Mastering Options Strategies

Mastering Options Strategies
A step-by-step guide to understanding profit & loss diagrams
Because Money Doesnt Grow on Trees
Written by the Staff of The Options Institute

of the Chicago Board Options Exchange
Table of Contents
Mastering Options Strategies

Why You Need This Workbook .............................................................................. 3
How to Draw Profit and Loss Diagrams ........................................................... 4-5
Call Strategies ........................................................................................................ 6
Put Strategies ......................................................................................................... 7
Straddles ................................................................................................................ 8
Strangles ................................................................................................................ 9
Call Spreads ......................................................................................................... 10
Put Spreads .......................................................................................................... 11
Stock and Option Strategies ...........................................................................12-14
Synthetic Combinations ...................................................................................... 15
Ratio Spreads ....................................................................................................... 16
Butterfly Strategies .............................................................................................. 17
Condor Strategies ................................................................................................ 18
Iron Strategies ..................................................................................................... 19
Synthetic Positions ..........................................................................................20-22
ANSWERS
Call Strategies ...................................................................................................... 23
Put Strategies ....................................................................................................... 24
Straddles .............................................................................................................. 25
Strangles .............................................................................................................. 26
Call Spreads ......................................................................................................... 27
Put Spreads .......................................................................................................... 28
Stock and Option Strategies ...........................................................................29-31
Synthetic Combinations ...................................................................................... 32
Ratio Spreads ....................................................................................................... 33
Butterfly Strategies .............................................................................................. 34
Condor Strategies ................................................................................................ 35
Iron Strategies ..................................................................................................... 36
Synthetic Positions ..........................................................................................37-39
In order to simplify the computations, commissions have NOT been included in the examples used in these materials. Commission costs will impact the outcome
of all stock and options transactions and must be considered prior to entering into any transactions.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of
Standardized Options, available to download at www.cboe.com. Copies of this document are also available from your broker or The Options Clearing Corporation
(OCC), One North Wacker Drive, Suite 500, Chicago, IL 60606 or by calling 1-888-OPTIONS. The OCC Prospectus contains information on options issued
by The Options Clearing Corporation. Copies of this document are also available from the OCC at the above address. The documents available discuss exchangetraded options issued by The Options Clearing Corporation and are intended for educational purposes. No statement in the documents should be construed as a
recommendation to buy or sell a security or to provide investment advice.
ANY STRATEGIES DISCUSSED, INCLUDING EXAMPLES USING ACTUAL SECURITIES AND PRICE DATA, ARE STRICTLY FOR ILLUSTRATIVE AND EDUCATIONAL PURPOSES ONLY AND ARE NOT TO BE CONSTRUED AS AN ENDORSEMENT, RECOMMENDATION, OR
SOLICITATION TO BUY OR SELL SECURITIES.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE.
Why You Need This Workbook
Learning the basics of options involves three steps:

1. Understand the rights and obligations of long and short
options,
2. Learn to calculate profit and loss at expiration, and
3. Master the mechanics of exercise and assignment.
This workbook takes you through each step. First, by drawing diagrams, you will
learn how to calculate profit and loss on an options expiration date. This will also
teach you recognize the potential profit, potential risk and break-even point of different positions. This knowledge will serve you well when choosing strategies. Second,
the problems that ask you to recognize when option exercise and assignment occurs
will reinforce how options can interact with a position in the underlying stock.
After mastering the concepts taught in this workbook, your options education will
not be complete! You will still need to learn the tradeoffs that different strategies offer
and about option price behavior. Finally, to use options successfully for either investing or trading, you must learn a two-step thinking process. After identifying a goal,
the first step is initiating an option position, and the second step is closing the position on or before the expiration date. These concepts along with many strategies are
taught in classes at The CBOEs Options Institute.
To learn more about The Options Institute classes,

schedules and/or to register,
call 1-877-THE-CBOE
or visit
www.cboe.com
How to Draw Profit and Loss Diagrams

Step 1: Describe the opening transaction completely
Strategy: Long Call
EXAMPLE: Buy a 50 Call @ $2
Step 2: Make a profit/loss table and a grid for the diagram.

