Option Trading Lesson 2.8

What Is a Christmas Tree?

A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. 

Long call Christmas tree when using calls options. 看升-聖誕樹

Long put Christmas tree when using put options. 看跌-聖誕樹

The strategy is also available long (bullish) or short (bearish).This spread is essentially the combination of a long vertical spread and two short vertical spreads.

The 1-3-2 structure supposedly appears as a tree. Time decay is on the holder's side, as the holder wants all options except the lowest to expire worthless.

For example, with the underlying asset at $100,

• Long Christmas Tree With Calls (LC 95x1, SC 105x3, LC 110x2) 傾向看升
• Long Christmas Tree with Puts (LP 105x1, SP 95x3, LP 90x2) 傾向看跌

Maximum profit equals middle strike minus higher strike minus the premium.

Maximum loss is the net debit paid for the strategy.

Short Christmas Tree with Calls (SC 95x1, LC 105x3, SC 110x2) 傾向看跌

Short Christmas Tree with Puts (SP 105x1, LP 95x3, SP 90x2) 傾向看升

The maximum profit is the net credit received.

留意commission 和手續費的開支，因為一次策略會牽涉六個期權 

Source: Investopedia

Option Trading Lesson 2.7

What Is double diagonal spread?

A double diagonal spread is made up of a diagonal call spread and a diagonal put spread. To run this strategy, you need to know how to manage the risk of early assignment on your short options.

I.e. Iron condor 但唔係同一個到期日

SC 110, SP 90 due on 7 Jan

LC 120, LP 80 due on 7 Mar

Typically, the stock will be halfway between 90 and 110 when you establish the strategy. If the stock is not in the center at this point, the strategy will have a bullish or bearish bias. You want the stock to remain between 90 and 110, so the options you’ve sold will expire worthless and you will capture the entire premium. 

The put and call you bought at 80 and 120 serve to reduce your risk over the course of the strategy in case the stock makes a larger-than-expected move in either direction. (擺一個短期龍門，買一個長期保險)

Once you’ve sold the additional options at strike 90 and 110 and all the options have the same expiration date, you’ll discover you’ve gotten yourself into a good old iron condor. 

The goal at this point is still the same as at the outset—you want the stock price to remain between strike 90 and 110. Ultimately, you want all of the options to expire out-of-the-money and worthless so you can pocket the total credit from running all segments of this strategy. (最終目的都係等收錢，LP and LC 只係一個長期保障)

Suggestion:

• Short weekly, Long 1 month
• Short bi-weekly, Long 2 months
• Short monthly, Long 3 months
  

Source: Options playbook

Option Trading Lesson 2.6

What Is a Diagonal Spread?

A diagonal spread (對等) is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates. (搬龍門，搬行權價和日期，兩者都變動)

Diagonal spreads allow traders to construct a trade that minimizes the effects of time, while also taking a bullish or bearish position. It is called a "diagonal" spread because it combines features of a horizontal (calendar) spread and a vertical (strike price) spread.

Types of Diagonal Spreads

Because there are two factors for each option that are different, namely strike price and expiration date, there are many different types of diagonal spreads. They can be bullish or bearish, long or short, and utilize either puts or calls. (任何看法、任何日期、 獲利來自時間消耗)

Typically, these are structured on a 1:1 ratio, and long vertical and long calendar spread results in a debit to the account. With diagonal spreads, the combinations of strikes and expirations will vary. 

Long diagonal spread is generally put on for a debit .

Short diagonal spread is set up as a credit.

However, many traders "roll" the strategy (轉倉), replacing the expired option with an option with the same strike price but with the expiration of the longer option (or earlier).

Example:

Call:
SC 110, due on 7 Jan: LC 120, due on 7 Mar (Debit premium)

LC 110, due on 7 Jan: SC 120 due on 7 Mar (Credit premium)

Put:

SP 90, due on 7 Jan: LP 80, due on 7 Mar (Debit premium)

LP 90, due on 7 Jan: SP 80 due on 7 Mar (Credit premium)

Source: Options playbook

Option Trading Lesson 2.5

What Is a Butterfly Spread?

A butterfly spread is an options strategy combining bull and bear spreads, with a fixed risk and capped profit. (蝶式價差)

Butterfly spreads use four option contracts with the same expiration but three different strike prices. A higher strike price, an at-the-money strike price, and a lower strike price. The options with the higher and lower strike prices are the same distance from the at-the-money options. 

Each type of butterfly has a maximum profit and a maximum loss.

Puts or calls can be used for a butterfly spread. Combining the options in various ways will create different types of butterfly spreads, each designed to either profit from volatility or low volatility.

Long Call Butterfly Spread (LC 95, SC 100 x2, LC 105)

Net debt is created when entering the trade.

