OptionX Frequently Asked Questions

Question 1

How does a Strap strategy have a bullish bias while betting on volatility?

Accepted Answer

A Strap involves buying two calls and one put with the same strike price and expiration. This strategy has a bullish bias while still profiting from downward moves. You make more money from upward moves (due to the extra call) than downward moves. It's ideal when you expect volatility but believe the stock is more likely to rise than fall, such as before potentially positive earnings or product announcements.

Question 2

What is a Long Iron Butterfly and how does it limit risk while betting on volatility?

Accepted Answer

A Long Iron Butterfly involves buying the outer strikes and selling the inner strikes of both calls and puts. You pay a net premium but have limited risk and limited reward. You profit when the stock moves significantly away from the middle strike in either direction. It's like buying volatility with defined risk, ideal when you expect big moves but want to limit your maximum loss.

Question 3

How does a Strip strategy have a bearish bias while betting on volatility?

Accepted Answer

A Strip involves buying one call and two puts with the same strike price and expiration. This strategy has a bearish bias while still profiting from upward moves. You make more money from downward moves (due to the extra put) than upward moves. It's ideal when you expect volatility but believe the stock is more likely to fall than rise, such as before potentially negative news.

Question 4

What is a Long Iron Condor and how does it differ from a Short Iron Condor?

Accepted Answer

A Long Iron Condor involves buying a call spread and a put spread with the same expiration. You pay a net premium and profit when the stock moves outside the inner strikes (beyond both spreads). This creates a volatility strategy with limited risk and limited reward. It's the opposite of a Short Iron Condor - you want big moves rather than the stock staying in a range.

Question 5

How does a Long Straddle bet on volatility regardless of direction?

Accepted Answer

A Long Straddle involves buying both a call and put at the same strike price and expiration. You profit when the stock makes a big move in either direction beyond the breakeven points. This strategy bets on high volatility - you need significant movement up or down to overcome the cost of both options. It's ideal before earnings announcements or major events that could cause dramatic price swings.

Question 6

What is a Put Ratio Spread and when should I use it?

Accepted Answer

A Put Ratio Spread involves selling more puts at a lower strike than you buy at a higher strike (typically 1:2 ratio). You profit from moderate downward moves but lose money if the stock falls too much. This strategy generates income upfront but has significant risk below the lower strike. It's ideal when you expect modest declines but want to protect against crash scenarios.

Question 7

How does a Long Strangle profit from big moves in either direction?

Accepted Answer

A Long Strangle involves buying a call above current price and a put below current price. You profit when the stock makes a big move in either direction beyond the breakeven points. This strategy bets on high volatility - you need the stock to move significantly up or down to overcome the cost of both options. It's perfect when you expect big news or events that could move the stock dramatically.

Question 8

What is a Call Ratio Spread and why does it have unlimited risk?

Accepted Answer

A Call Ratio Spread involves selling more calls at a higher strike than you buy at a lower strike (typically 1:2 ratio). You profit from moderate upward moves but lose money if the stock rises too much. This strategy generates income upfront but has unlimited risk above the higher strike. It's ideal when you expect modest gains but want to cap explosive moves.

Question 9

How does a Reverse Jade Lizard eliminate downside risk?

Accepted Answer

A Reverse Jade Lizard involves selling a put spread and a call at a higher strike. You collect net premium and profit when the stock stays below the call strike or above the short put strike. This neutral-to-slightly-bearish strategy has no downside risk (since you collect more premium than the put spread width) but limited upside risk. It's the opposite of a regular Jade Lizard.

Question 10

What is a Short Iron Condor and how does it work?

Accepted Answer

A Short Iron Condor combines selling a call spread and a put spread with the same expiration. You collect premium from both spreads and profit when the stock stays between the inner strikes (short strikes). This creates a neutral strategy with limited risk and limited reward. It's perfect when you expect low volatility and want the stock to stay within a specific range.

Question 11

How does a Jade Lizard eliminate upside risk?

Accepted Answer

A Jade Lizard involves selling a call spread and a put at a lower strike. You collect net premium and profit when the stock stays above the put strike or below the short call strike. This neutral-to-slightly-bullish strategy has no upside risk (since you collect more premium than the call spread width) but limited downside risk. It's ideal when you expect low volatility with a slight upward bias.

Question 12

What is a Short Strangle and how does it differ from a Short Straddle?

Accepted Answer

A Short Strangle involves selling a call above current price and a put below current price. You collect premium from both and profit when the stock stays between the two strike prices. This is similar to a Short Straddle but gives the stock more room to move. You win when volatility is low and the stock stays within your profit range, but face unlimited risk on large moves.

Question 13

How does a Double Plateau create multiple profit zones?