The table (Table 1.1) should have one column for each option and one column for the total
profit/loss. On the grid (Figure 1.1), the vertical line represents profit and loss, labeled P/(L), and
the horizontal line represents a range of stock prices.
Strategy: Long Call
EXAMPLE: Buy a 50 Call @ $2
P/(L)
Table 1.1
Stock Price
at Expiration
Figure 1.1
Long 50 Call
@ 2 P/(L)
4
3
57
56
55
54
53
52
51
50
49
48
47
2
1
Stock Price
at Expiration
0
-1
45
50
55
-2
-3
-4
-5
Step 3: Select a stock price at expiration and calculate the options value.
With a stock price of $55 at expiration, for example, the 50 Call has a value of $5.
P/(L)
Table 1.2
Stock Price
at Expiration
57
56
55
54
53
52
51
50
49
48
47
Figure 1.2
Long 50 Call
@ 2 P/(L)
4
3
2
Stock Price
at Expiration
0
-1
-2
-3
-4
-5
45
50
55
How to Draw Profit and Loss Diagrams

Step 4: Calculate the profit or loss.
For a purchased (long) option, subtract the purchase price from the value at expiration. For a sold
(short) option, subtract the value at expiration from the selling price. In this example, 5
(value at expiration) minus 2 (purchase price) equals a profit of 3. Plot the profit on the graph in
Figure 1.3.
P/(L)
Table 1.3
Stock Price
at Expiration
57
56
55
54
53
52
51
50
49
48
47
Long 50 Call
@ 2 P/(L)
Figure 1.3
5
4
3
2
Stock Price
at Expiration
45
-1
50
55
-2
-3
-4
Step 5: Plot the profit or loss
-5
A stock price of $55 at expiration, in this example, yields a profit of 3 and creates the point (55, 3) on
the grid.
P/(L)
Table 1.4
Stock Price
at Expiration
Long 50 Call
@ 2 P/(L)
57
56
55
54
53
52
51
50
49
48
47
5
4
3
2
1
0
(1)
(2)
(2)
(2)
(2)
Figure 1.4
4
3
Stock Price
at Expiration
45
-1
50
55
-2
-3
-4
-5
Step 6: Repeat steps 3, 4 and 5

Repeating the steps above over a range of stock prices creates a set of points which, when connected,
becomes the profit and loss diagram.
5
Call Strategies
STRATEGY:
LongCall
EXAMPLE:
Buy$50Call@3
StockPrice
atExpiration
LongCall
P/(L)
P/(L)
LONGCALL
58
57
3
56
55
54
53
52
-1
45
50
55
Stock
Price
51
-2
50
49
-3
48
-4
-5
STRATEGY:
ShortCall
EXAMPLE:
Sell$50Call@3
StockPrice
atExpiration
ShortCall
P/(L)
P/(L)
5
58
57
56
SHORTCALL
55
1
54
53
52
-1
51
-2
50
-3
49
-4
48
-5
45
50
55
Stock
Price
Put Strategies
STRATEGY:
LongPut
EXAMPLE:
Buy$50Put@2
StockPrice
atExpiration
LongPut
P/(L)
P/(L)
LONGPUT
53
52
3
51
50
49
48
47
-1
Stock
Price
45
50
55
46
-2
45
44
-3
43
-4
-5
STRATEGY:
ShortPut
EXAMPLE:
Sell$50Put@2
StockPrice
atExpiration
ShortPut
P/(L)
P/(L)
53
52
51
50
SHORTPUT
49
48
47
-1
46
-2
45
-3
44
-4
43
-5
45
50
55
Stock
Price
Straddles
STRATEGY:
LongStraddle
EXAMPLE:
Buy$50Call@3and
Buy$50Put@2
StockPrice
atExpiration
LongCallLongPutTotal
P/(L)P/(L)P/(L)
P/(L)
5
LONGSTRADDLE
59
3
57
55
53
51
50
-1
Stock
Price
45
50
55
49
-2
47
44
-3
43
-4
41
-5
STRATEGY:
ShortStraddle
EXAMPLE:
Sell$50Call@3and
Sell$50Put@2
StockPrice
atExpiration
ShortCallShortPutTotal 4
P/(L)P/(L)P/(L)
P/(L)
5
59
57
55
53
SHORTSTRADDLE
51
-1
50
49
-2
47
-3
45
-4
43
-5
41
45
50
55
Stock
Price
Strangles
STRATEGY:
LongStrangle
EXAMPLE:
Buy$55Call@11/2and
Buy$50Put@11/2
StockPrice
atExpiration
P/(L)P/(L)P/(L)
P/(L)
5
LONGSTRANGLE
61
3
59
57
55
53
51
-1
Stock
Price
50
55
60
50
-2
49
47
-3
45
-4
43
-5
STRATEGY:
ShortStrangle
EXAMPLE:
Sell$55Call@11/2and
Sell$50Put@11/2
StockPrice
atExpiration
P/(L)
SHORTSTRANGLE
P/(L)P/(L)P/(L)
4
61
59
57
55
53
51
-1
50
49
-2
47
-3
45
-4
43
-5
50
55
60
Stock
Price
Call Spreads
STRATEGY:
LongCallSpread
EXAMPLE:
Buy$50Call@4and
Sell$55Call@2
StockPrice
atExpiration
LongCallShortCallTotal
P/(L)P/(L)P/(L)
P/(L)
5
LONGCALLSPREAD
58
3
57
56
55
54
53
-1
50
55
60
Stock
Price
52
-2
51
50
-3
49
-4
48
-5
STRATEGY:
ShortCallSpread
EXAMPLE:
Sell$50Call@4and
Buy$55Call@2
StockPrice
atExpiration
P/(L)
SHORTCALLSPREAD
ShortCallLongCallTotal 5
P/(L)P/(L)P/(L)
4
58
57
56
55
54
53
-1
52
51
-2
50
-3
49
-4
48
-5
10
50
55
60
Stock
Price
Put Spreads
STRATEGY:
LongPutSpread
EXAMPLE:
Buy$50Put@31/2and
Sell$45Put@11/2
StockPrice
atExpiration
LongPutShortPutTotal
P/(L)P/(L)P/(L)
P/(L)
5
LONGPUTSPREAD
53
3
52
51
50
49
48
-1
Stock
Price
45
50
55
47
-2
46
45
-3
44
-4
43
-5
STRATEGY:
ShortPutSpread
EXAMPLE:
Sell$50Put@31/2and
Buy$45Put@11/2
StockPrice
atExpiration
ShortPutLongPutTotalP/(L)
5
P/(L)P/(L)P/(L)
SHORTPUTSPREAD
53
52
51
50
1
49
48
47
-1
46
-2
45
-3
44
-4
43
-5
11
Stock
Price
45
50
55
Stock and Option Strategies

STRATEGY:
ProtectivePut
EXAMPLE:
BuyStock@50and
Buy$50Put@2
StockPrice
atExpiration
P/(L)
LongStockLongPutTotal
P/(L)P/(L)P/(L)
PROTECTIVEPUT
57
56
55
54
53
52
51
-1
50
-2
49
Stock
Price
45
50
55
-3
48
-4
47
-5
STRATEGY:
CoveredWrite
EXAMPLE:
BuyStock@50and
Sell$50Call@3
StockPrice
atExpiration
P/(L)
COVEREDWRITE
LongStockShortCallTotal 5
P/(L)P/(L)P/(L)
4
53
52
51
50
49
48
-1
47
46
-2
45
-3
44
-4
43
-5
12
45
50
55
Stock
Price

STRATEGY:
LongStock+ShortStraddle
EXAMPLE:
BuyStock@50and
Sell$50Call@3and
Sell$50Put@2
LONGSTOCK+SHORTSTRADDLE
P/(L)
5
StockPriceLongStockShortCallShortPutTotal
atExpirationP/(L)P/(L)P/(L)P/(L)
55
54
53
52
51
50
-1
45
50
55
Stock
Price
49
-2
48
47
-3
46
-4
45
-5
STRATEGY:
LongStock+ShortStrangle
EXAMPLE:
BuyStock@52and
Sell1$55Call@1and
Sell1$50Put@1
LONGSTOCK+SHORTSTRANGLE
P/(L)
StockPriceLongStockShortCallShortPutTotal 5
4
56
3
55
54
53
52
51
-1
50
-2
49
48
-3
47
-4
46
-5
13
50
55
60
Stock
Price

STRATEGY:
LongStock+RatioCallSpread
EXAMPLE:
BuyStock@50and
Buy1$50Call@3and
Sell2$55Calls@11/2each
LONGSTOCK+RATIOCALLSPREAD
P/(L)
10
StockPriceLongStockLongCallShortCallsTotal
9
8
56
55
54
53
52
3
2
51
50
49
-1
48
-2
45
50
55
Stock
Price
-3
47
-4
46
-5
STRATEGY:
LongStock+Collar
EXAMPLE:
BuyStock@52and
Sell1$55Call@1and
Buy1$50Put@1
LONGSTOCK+COLLAR
P/(L)
StockPriceLongStockShortCallLongPutTotal
5
4
58
57
56
55
54
53
-1
52
51
-2
50
-3
49
-4
48
-5
14
50
55
60
Stock
Price
Synthetic Combinations
STRATEGY:
LongSplit-StrikeSynthetic
EXAMPLE:
Buy1$55Call@11/2and
Sell1$50Put@1
StockPrice
atExpiration
P/(L)
5
LongCallShortPutTotal
P/(L)P/(L)P/(L)
LONGSPLIT-STRIKESYNTHETIC
59
3
58
57
56
55
53
Stock
Price
50
-1
55
60
51
-2
50
49
-3
48
-4
47
-5
STRATEGY:
ShortSplit-StrikeSynthetic
EXAMPLE:
Sell1$55Call@11/2and
Buy1$50Put@1
SHORTSPLIT-STRIKESYNTHETIC
P/(L)
StockPriceShortCallLongPutTotal 5
P/(L)P/(L)P/(L)
atExpiration
4
59
58
57
56
55
53
-1
51
50
-2
49
-3
48
-4
47
-5
15
50
55
60
Stock
Price
Ratio Spreads
STRATEGY:
EXAMPLE:
1X2RatioVerticalSpreadWithCalls
Buy1$50Call@3and
Sell2$55Calls@1each
1X2RATIOVERTICALSPREAD
WITHCALLS
(FRONTSPREAD)
StockPrice LongCallShortCallsTotal
atExpirationP/(L)P/(L)P/(L)
P/(L)
62
60
59
58
57
56
0
55
54
-1
53
-2
52
-3
51
50
55
60
Stock
Price
-4
50
-5
48
STRATEGY:
EXAMPLE:
1X2RATIOVOLATILITYSPREAD
WITHCALLS
(BACKSPREAD)
1X2RatioVolatiltySpreadWithCalls
Sell1$50Call@3and
Buy2$55Calls@1each
StockPrice ShortCallLongCallsTotal
P/(L)
5
62
60
59
58
57
56
0
55
54
-1
53
-2
52
-3
51
-4
50
-5
48
16
50
55
60
Stock
Price
Butterfly Strategies
STRATEGY:
EXAMPLE:
CallButterfly
Buy1$45Call@6and
Sell2$50Calls@3ea.and
Buy1$55Call@1
LONGCALLBUTTERFLY
P/(L)
StockPriceLongCallShortCallsLongCallTotal
56
55
54
53
52
1
Stock
Price
51
50
49
-1
48
-2
45
50
55
47
-3
46
45
-4
44
-5
STRATEGY:
EXAMPLE:
ShortButterflywithCalls
Sell1$45Call@6and
Buy2$50Calls@3ea.and
Sell1$55Call@1
SHORTCALLBUTTERFLY
P/(L)
StockPriceShortCallLongCallsShortCallTotal
56
55
54
53
52
51
50
49
-1
48
-2
47
45
50
-3
46
45
-4
44
-5
Thesestrategiesarepresentedforeducationalpurposesonly.Transactioncostsmaymakethese
impracticalforindividualinvestors.
17
55
Stock
Price
Condor Strategies
STRATEGY:
EXAMPLE:
LongCondorwithCalls
Buy1$45Call@6and
Sell1$50Call@4and
Sell1$55Call@2and
Buy1$60Call@1
LONGCALLCONDOR
P/(L)
5
StockPriceLong45Short50Short55Long60Total
atExpirationP/(L)P/(L)P/(L)P/(L)P/(L)
62
60
58
56
55
54
52
-1
50
45
50
55
60
Stock
Price
-2
48
46
-3
45
-4
44
-5
STRATEGY:
EXAMPLE:
ShortCondorwithCalls
Sell1$45Call@6and
Buy1$50Call@4and
Buy1$55Call@2and
Sell1$60Call@1
SHORTCALLCONDOR
P/(L)
StockPriceShort45Long50Long55Short60Total 5
4
62
60
58
56
55
54
52
-1
45
50
55
50
-2
48
46
-3
45
-4
44
-5
18
60
Stock
Price
Iron Strategies
STRATEGY:
EXAMPLE:
IronButterfly
Buy1$45Put@1and
Sell1$50Put@3and
Sell1$50Call@3and
Buy1$55Call@1
IRONBUTTERFLY
StockPriceLongPutShortPutShortCallLongCallTotal
P/(L)
5
56
55
54
53
52
51
50
-1
49
45
50
55
Stock
Price
-2
48
47
-3
46
-4
45
-5
44
STRATEGY:
EXAMPLE:
IronCondor
Buy1$45Put@1and
Sell1$50Put@3and
Sell1$55Call@3and
Buy1$60Call@1
IRONCONDOR
P/(L)
5
62
60
58
56
55
54
52
-1
50
48
-2
46
-3
45
50
55
45
-4
44
-5
19
60
Stock
Price
Synthetic Positions
STRATEGY:
SyntheticLongStock
EXAMPLE:
Buy1$50Call@2and
Sell1$50Put@2
StockPrice
atExpiration
P/(L)P/(L)P/(L)
SYNTHETICLONGSTOCK
P/(L)
5
55
3
54
53
52
51
50
-1
45
50
55
Stock
Price
49
-2
48
47
-3
46
-4
45
-5
STRATEGY:
SyntheticShortStock
EXAMPLE:
Sell1$50Call@2and
Buy1$50Put@2
StockPrice
atExpiration
SYNTHETICSHORTSTOCK
P/(L)
ShortCallLongPutTotal
5
P/(L)P/(L)P/(L)
55
54
53
52
51
50
49
-1
48
-2
47
45
50
-3
46
45
-4
-5
20
55
Stock
Price
Synthetic Positions
STRATEGY:
SyntheticLongCall
EXAMPLE:
BuyStock@50and
Buy1$50Put@2
StockPrice
atExpiration
P/(L)P/(L)P/(L)
SYNTHETICLONGCALL
P/(L)
5
55
3
54
53
52
51
50
-1
45
50
55
Stock
Price
49
-2
48
47
-3
46
-4
45
-5
STRATEGY:
SyntheticShortCall
EXAMPLE:
SellStockShort@50and
Sell1$50Put@2
StockPrice
atExpiration
SYNTHETICSHORTCALL
P/(L)
ShortStockShortPutTotal 5
P/(L)P/(L)P/(L)
4
55
54
53
52
51
50
-1
49
48
-2
47
-3
46
-4
45
-5
45
50
21
55
Stock
Price
Synthetic Positions
STRATEGY:
SyntheticLongPut
EXAMPLE:
Buy1$50Call@2
StockPrice
atExpiration
ShortStockLongCallTotal
P/(L)P/(L)P/(L)
SYNTHETICLONGPUT
P/(L)
5
55
3
54
53
52
51
50
-1
45
50
55
Stock
Price
49
-2
48
47
-3
46
-4
45
-5
STRATEGY:
SyntheticShortPut
EXAMPLE:
BuyStock@50and
Sell1$50Call@2
SYNTHETICSHORTPUT
P/(L)
StockPriceLongStockShortCallTotal 5
P/(L)P/(L)P/(L)
atExpiration
55
54
53
52
51
50
-1
49
48
-2
47
-3
46
-4
45
45
50
-5
Page17
22
55
Stock
Price
ANSWERS: Call Strategies

