Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Neutral to Moderately Bullish on XEO
Example: XEO is at 625.00.
Outlook: You are neutral to moderately bullish on XEO through year-end. You do not want to buy call options or call spreads since the index may sit still. You do not want to sell uncovered options, since risk would be too excessive.
Possible strategy: Short Put Spread:
Sell 1 Dec 600 put at 2.25.
Buy 1 Dec 575 put at 1.
Net credit of 1.25 or $125.

*All values shown are at the time of expiration.

Index Change
XEO @ expiration
Short 600
put value
Long 575 put value
Spread Value
Spread Credit
Net Profit/(Loss)
+ 5.00%
656.25
$0.00
$0.00
$0.00
$125.00
$125.00
+/- 0.0%
625**
$0.00
$0.00
$0.00
$125.00
$125.00
- 4.00%
600*
$0.00
$0.00
$0.00
$125.00
$125.00
- 4.20%
598.75***
$125.00
$0.00
($125.00)
$125.00
$0.00
- 8.00%
575****
($2500.00)
$0.00
($2500.00)
$125.00
($2,375.00)
- 12.00%
525
($7500.00)
$5000.00
($2500.00)
$125.00
($2,375.00)

At Expiration (12/22/01)
* Max Gain: $125.00 if XEO is at 600/higher.
** Unchanged: Gain of $125.00.
*** Break-even: XEO at 598.75.
**** Max Loss: $2,500.00 if XEO is at 575/lower.

In short: This position creates a credit from the time of inception, as opposed to the purchase of a call or a call spread which would create a debit. Maximum profit is equal to initial credit of $125.00, with maximum risk of $2,375.00.

CBOE Volatility Index (VIX)