Option Trading Strategies by CTM

7/28/2019 Option Trading Strategies by CTM

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PROVEN STRATEGIESor trading options on CME Group utures


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A wORld O OPTIONS ON

A SINGlE POwERul PlATORm.

With more than 3.4 billion contracts worth more

than $1 quadrillion in notional value traded in 2011,

CME Group is the worlds leading and most diverse

derivatives exchange. Building on the heritage oCME, CBOT and NYMEX, CME Group serves the risk

management needs o customers around the globe.

As an international marketplace, CME Group brings

buyers and sellers together whether trading on

the CME Globex electronic trading platorm or ontrading oors in Chicago and New York, or clearing

OTC transactions through CME ClearPort. CME

Group oers the widest range o benchmark products

available across all major asset classes, including

utures and options based on interest rates, equityindexes, oreign exchange, energy, agricultural

commodities, metals, weather and real estate.

Options on utures rank among our most versatile risk

management tools, and we oer them on most o our

products. Whether you trade options or purposes o

hedging or speculating, you can limit your risk to the

amount you paid up-ront or the option while maintaining

your exposure to benecial price movements.

CME Group is a trademark o CME Group Inc. The Globe logo, CME, Chicago MercantileExchange and Globex are trademarks o Chicago Mercantile Exchange Inc. CBOT andChicago Board o Trade are trademarks o the Board o Trade o the City o Chicago.NYMEX, New York Mercantile Exchange and ClearPort are trademarks o New YorkMercantile Exchange Inc. COMEX is a trademark o Commodity Exchange Inc. All othertrademarks are the property o their respective owners. Further inormation aboutCME Group and its products can be ound at www.cmegroup.com.

Copyright 2008-2012 CME Group. All rights reserved.


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Pattern evolution:

HOw TO uSE THIS BOOKlET

Each illustration demonstrates the eect o time decay on

the total option premium involved in the position. The let

vertical axis shows the prot/loss scale. The horizontal

zero line in the middle is the break-even point, not

including commissions. Thereore, anything above that lineindicates prots, anything below it, losses. The price o the

underlying instrument is represented along the bottom.

A, B and C in the diagrams indicate the strike prices.

The arrows show the impact o time decay on an option.

Arrows on the diagram under the heading o Pattern

Evolution indicate what impact the decay o option prices

with time has on the total position. The purple line reects

the situation with our months let until expiration, the gold

line the status with one month let and the green line the

situation at expiration.

or ore inoration,go to cmegroup.com/options.


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TABlE O CONTENTS

Long Futures 1Short Futures 2Long Synthetic Futures 3Short Synthetic Futures 4Long Risk Reversal 5(AKA Squash or Combos)Short Risk Reversal 6(AKA Squash or Combos)Long Call 7

Short Call 8Long Put 9Short Put 10Bull Spread 11Bear Spread 12Long Buttery 13

Short Buttery 14Long Iron Buttery 15Short Iron Buttery 16Long Straddle 17Short Straddle 18Long Strangle 19Short Strangle 20Ratio Call Spread 21Ratio Put Spread 22Call Ratio Backspread 23Put Ratio Backspread 24

Box or Conversion 25


6/32

Pattern evolution:

lONG uTuRES

CATEGORY: DirectionalSYNTHETICS: Long call A, short put A

A

when to se: When you are bullish on the market and

uncertain about volatility. You will not be aected by volatility

changing. However, i you have an opinion on volatility and that

opinion turns out to be correct, one o the other strategies may

have greater prot potential and/or less risk.

Proft characteristics: Prot increases as market rises. Prot

is based strictly on the dierence between the exit price and

the entry price.

loss characteristics: Loss increases as market alls. Loss is

based strictly on the dierence between the exit price and the

entry price.

decay characteristics: None.


7/32

Pattern evolution:

SHORT uTuRES

CATEGORY: DirectionalSYNTHETICS: Long put A, short call A

A

when to se: When you are bearish on the market and



opinion turns out to be correct, one o the other strategies may

have greater prot potential and/or less risk.

