Strategy Builder FAQs - Page 2

Question 1

What is a Call Ratio Back Spread and how does it work?

Accepted Answer

A Call Ratio Back Spread involves buying more call options at a higher strike price than you sell at a lower strike price (typically 2:1 ratio). This strategy profits when the stock makes a very strong upward move beyond the higher strike. It's ideal when you expect explosive growth but want to reduce the cost of buying calls. Limited risk with unlimited upside potential.

Question 2

How does a Range Forward strategy work?

Accepted Answer

A Range Forward combines buying a call and selling a put at different strike prices. This creates a range where you're protected on the downside (put strike) but participate in upside moves (call strike). It's like buying stock at a discount while getting some downside protection. Best used when you're moderately bullish and want to reduce the cost of market exposure.

Question 3

What does it mean to Sell Put and why is it bullish?

Accepted Answer

Selling a Put means you collect premium upfront and agree to buy the stock at the strike price if it falls below that level. This is a bullish strategy because you profit when the stock stays above the strike price (keeping the premium) or you get to buy the stock at your desired lower price. It's like getting paid to place a buy order below current market price.

Question 4

How does a Bull Call Spread limit both risk and reward?

Accepted Answer

A Bull Call Spread involves buying a lower strike call and selling a higher strike call with the same expiration. This reduces the cost of buying calls but limits your maximum profit. You profit when the stock rises but your gains are capped at the difference between strikes minus the net premium paid. It's perfect for moderate bullish views with limited risk and reward.

Question 5

What is a Bull Put Spread and how do I profit from it?

Accepted Answer

A Bull Put Spread involves selling a higher strike put and buying a lower strike put. You collect net premium upfront and profit when the stock stays above the higher strike price. This strategy combines income generation with limited downside risk. Maximum profit is the net premium received, and maximum loss is the difference between strikes minus the premium collected.

Question 6

How does a Long Calendar with Calls strategy work?

Accepted Answer

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

Question 7

What is a Bull Condor and when should I use it?

Accepted Answer

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

Question 8

How does a Bull Butterfly strategy target a specific stock price?

Accepted Answer

A Bull Butterfly involves buying one low strike call, selling two middle strike calls, and buying one high strike call. You profit when the stock closes exactly at the middle strike price at expiration. It's like placing a precise bet on where the stock will end up. This strategy costs little to enter but offers limited profit potential, ideal when you have a specific price target in mind.

Question 9

What is a Long Synthetic Future and why use it instead of buying stock?

Accepted Answer

A Long Synthetic Future combines buying a call and selling a put at the same strike price and expiration. This mimics owning the stock without actually buying it. You profit dollar-for-dollar with stock price increases above the strike, but also lose dollar-for-dollar if it falls below. It's useful when you want stock-like exposure with less capital or in markets where you can't buy the underlying asset directly.

Question 10

What is a Buy Put strategy and when should I use it?

Accepted Answer

A Buy Put is the simplest bearish strategy where you purchase a put option. You make money when the stock price falls below the strike price minus the premium you paid. Use this when you expect the stock to decline significantly. Your maximum loss is limited to the premium paid, while your maximum profit is capped at the strike price minus premium (since stocks can't go below zero).

Question 11

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.

Question 12

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 13

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 14

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 15

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 16

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 17

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 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

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 20

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 21

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 22

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 23

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 24

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 25

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.

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