STRATEGY:
LongCall
EXAMPLE:
Buy$50Call@3
StockPrice
atExpiration
LongCall
P/(L)
58
57
P/(L)
5
4
3
563
552
541
530
52(1)
LONGCALL
-1
45
50
55
Stock
Price
51(2)
50(3)
-2
49(3)
-3
48(3)
-4
-5
STRATEGY:
ShortCall
EXAMPLE:
Sell$50Call@3
StockPrice
atExpiration
ShortCall
P/(L)
58
(5)
57
(4)
56(3)
P/(L)
5
4
3
55(2)
54(1)
530
521
512
503
SHORTCALL
-1
-2
493
-3
483
-4
-5
23
Stock
Price
45
50
55
ANSWERS: Put Strategies

STRATEGY:
LongPut
EXAMPLE:
Buy$50Put@2
StockPrice
atExpiration
LongPut
P/(L)
53
(2)
52
(2)
P/(L)
LONGPUT
5
4
3
51(2)
50(2)
49(1)
480
471
-1
462
Stock
Price
45
50
55
-2
453
444
-3
435
-4
-5
STRATEGY:
ShortPut
EXAMPLE:
Sell$50Put@2
StockPrice
atExpiration
ShortPut
P/(L)
53
52
P/(L)
SHORTPUT
512
502
491
480
47(1)
-1
46(2)
-2
45(3)
-3
44(4)
-4
43(5)
24
45
50
55
Stock
Price
ANSWERS: Straddles
STRATEGY:
LongStraddle
EXAMPLE:
Buy$50Call@3and
Buy$50Put@2
P/(L)
5
StockPrice
atExpiration
P/(L)P/(L)P/(L)
59
(2)4
57
(2)2
552
(2)0
530
(2)(2)
51(2)
(2)(4)
50(3)
(2)(5)
49(3)
(1)(4)
47(3)
1(2)
45(3)
30
-3
43(3)
52
-4
41(3)
74
-5
STRATEGY:
ShortStraddle
EXAMPLE:
Sell$50Call@3and
Sell$50Put@2
LONGSTRADDLE
4
3
-1
Stock
Price
45
50
55
-2
SHORTSTRADDLE
P/(L)
StockPrice
atExpiration
P/(L)P/(L)P/(L)
59
(6)
2(4)
57
(4)
2(2)
55(2)
20
530
22
512
24
503
25
493
14
-1
473
(1)2
-2
453
(3)0
-3
433
(5)(2)
413
(7)(4)
1
0
-4
-5
25
45
50
55
Stock
Price
ANSWERS: Strangles
STRATEGY:
LongStrangle
EXAMPLE:
Buy$55Call@11/2and
Buy$50Put@11/2
StockPrice
atExpiration
P/(L)P/(L)P/(L)
61
41/2(11/2)3
59
21/2(11/2)1
P/(L)
5
LONGSTRANGLE
4
3
571/2(11/2)(1)
55(11/2)(11/2)(3)
53(11/2)(11/2)(3)
51(11/2)(11/2)(3)
-1
Stock
Price
45
50
55
60
50(11/2)(11/2)(3)
-2
49(11/2)(1/2)(2)
47(11/2)11/20
-3
45(11/2)31/22
-4
43(11/2)51/24
-5
STRATEGY:
ShortStrangle
EXAMPLE:
Sell$55Call@11/2and
Sell$50Put@11/2
P/(L)
StockPrice
atExpiration
P/(L)P/(L)P/(L)
61
(41/2)11/2(3)
59
(21/2)11/2(1)
SHORTSTRANGLE
4
3
57(1/2)11/21
5511/211/23
5311/211/23
5111/211/23
-1
5011/211/23
4911/21/22
-2
4711/2(11/2)0
-3
4511/2(31/2)(2)
-4
4311/2(51/2)(4)
-5
26
45
50
55
60
Stock
Price
ANSWERS: Call Spreads

