29 Option Spread Strategies You Need to Know (Part 4)

Billy Williams

⇐ Part 3 (#4 to #8)

The following list of option spread strategies features tips 9-12 and picks up where a previous article left off.

These strategies offer a glimpse into unique combinations of options that are aimed at seizing specific investing opportunities. As investors become comfortable with basic options strategies, these possibilities may be worth considering for specific situations.

9) Neutral Calendar Spread

Neutral calendar spread is another neutral market strategy. I am neutral toward the market in the short term. My plan is to take advantage of rapid devaluation of the near-term option because of time decay.

As the name suggests, the spread is based on calendar dates of the same security at the same prices. I will sell one near-term at-the-money call. I will buy one long-term at-the-money call.

 

 

BUY

SELL
1 long-term at-the-money CALL

1 near-term at-the-money CALL

My profit is limited to the premiums I collect for selling the near-term option, less the time decay of the longer-term option. All of my profit is paid upon entering the trade.

If the price of the underlying security goes down and stays down until the exercise date of the longer-term option, I lose money. The payment it took to put on the spread is the most that I can lose with this strategy.

This strategy has limited profit potential and limited loss potential. Therefore, other strategies are more useful when seeking big profits.

10) Put Ratio Spread

Put ratio spread is another strategy suited for neutral markets. I buy one in-the-money put, and I will sell two out-of-the-money puts.

Exclusive  Is Options Spread Trading for You?

BUY

SELL
1 in-of-the-money PUT

2 out-the-money PUTS

This is another strategy with exposure to unlimited risk and a limited profit potential. To maximize the return, the price of the stock must be at the strike price upon expiration of the options I have sold.

The intrinsic value of the long put with either the addition or the subtraction of the credit or the debit of the spread is the maximum profit I can make on this trade.

If the underlying security nosedives and goes below my breakeven point at expiration, the loss exposure with a put ratio spread is virtually unlimited.

11) Ratio Call Write

Here is yet another trading strategy that offers limited profit potential and unlimited loss potential. This form of option spread trade is a bit of an oddball for most traders. Ration call write is a bit strange because I have to own the underlying stock. To execute a ratio call write, I would sell far more calls than the shares that I own. The strategy is called a ratio because I sell the at-the-money call in multiples of the shares I own. I would go long on a security first. Then I might sell two or three or five or ten at-the-money calls for that same security.

BUY (or own)

SELL
100 shares of any stock or security

2 (or more) multiples of at-the-money CALLS on the same security

In this case, a two-to-one ratio is simply two at-the-money calls for 100 shares I might own. I am buying 100 shares because options are generally bought and sold as contracts of 100 shares each. There are cases when you can trade option contracts for fewer shares. However, those option contracts are not as common as contracts for 100 shares.

Exclusive  The Difference Between Buying and Selling Put Options

It is quite evident that this strategy has more loss exposure than potential to earn a profit. Therefore, the ratio call write strategy is another option trading combination that I do not recommend.

12) Ratio Put Write

Ratio put write is a strategy that I am including here merely for the sake of completeness of the list. I cannot think of any good reason to get involved with a ratio put write trade.

The limited profit potential and unlimited risk with this strategy are obvious. Ratio put write is another strategy that is used in neutral markets. If I expect very little or no movement in the price of the underlying security, this strategy calls for shorting 100 shares of the security and then selling two at-the-money puts.

 

SELL
short 100 shares

2 at-the-money PUTS

I consider this strategy to be even worse than the ratio call write. My risk is higher because, in addition to selling puts, I am also shorting 100 shares of stock.

The risk is completely unlimited because if the stock drops below the price of the puts I sold, I am on the hook no matter how far down it goes. Not only that, but I am also on the hook if the price goes above that transaction.

My maximum and only real profit is the sale of the two at-the-money puts minus the commissions I paid.

The risk exposure is very high and the potential profit is limited. Therefore, I do not use or recommend this strategy.

My next article in this series will be Part 5 and feature tips 13-16.

Exclusive  Quadruple Witching – What is it?

Billy WIliams option spread strategies

 

 

Billy Williams is a 25-year veteran trader and author. For a free strategy guide, “Fundamentals for the Aspiring Trader”, and to learn more about profitable trading, go to www.stockoptionsystem.com.

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

Exchange-traded fund (ETF) investing expert Jim Woods offers his take on confidence in stock market investing.

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE