Chapter 12

Combination Strategies: Spreads and Other Wild Things

In This Chapter

arrow Covering options with stock

arrow Reducing the cost of protection

arrow Expanding on vertical spreads

arrow Changing the spread time horizon

Basic option positions reduce risk by reducing your position cost. However, the real power from these securities is unleashed when combining them with stock and other options, adding a new layer of protection and potential profit to your strategies. Starting with option positions covered with stock, in this chapter we analyze the risk and develop a strategy that discounts the cost of put protection for long stock. This strategy is known as a collar.

Covered option strategies with stock are only the beginning. This strategy can be modified to include just options when you vary different components of a vertical spread. By using the same strike price in th-e vertical spread while varying the expiration month for the two options, you create a calendar spread, which adds time flexibility to the position. By allowing the strike prices to also change, you create a diagonal ...

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