STRATEGY:
LongCallSpread
EXAMPLE:
Buy$50Call@4and
Sell$55Call@2
StockPrice
atExpiration
LongCallShortCallTotal
P/(L)P/(L)P/(L)
58
4(1)3
P/(L)
5
4
3
57 303
56
213
55
123
54022
53
(1)21
52
(2)20
51
(3)2(1)
50
(4)2(2)
-3
49
(4)2(2)
-4
48
(4)2(2)
-5
STRATEGY:
ShortCallSpread
EXAMPLE:
Sell$50Call@4and
Buy$55Call@2
LONGCALLSPREAD
-1
Stock
Price
50
55
60
-2
SHORTCALLSPREAD
StockPrice
atExpiration
ShortCallLongCallTotalP/(L)
P/(L)P/(L)P/(L)
5
58
(4)1(3)
57 (3)0(3)
3
56
(2)(1)(3)
55
(1)(2)(3)
540(2)(2)
53
1(2)(1)
0
52
2(2)0
51
3(2)1
50
4(2)2
49
4(2)2
-3
48
4(2)2
-4
-1
-2
-5
27
50
55
60
Stock
Price
ANSWERS: Put Spreads

STRATEGY:
LongPutSpread
EXAMPLE:
Buy$50Put@31/2and
Sell$45Put@11/2
StockPrice
atExpiration
LongPutShortPutTotal
P/(L)P/(L)P/(L)
53
(31/2)11/2(2)
P/(L)
5
4
3
52 (31/2)11/2(2)
51
(31/2)11/2(2)
50
(31/2)11/2(2)
49
(21/2)11/2(1)
48
(11/2)11/20
47
(1/2)11/21
46
1/211/22
45
11/211/23
-3
44
21/21/23
-4
43
31/2(1/2)3
-5
STRATEGY:
ShortPutSpread
EXAMPLE:
Sell$50Put@31/2and
Buy$45Put@11/2
LONGPUTSPREAD
-1
Stock
Price
45
50
55
-2
P/(L)
StockPrice
atExpiration
ShortPutLongPutTotal 5
P/(L)P/(L)P/(L)
53
31/2(11/2)2
52 31/2(11/2)2
51
31/2(11/2)2
50
31/2(11/2)2
49
21/2(11/2)1
48
11/2(11/2)0
47
1/2(11/2)(1)
46
(1/2)(11/2)(2)
-2
45
(11/2)(11/2)(3)
-3
44
(21/2)(1/2)(3)
-4
43
(31/2)1/2(3)
SHORTPUTSPREAD
0
-1
-5
28
45
50
55
Stock
Price
ANSWERS: Stock and Option Strategies