Proft characteristics: Prot increases as market alls. Prot

is based strictly on the dierence between the entry price and

the exit price.

loss characteristics: Loss increases as market rises. Loss is

based strictly on the dierence between the entry price and

the exit price.



8/32

Pattern evolution:

lONG SYNTHETICuTuRES

CATEGORY: DirectionalLong call A, short put A




opinion turns out to be correct, one o the other strategies

may have greater prot potential and/or less risk. May be

traded into rom initial long call or short put position to createa stronger bullish position.

Proft characteristics: Prot increases as market rises. Prot

is based strictly on the dierence between the exit price and

the synthetic entry price.

loss characteristics: Loss increases as market alls. Loss is

based strictly on the dierence between the exit price and the

synthetic entry price.


A


9/32

Pattern evolution:

SHORT S

YNTHETICuTuRES




opinion turns out to be correct, one o the other strategies

may have greater prot potential and/or less risk. May be

traded into rom initial short call or long put position to createa stronger bearish position.

Proft characteristics: Prot increases as market alls. Prot

is based strictly on the dierence between the synthetic entry

price and the exit price.

loss characteristics: Loss increases as market rises. Loss is

based strictly on the dierence between the synthetic entry

price and the exit price.


A

CATEGORY: DirectionalLong put A, short call A


10/32

Pattern evolution:

lONG RISK REVERSAl(AKA SQuASHOR COmBOS)

(SPlIT STRIKE)

CATEGORY: DirectionalLong call B, short put A

A B


uncertain about volatility. Normally this position is initiated as

a ollow-up to another strategy. Its risk/reward is the same as

a LONG FUTURES except that there is a at area o little or no

gain/loss.

Proft characteristics: Prot increases as market rises abovethe long call strike price. Prot at expiration is open-ended and

is based on the exercise price o B +/ price received or paid

to initiate position.

loss characteristics: Loss increases as market alls below the

short put. Loss at expiration is open-ended and is based on

the exercise price o A +/ premium received or paid to initiate

position.

decay characteristics: Time decay characteristics vary

according to the relationship o the call strike price, put

strike price and the underlying utures price at the time the

position is established. The position is time decay neutral (not

aected) i the utures price is exactly mid-way between the

call and put strike prices; long time decay (benets rom timedecay) when the utures price is closer to the call than the put

strike price and short time decay (time decay erodes the value

o the position) when the utures price is closer to the put than

the call strike price.


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Pattern evolution:

SHORT RISK RE

VERSAl(AKA SQuASHOR COmBOS)

(SPlIT STRIKE)

CATEGORY: DirectionalLong put A, short call B

A B


uncertain about volatility. Normally this position is initiated as

a ollow-up to another strategy. Its risk/reward is the same as

a SHORT FUTURES except that there is a at area o little or no

gain/loss.

Proft characteristics: Prot increases as market alls below

the long put strike price. Prot at expiration is open-ended and

is based on the exercise price o A +/ premium received or

paid to initiate position.

loss characteristics: Loss increases as market rises above

the short call. Loss at expiration is open-ended and is based on

the exercise price o B +/ premium received or paid to initiate

position.

decay characteristics: Time decay characteristics vary

according to the relationship o the call strike price, put strike

price and the underlying utures price at the time the position

is established. The position is time decay neutral (not aected)

i the utures price is exactly mid-way between the call and

put strike prices; long time decay (benets rom time decay)when the utures price is closer to the put than the call strike

price and short time decay (time decay erodes the value o the

position) when the utures price is closer to the call than the

put strike price.


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Pattern evolution:

lONG CAll

CATEGORY: DirectionalSYNTHETICS: Long instrument, long put

A

when to se: When you are bullish to very bullish on the

market. In general, the more out-o-the-money (higher strike)

calls, the more bullish the strategy.

Proft characteristics: Prot increases as market rises. At

expiration, break-even point will be call option exercise price A +price paid or call option.

loss characteristics: Loss limited to amount paid or option.

Maximum loss realized i market ends below option exercise A.decay characteristics: Position is a wasting asset. As time

passes, value o position erodes toward expiration value.