Accepted Answer

A Double Plateau creates two profit zones or "plateaus" where you make money if the stock lands in either range. This neutral strategy typically uses multiple options at different strikes to create flat profit areas. It's ideal when you believe the stock will move but aren't sure of the direction, and you want to profit from movement to specific price ranges rather than precise targets.

Question 14

What is a Batman Template strategy and when is it used?

Accepted Answer

A Batman Template is a complex neutral strategy that creates a specific profit pattern resembling Batman's logo. It typically involves multiple strikes and creates profit zones at specific price levels while limiting losses elsewhere. This advanced strategy is used when you expect the stock to trade within certain ranges and want to profit from precise price movements with controlled risk.

Question 15

What is an Iron Butterfly and how does it limit risk?

Accepted Answer

An Iron Butterfly combines a short straddle with protective wings. You sell a call and put at the middle strike, then buy a higher strike call and lower strike put for protection. You profit when the stock stays at the middle strike, but your losses are limited by the protective options. It's like a Short Straddle with built-in insurance against big moves.

Question 16

How does a Short Straddle profit from low volatility?

Accepted Answer

A Short Straddle involves selling both a call and put at the same strike price and expiration. You collect premium from both options and profit when the stock stays close to the strike price. This strategy bets on low volatility - you win when the stock doesn't move much in either direction. However, it carries unlimited risk if the stock makes a big move up or down.

Question 17

How does a Bear Butterfly target a specific price in a declining market?

Accepted Answer

A Bear Butterfly involves buying one low strike put, selling two middle strike puts, and buying one high strike put. You profit when the stock closes exactly at the middle strike price at expiration, but with a bearish setup. It's like placing a precise bet on where a declining stock will end up. This strategy costs little to enter but offers limited profit potential.

Question 18

How does a Bear Put Spread limit both cost and profit potential?

Accepted Answer

A Bear Put Spread involves buying a higher strike put and selling a lower strike put with the same expiration. This reduces the cost of buying puts but limits your maximum profit. You profit when the stock falls, but your gains are capped at the difference between strikes minus the net premium paid. It's perfect for moderate bearish views with controlled risk and reward.

Question 19

What is a Bear Condor and how does it work?

Accepted Answer

A Bear Condor uses four options: buy a low strike put, sell a middle-low put, sell a middle-high put, and buy a high strike put. You profit when the stock stays between the two middle strikes but with a bearish bias. It's like betting the stock will decline moderately and stay within a specific range. This strategy offers limited risk and limited reward, perfect for mildly bearish expectations.

Question 20

How does a Bear Call Spread generate income while being bearish?

Accepted Answer

A Bear Call Spread involves selling a lower strike call and buying a higher strike call with the same expiration. You collect net premium upfront and profit when the stock stays below the lower strike price. This strategy generates income while limiting upside risk. Maximum profit is the net premium received, and maximum loss is the difference between strikes minus the premium collected.

Question 21

What is a Short Synthetic Future and when should I use it?

Accepted Answer

A Short Synthetic Future combines selling a call and buying a put at the same strike price and expiration. This mimics shorting the stock without actually borrowing shares. You profit dollar-for-dollar with stock price decreases below the strike, but also lose dollar-for-dollar if it rises above. It's useful when you want short exposure with less capital or in markets where shorting the underlying asset is difficult.

Question 22

How does a Long Calendar with Puts strategy work?

Accepted Answer

A Long Calendar with Puts involves selling a near-term put and buying a longer-term put at the same strike price. You profit from time decay of the short-term option while maintaining downside protection through the long-term put. This works best when the stock stays near the strike price initially, then moves down later. It's ideal for stocks you expect to decline but not immediately.

Question 23

Why is Sell Call considered a bearish strategy and what are the risks?

Accepted Answer

Selling a Call means you collect premium upfront and agree to sell the stock at the strike price if it rises above that level. This is a bearish strategy because you profit when the stock stays below the strike price (keeping the premium) or you're forced to sell at the strike if assigned. It's like getting paid to place a sell order above current market price, but carries unlimited risk if the stock soars.

Question 24

What is a Risk Reversal and how does it provide bearish exposure?

Accepted Answer

A Risk Reversal involves buying a put and selling a call at different strike prices. This creates a bearish position where you profit from downward moves while potentially being obligated to sell the stock if it rises above the call strike. It's like having downside protection while generating income from the call premium. Best used when you're bearish but want to reduce the cost of put protection.

Question 25

How does a Put Ratio Back Spread work for strong bearish moves?

Accepted Answer

A Put Ratio Back Spread involves buying more put options at a lower strike price than you sell at a higher strike price (typically 2:1 ratio). This strategy profits when the stock makes a very strong downward move below the lower strike. It's ideal when you expect a significant crash but want to reduce the cost of buying puts. Limited risk with substantial downside profit potential.

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