3. Spreads. The spread involves buying or selling options at different strikes, with different expirations, or both, on the same underlying stock. Variations include calendar, butterfly, ratio, and reverse spreads. These are among the most popular of options strategies because profits and losses can be controlled and limited in the structure of the spread.
4. Straddles. The straddle involves buying or selling dissimilar options with the same strike prices and on the same underlying stock. Risks might be greater, and creating profits is often more difficult than with spreads, but many variations make straddles interesting and appealing. Because one of the two sides can be closed profitably at any time, straddle risks can be reduced over time, especially for short positions or for the strangle, a variety of straddle.
5. Combinations. Some strategies involve the combined positions in options with related positions in other options, often with weight favoring bullish or bearish movement in the underlying stock. Any position with both calls and puts that is not a straddle is classified as a combination.
6. Synthetic positions. Some strategies are designed to create profit and risk profiles equal to other positions; these are called synthetics. For example, opening a long call and a short put creates synthetic long stock (an options position whose price will react in the same way as buying 100 shares of stock). A long put with a short call creates the opposite: synthetic short stock. The appeal to synthetic positions is that they can be opened for less capital than the mirrored position and often with identical or lower risk.
Anyone embarking on the use of options in their portfolio needs to appreciate the various levels of risk to a particular strategy as a primary consideration. The next chapter explains how risk varies among the different options strategies.
Endnotes
1 . Source: Chicago Board Options Exchange (CBOE), 2008 Market Statistics.
2 . Aristotle, Politics, Book One, Part XI, c. 350 B.C.
3 . The original 16 companies on which call options were traded in 1973 were AT&T, Atlantic Richfield, Brunswick, Eastman Kodak, Ford, Gulf & Western, Loews, McDonald’s, Merck, Northwest Airlines, Pennzoil, Polaroid, Sperry Rand, Texas Instruments, Upjohn, and Xerox.
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