Long Put Butterfly Spread (LP 105, SP 100 x2, LP 95)

Net debt is created when entering the position.

Short Call Butterfly Spread (SC 95, LC 100 x2, SC 105)

A short butterfly spread with calls is the strategy of choice when the forecast is for a stock price move outside the range of the highest and lowest strike prices. (股價大升). The maximum profit for the strategy is the premiums received.

Short Put Butterfly Spread (SP 105, LP 100 x2, SP 95)

A short butterfly spread with puts realizes its maximum profit if the stock price is above the higher strike or below the lower strike on the expiration date. The forecast, therefore, must be for "high volatility, (高於市場SP買貨 or 股價大跌). The maximum profit for the strategy is the premiums received.

Iron Butterfly Spread (LP 95, SP 100, SC 100, LC 105)

The result is a trade with a net credit that's best suited for lower volatility scenarios. The maximum profit occurs if the underlying stays at the middle strike price.

Reverse Iron Butterfly Spread (SP 95, LP 100, LC 100, SC 105)

This creates a net debit trade that's best suited for high-volatility scenarios. Maximum profit occurs when the price of the underlying moves above or below the upper or lower strike prices.

Option Trading Lesson 2.4

What Is an Iron Condor?

An iron condor is an options strategy consisting of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with the same expiration date. 

The iron condor strategy has limited upside and downside risk because the high and low strike options, the wings, protect against significant moves in either direction. Because of this limited risk, its profit potential is also limited.

LC 110, SC 105, SP 95, LP 90

The options that are further OTM, called the wings, are both long positions. Because both of these options are further OTM, their premiums are lower than the two written options, so there is a net credit to the account when placing the trade. 

龍門 (95-105)外再每一邊加一個網 (LC 110, LP 90)

The options that are further OTM, called the wings, are both long positions. Because both of these options are further OTM, their premiums are lower than the two written options, so there is a net credit to the account when placing the trade. 

Iron Condor Profits and Losses

The maximum profit for an iron condor is the amount of premium, or credit, received for creating the four-leg options position.

The maximum loss is also capped. The maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes. Reduce the loss by the net credits received, but then add commissions to get the total loss for the trade.

Option Trading Lesson 2.3

What Is a Strangle?

A strangle is an options strategy in which the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset.

A strangle is a good strategy if you think the underlying security will experience a large price movement in the near future but are unsure of the direction. However, it is profitable mainly if the asset does swing sharply in price. (Set 龍門)

How Does a Strangle Work?

Strangles come in two forms:

Long strangle (LC 105, LP 95)

Investor simultaneously buys an out-of-the-money call and an out-of-the-money put option. The call option's strike price is higher than the underlying asset's current market price, while the put has a strike price that is lower than the asset's market price. 

This strategy has large profit potential since the call option has theoretically unlimited upside if the underlying asset rises in price, while the put option can profit if the underlying asset falls. The risk on the trade is limited to the premium paid for the two options. (買刀仔，鋸大樹)

Short strangle (SC 105, SP 95)

Investor simultaneously sells an out-of-the-money put and an out-of-the-money call. This approach is a neutral strategy with limited profit potential. 

A short strangle profits when the price of the underlying stock trades in a narrow range between the breakeven points. The maximum profit is equivalent to the net premium received for writing the two options, less trading costs. (兩手準備，一手現金一手貨，賣合約收錢)

Option Trading Lesson 2.2

What Is a Straddle?

More broadly, straddle strategies in finance refer to two separate transactions which both involve the same underlying security, with the two component transactions offsetting one another. Investors tend to employ a straddle when they anticipate a significant move in a stock's price but are unsure about whether the price will move up or down.

How do you earn a profit in a straddle?

To determine how much an underlying security must rise or fall in order to earn a profit on a straddle, divide the total premium cost by the strike price.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

• Long Straddle (LP 100, LC 100)

A long straddle (同價錢、同到期日，升跌兩邊買晒) is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. (投資者認為到期日價錢不會停留在$100)

Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined. 

This makes it much more difficult for traders to profit from the move because the price of the straddle will already include mild moves in either direction. If the anticipated event does not generate a strong move in either direction for the underlying security, then options purchased likely will expire worthless, creating a loss for the trader. (如果股價唔夠波動，便會造成損失)

• Short Straddle (SP 100, SC 100)

Short straddles are when traders sell a call option and a put option at the same strike and expiration on the same underlying. A short straddle profits from an underlying lack of volatility in the asset's price.

Premiums are collected when the trade is opened with the goal to let both the put and call expire worthless. However, chances that the underlying asset closes exactly at the strike price at the expiration are low, and that leaves the short straddle owner at risk for assignment. 

They are generally used by advanced traders to bide time. (投資者認為到期日價錢會停留在$100)

Source: Investopedia