Strategy Builder FAQs - Page 3

Question 1

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 2

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 3

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 4

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 5

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 6

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 7

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 8

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 9

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 10

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.

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