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Pattern evolution:

SHORT CAll

CATEGORY: Directional

SYNTHETICS: Short instrument, short put

A

when to se: When you are bearish on the market. Sell out-

o-the-money (higher strike) puts i you are less condent the

market will all, sell at-the-money puts i you are condent the

market will stagnate or all.

Proft characteristics: Prot limited to premium received. Atexpiration, break-even is exercise price A + premium received.

Maximum prot realized i market settles at or below A.

loss characteristics: Loss potential is open-ended. Loss

increases as market rises. At expiration, losses increase by one

point or each point market is above break-even. Because risk

is open-ended, position must be watched closely.

decay characteristics: Position benets rom time decay.

The option sellers prot increases as option loses its time

value. Maximum prot rom time decay occurs i option is

at-the-money.


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Pattern evolution:

lONG PuT

CATEGORY: DirectionalSYNTHETICS: Short instrument, long call

A

when to se: When you are bearish to very bearish on the

market. In general, the more out-o-the-money (lower strike)

the put option strike price, the more bearish the strategy.

Proft characteristics: Prot increases as markets all. At

expiration, break-even point will be option exercise price A price paid or option. For each point below break-even, prot

increases by additional point.

loss characteristics: Loss limited to amount paid or option.

Maximum loss realized i market ends above option exercise A.

decay characteristics: Position is a wasting asset. As time

passes, value o position erodes toward expiration value.


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Pattern evolution:

SHORT PuT

CATEGORY: DirectionalSYNTHETICS: Long instrument, short call

A

when to se: I you rmly believe the market is not going

down. Sell out-o-the-money (lower strike) options i you are

only somewhat convinced, sell at-the-money options i you are

very condent the market will stagnate or rise. I you doubt

market will stagnate and are more bullish, sell in-the-money

options or maximum prot.

Proft characteristics: Prot limited to premium received rom

put option sale. At expiration, break-even point is exercise

price A premium received. Maximum prot realized i market

settles at or above A.

loss characteristics: Loss potential is open-ended. Loss

increases as market alls. At expiration, losses increase by one

point or each point market is below break-even. Because risk

is open-ended, position must be watched closely.

decay characteristics: Position benets rom time decay. The

option sellers prot increases as option loses its time value.

Maximum prot rom time decay occurs i option is at-the-

money.


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Pattern evolution:

Bull SPREAd

CATEGORY: DirectionalLong call A, short call BLong put A, short put B

when to se: I you think the market will go up, but with

limited upside. Good position i you want to be in the market

but are less condent o bullish expectations. Youre in good

company. This is the most popular bullish trade.

Proft characteristics: Prot limited, reaching maximum imarket ends at or above strike price B at expiration. I call-vs.-

call version (most common) used, break-even is at A + net cost

o spread. I put-vs.-put version used, break-even is at B net

premium collected.

loss characteristics: What is gained by limiting prot

potential is mainly a limit to loss i you guessed wrong on

market. Maximum loss i market at expiration is at or below A.With call-vs.-call version, maximum loss is net cost o spread.

decay characteristics: I market is midway between A and

B, little i any time decay eect. I market is closer to B, time

decay is generally a benet. I market is closer to A, time decay

is generally detrimental to protability.

A

B


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Pattern evolution:

BEAR SPREAd

CATEGORY: DirectionalShort put A, long put BShort call A, long call B

when to se: I you think the market will go down, but with

limited downside. Good position i you want to be in the market

but are less condent o bearish expectations. The most

popular position among bears because it may be entered as a

conservative trade when uncertain about bearish stance.

Proft characteristics: Prot limited, reaching maximum at

expiration i market is at or below strike price A. I put-vs.-put

version (most common) used, break-even is at B net cost o

spread. I call-vs.-call version, break-even is at A + net premium

collected.

loss characteristics: By accepting a limit on prots, you also

achieve a limit on losses. Losses, at expiration, increase as

market rises to B, where they are at a maximum. With put-vs.-

put version, maximum loss is net cost o spread.

decay characteristics: I market is midway between A and

B, little i any time decay eect. I market is closer to A, time

decay is generally a benet. I market is closer to B, time decay

is generally detrimental to protability.

