 7 to 10, are presented in a consistent format. Each example includes the following:

• Strategy summary,

• Table showing values at expiration date,

• Chart showing values at expiration date,

• Illustrative Greeks for a near-term expiration month,

• Illustrative Greeks for a longer-term expiration month,

• Ramifications of exercise and assignment.

Each example assumes that XYZ stock is initially trading at $100 a share. To gain an understanding under various scenarios, each strategy is analyzed from the perspective that an option is established in the following ways:

• Deep-in-the-money at $11,

• Slightly-in-the-money at $7,

• At-the-money at $5,

• Slightly-out-of-the-money at $2,

• Far-out-of-the-money at $1.

Each example shows a wide range of potential option values at the expiration date (expiration analysis). This expiration analysis shows the gain or loss from each strategy, assuming that the underlying stock closes from $75 to $125 at the expiration ...