More Complex Option Strategies
Multiple options are so often combined together that certain strategies have earned their own nicknames. If nothing else, discussing these positions gives you good exercises for graphing more complex payoff diagrams! The two basic kinds are spreads, which consist of long and short options of the same type (call or put), and combinations, which consist of options of different types.
Simple Spread A position that is long one option and short another option, on the same stock. The options are of the same type (puts or calls), have the same expiration date, but different strike prices. For example, a simple spread may purchase one put with a strike price of $90 and sell one put with a strike price of $70. You should confirm that it is correct by constructing your own payoff table. Complex Spread (e.g., Butterfly Spread) Like a simple spread, but with more than one option. (You will get to graph the payoff diagram in one of the questions below.) Straddle A straddle is the most popular combination. It combines one put and one call. (You will get to graph the payoff diagram in one of the questions below.)
A calendar spread is a position that is long one option and short another option, on the same stock. The options are of the same type (puts or calls), have the same strike prices, but different expiration dates. Therefore, they do not lend themselves to graphing in payoff diagrams, which hold the expiration date constant.
Tags: debt. credit > loan > mortgage > option strategies