A

B


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Pattern evolution:

lONGBuTTERlY

CATEGORY: Precision

Long call A, short 2 calls B, long call CLong put A, short 2 puts B, long put C(Note: B A generally is equal to C B)

when to se: One o the ew positions which may be entered

advantageously in a long-term options series. Enter when, with

one month or more to go, cost o the spread is 10 percent or

less o B A (20 percent i a strike exists between A and B).

This is a rule o thumb; check theoretical values.

Proft characteristics: Maximum prot occurs i a market is at

B at expiration. That prot would be B A net cost o spread.

This prot develops, almost totally, in the last month.

loss characteristics: Maximum loss, in either direction, is cost

o spread. A very conservative trade, break-evens are at A +

cost o spread and at C cost o spread.

decay characteristics: Decay negligible until nal month,

during which distinctive pattern o buttery orms. Maximum

prot growth is at B. I you are away rom (A-C) range entering

the last month, you may wish to liquidate position.

A C

B


19/32

Pattern evolution:

SHORTBuTTERlY

CATEGORY: Precision

Short call A, long 2 calls B, short call CShort put A, long 2 puts B, short put C(Note: B A generally is equal to C B)

when to se: When the market is either below A or above C

and position is overpriced with a month or so let. Or when

only a ew weeks are let, market is near B, and you expect an

imminent move in either direction.

Proft characteristics: Maximum prot equals the creditat which spread is established. Occurs when market, at

expiration, is below A or above C, thus making all options in-

the-money or all options out-o-the-money.

loss characteristics: Maximum loss occurs i market is at B at

expiration. Amount o that loss is B A credit received when

setting up position. Break-evens are at A + initial credit and

C initial credit.



loss acceleration is at B.

A C

B


20/32

Pattern evolution:

A C

B

lONG IRONBuTTERlY

CATEGORY: PrecisionLong straddle B, short strangle at AC

Short put A, long put B, long call B, short call C(Note: B A generally is equal to C B)

when to se: When the market is either below A or above C

and the position is underpriced with a month or so let. Or

when only a ew weeks are let, market is near B, and you

expect an imminent breakout move in either direction.

Proft characteristics: Maximum prot equals (B A) lessthe net debit to create the position. Occurs when market, at

expiration, is below A or above C.

loss characteristics: Maximum loss occurs i market is at

B at expiration. Amount o that loss is net debit to create the

position. Break-evens are at B + and initial debit.

decay characteristics: Decay negligible until nal month,during which distinctive pattern o buttery orms. Maximum

loss is at B. I you are away rom (A-C) range entering last

month, you may wish to hold the position.


21/32

Pattern evolution:

SHORT IRONBuTTERlY

A C

B

CATEGORY: PrecisionShort 1 call and 1 put at B, buy 1 put at A, buy 1 call at Cor sell straddle at strike price B and buy strangle at ACor protection(Note: B A generally is equal to C B)

when to se: Enter when the Short Iron Butterys net credit

is 80 percent or more o C A, and you anticipate a prolonged

period o relative price stability where the underlying will be

near the mid-point o the C A range close to expiration. This

is a rule o thumb; check theoretical values.

Proft characteristics: Maximum prot occurs i a market

is at B at expiration. Prot would be equal to short straddle

premium minus long strangle premium. This prot develops,

almost totally, in the last month.

loss characteristics: Maximum loss, in either direction, net

premium collected minus (B-A). This is a very conservativetrade, break-evens are at B + and net premium collected.



prot growth is at B. I you are away rom (A-C) range entering

the last month, you may wish to liquidate position.


22/32

Pattern evolution:

lONGSTRAddlE

CATEGORY: PrecisionLong call A, long put ASYNTHETICS: Long 2 calls A, short instrumentLong 2 puts A, long instrument

(All done to initial delta neutrality. A delta neutral spreadis a spread established as a neutral position by usingthe deltas o the options involved. The neutral ratio isdetermined by dividing the delta o the purchased optionby the delta o the written option)

when to se: I market is near A and you expect it to start

moving but are not sure which way. Especially good position i

market has been quiet, then starts to zigzag sharply, signaling

potential eruption.

Proft characteristics: Prot open-ended in either direction.

