OPTIONS STRATEGY GUIDE

Confused by all the variations of option strategies - straddles, strangles, butterflies etc?

This guide employs a mini "expert system" to help you find the most appropriate strategy for your view on the market. Simply click on the highlighted choices and follow the links to a description of the strategy.

START THE GUIDE

Alternatively, there is a thumbnail diagram menu - representing all the strategies described in this area.

[The guide has been zipped and can be downloaded (approx 64k) for viewing off-line. Note: unzip using WinZIP, or if using pkunzip from the DOS prompt include the "-d" switch to create the images sub-directory, for example, pkunzip -d os-guide.zip. If you have a problem unzipping files, there is also a self-extracting version].


Explanation of the Strategy Descriptions

Each of the 17 strategy descriptions is explained using the following template:

Strategy Profit/Loss Chart

The profitability of each stategy is represented by a chart. (The chart here represents the profit/loss profile for a buy call strategy).

example_chart Whenever the red line is above the horizontal line, the strategy is in profit, and when below in loss. We can see from this particular chart, that profit increases as the share price increases, but that as the share price falls the loss is limited at a certain level.

The point a usually represents the value of the strike price (additional points are marked in the case of multiple option strategies). This point can be used as a reference point when judging the profitability for any particular strategy. The point b here represents the breakeven point for the strategy - which in this case is the level of the share price equal to the strike price plus the premium paid for the call option.

N.B. It must be noted that these charts represent the profit/loss profile only at expiry of the options.

All 17 profit/loss profile charts can be seen together on one page, reduced as thumbnail images.

Further Notes

  1. These option strategies are largely independent of the underlying asset, hence in this area we have used the following terms loosely and interchangeably: asset, share price, index, commodity.
  2. In a similar fashion the terms strike and exercise price are used here interchangeably.


Disclaimer
This carries the usual disclaimer that nothing here purports to be a recommendation and that investors should take professional advice before making any investment.
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