At expiration, break-even is at A, +/ cost o spread. However,

position is seldom held to expiration because o increasing

time decay with passage o time.

loss characteristics: Loss limited to the cost o spread.

Maximum loss occurs i market is at A at expiration.

decay characteristics: Time decay accelerates as optionsapproach expiration. Position is generally liquidated well beore

expiration.

A


23/32

Pattern evolution:

SHORTSTRAddlE

CATEGORY: Precision

Short call A, short put ASYNTHETICS: Short 2 calls A, long instrumentShort 2 puts A, short instrument(All done to initial delta neutrality)

when to se: I market is near A and you expect market is

stagnating. Because you are short options, you reap prots as

they decay as long as market remains near A.

Proft characteristics: Prot maximized i market, at

expiration, is at A. In call-put scenario (most common),maximum prot is equal to the credit rom establishing

position; break-even is A +/ total credit.

loss characteristics: Loss potential open-ended in either

direction. Position, thereore, must be closely monitored

and readjusted to delta neutral i market begins to drit away

rom A.

decay characteristics: Because you are only short options,

you pick up time-value decay at an increasing rate as

expiration approaches. Time decay is maximized i market is

near A.

A


24/32

Pattern evolution:

lONGSTRANGlE

CATEGORY: PrecisionLong put A, long call B(Generally done to initial delta neutrality)

when to se: I market is within or near (A-B) range and

has been stagnant. I market explodes either way, you make

money; i market continues to stagnate, you lose less than

with a long straddle. Also useul i implied volatility is expected

to increase.

Proft characteristics: Prot open-ended in either direction.

Break-even levels are at A cost o spread and B + cost o

spread. However, spread is usually not held to expiration.

loss characteristics: Loss limited. Loss is equal to net cost

o position. Maximum loss occurs i, at expiration, market is

between A and B.

decay characteristics: Decay accelerates as options

approach expiration but not as rapidly as with long straddle. To

avoid largest part o decay, the position is normally liquidated

prior to expiration.

A B


25/32

Pattern evolution:

SHORTSTRANGlE

CATEGORY: PrecisionShort put A, short call B

(All done to initial delta neutrality)

when to se: I market is within or near (A-B) range and,

though active, is quieting down. I market goes into stagnation,

you make money; i it continues to be active, you have a bit

less risk then with a short straddle.

Proft characteristics: Maximum prot equals optionpremium collected. Maximum prot realized i market, at

expiration, is between A and B.

loss characteristics: At expiration, losses occur only i

market is above B + option premium collected (or put-call) or

below A that amount. Potential loss is open-ended. Although

less risky than short straddle, position is risky.

decay characteristics: Because you are short options, time

value decays at an increasing rate as the option expiration date

approaches; maximized i market is within (A-B) range.

A B


26/32

Pattern evolution:

RATIO CAllSPREAd

CATEGORY: PrecisionLong call A, short calls BFor example long 1 call @ A; short 2 calls @ B

when to se: Usually entered when market is near A and user

expects a slight to moderate rise in market but sees a potential

or sell-o. One o the most common option spreads, seldom

done more than 1:3 (two excess shorts) because o upside risk.

Proft characteristics: Maximum prot, is equal to B A netcost o position (or call-vs.-call version), realized i market

is at B at expiration or B A + net credit o position (i long

option premium is less than premium collected rom the sale

o two or more options).

loss characteristics: Loss limited on downside (to net cost o

position in call-vs.-call, or no loss i position established at a

credit) but open-ended i market rises. Rate o loss, i market

rises beyond strike price B, is proportional to number o excess

shorts in position.

decay characteristics: Depends on the net time value

purchased or sold via this strategy. I more time value sold

than bought, then time value decays works to the benet o

the holder o this strategy.

A

B


27/32

Pattern evolution:

RATIO PuTSPREAd

CATEGORY: PrecisionLong put B, short puts AFor example long 1 put @ B; short 2 puts @ A

when to se: Usually entered when market is near B and you

expect market to all slightly to moderately, but see a potential

or sharp rise. One o the most common option spreads,

seldom done more than 1:3 (two excess shorts) because o

downside risk.

Proft characteristics: Maximum prot in amount o B A

net cost o position (or put-vs.-put version), realized i market

is at A at expiration, or B A + net credit o position (i long

option premium is less than premium collected rom the sale

o two or more options).

loss characteristics: Loss limited on upside (to net cost

o position in put-vs.-put version, or no loss i position

established at a credit) but open-ended i market alls. Rate

o loss, i market alls below strike price A, is proportional to

number o excess shorts in position.

decay characteristics: Dependent on the net time value


than bought, then time value decays work to the benet othe holder.

A

B


28/32

Pattern evolution:

CAll RATIO

BACKSPREAd

CATEGORY: Precision

Short call A, long 2 or more calls B

when to se: Normally entered when market is near B and

shows signs o increasing activity, with greater probability

to upside.

Proft characteristics: Prot limited on downside (i net credit

taken in when position was established) but open-ended inrallying market.

loss characteristics: Maximum loss, is amount o B A

initial credit (or B A + initial debit), realized i market is at

B at expiration. This loss is less than or equivalent long

straddle, the trade-o or sacricing prot potential on the

downside.



than bought, then time value decays work to the benet o

the holder.

A

B


29/32

Pattern evolution:

PuT RATIOBACKSPREA

d

CATEGORY: PrecisionShort 1 put B, long 2 or more puts A

when to se: Normally entered when market is near A and

shows signs o increasing activity, with greater probability to

downside (or example, i last major move was up, ollowed

by stagnation).

Proft characteristics: Prot limited on upside (to net credittaken in when position was established) but open-ended in

collapsing market.

loss characteristics: Maximum loss, is amount o B A

initial credit (or B A + initial debit), realized i market is

at A at expiration. This loss is less than or the equivalent

long straddle, the trade-o or sacricing prot potential

on the upside.



than bought, then time value decays work to the benet o

the holder.

A

B


30/32

Pattern evolution:

BOX OR

CONVERSION

CATEGORY: Locked or arbitrage trade.These spreads are reerred to as locked tradesbecause their value at expiration is totally independento the price o the underlying instrument. I you can buythem or less than that value or sell them or more, youwill make a prot (ignoring commission costs).

when to se: Occasionally, a market will get out o line enough

to justiy an initial entry into one o these positions. However,

they are most commonly used to lock all or part o a portolio

by buying or selling to create the missing legs o the position.

These are alternatives to closing out positions at possibly

unavorable prices.

long box: Long a bull spread, long a bear spread that is,

long call A, short call B, long put B, short put A. Value = B A

Net Debit.

Short box: Long call B, short call A, long put A, short put B.

Value = Net Credit + (A B).

long-instrent conversion: Long instrument, long put A,

short call A. Value = 0. Price = instrument + put A call.

Short-instrent conversion: Short instrument, long call A,

short put A. Value = 0. Price = A + call instrument put.

A B


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or ore inoration,go to cmegroup.com/options.

Trading utures and options on utures is not suitable or all investors, and involves risk oloss. Futures are a leveraged instrument, and because only a percentage o a contract'svalue is required to trade, it is possible to lose more than the amount o money initiallydeposited or a utures product.

The inormation presented here has been compiled by CME Group or generalpurposes only. Although every attempt has been made to ensure the accuracy o theinormation within this brochure, CME Group assumes no responsibility or any errorsor omissions. Additionally, all examples in this brochure are hypothetical situations,used or explanation purposes only, and should not be considered investmentadvice or the results o actual market experience. All matters pertaining to rules andspecications herein are made subject to and superseded by ofcial CME, CBOTNYMEX, COMEX and CME Group rules. Current rules should be consulted in all casesconcerning contract specications.


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CmE GROuP GlOBAl OICES

New York

212 299 2000

London

+44 20 3379 3700

Singapore

+65 6593 5555

Calgary

Houston

713 658 9292

So Paulo

+55 11 2565 5999

Tokyo

+81 3 5403 4828

Washington D.C.

CmE GROuP HEAdQuARTERS

20 South Wacker Drive

Chicago, Illinois 60606

cmegroup.com

[email protected]

800 331 3332

312 930 1000

Option Trading Strategies by CTM

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Transcript of Option Trading Strategies by CTM