STRATEGY:
ProtectivePut
EXAMPLE:
BuyStock@50and
Buy$50Put@2
P/(L)
StockPrice
atExpiration
P/(L)P/(L)P/(L)
57
7(2)5
56
6(2)4
55
5(2)3
54
4(2)2
53
3(2)1
52
2(2)0
51
1(2)(1)
-1
50
0(2)(2)
-2
49
(1)(1)(2)
-3
EXAMPLE:
BuyStock@50and
Sell$50Call@3
45
50
55
-4
47(3)1(2)
CoveredWrite
Stock
Price
48(2)0(2)
STRATEGY:
PROTECTIVEPUT
-5
StockPrice
atExpiration
P/(L)
LongStockShortCallTotal
5
P/(L)P/(L)P/(L)
52
213
51
123
50
033
49
(1)32
48
(2)31
47
(3)30
46
(4)3(1)
-1
45
(5)3(2)
-2
COVEREDWRITE
2
1
44(6)3(3)
-3
43(7)3(4)
-4
42(8)3(5)
-5
29
Stock
Price
45
50
55

STRATEGY:
LongStock+ShortStraddle
EXAMPLE:
BuyStock@50and
Sell$50Call@3and
Sell$50Put@2
LONGSTOCK+SHORTSTRADDLE
P/(L)
5
StockPriceLongStockShortCallShortPutTotal
555(2)25
544(1)25
533025
522125
511225
500325
-1
45
50
55
Stock
Price
49(1)313
-2
48(2)301
47(3)3(1)(1)
-3
46(4)3(2)(3)
-4
45(5)3(3)(5)
-5
STRATEGY:
LongStock+ShortStrangle
EXAMPLE:
BuyStock@52and
Sell1$55Call@1and
Sell1$50Put@1
LONGSTOCK+SHORTSTRANGLE
P/(L)
StockPriceLongStockShortCallShortPutTotal 5
4
564015
3
553115
542114
531113
520112
51(1)111
-1
50(2)110
-2
49(3)10(2)
48(4)1(1)(4)
-3
47(5)1(2)(6)
-4
46(6)1(3)(8)
-5
30
50
55
60
Stock
Price

STRATEGY:
LongStock+RatioCallSpread
EXAMPLE:
BuyStock@50and
Buy1$50Call@3and
Sell2$55Calls@11/2each
LONGSTOCK+RATIOCALLSPREAD
P/(L)
10
StockPriceLongStockLongCallShortCallsTotal
9
8
5663110
5552310
544138
533036
4
3
522(1)34
511(2)32
500(3)30
49(1)(3)3(1)
-1
-4
46(4)(3)3(4)
-5
EXAMPLE:
BuyStock@52and
Sell1$55Call@1and
Buy1$50Put@1
55
Stock
Price
-3
47(3)(3)3(3)
LongStock+Collar
50
-2
48(2)(3)3(2)
STRATEGY:
45
LONGSTOCK+COLLAR
P/(L)
StockPriceLongStockShortCallLongPutTotal
5
4
586(2)(1)3
575(1)(1)3
5640(1)3
5531(1)3
5421(1)2
5311(1)1
-1
5201(1)0
51(1)1(1)(1)
-2
50(2)1(1)(2)
-3
49(3)10(2)
-4
48(4)11(2)
-5
31
50
55
60
Stock
Price
ANSWERS: Synthetic Combinations

STRATEGY:
LongSplit-StrikeSynthetic
EXAMPLE:
Buy1$55Call@11/2and
Sell1$50Put@1
StockPrice
atExpiration
P/(L)
5
P/(L)P/(L)P/(L)
LONGSPLIT-STRIKESYNTHETIC
5921/2131/2
3
58
11/2
121/2
57
1/2
111/2
56(1/2) 11/2
55(11/2) 1(1/2)
53(11/2)
1(1/2)
Stock
Price
50
-1
55
60
51(11/2) 1(1/2)
-2
50(11/2) 1(1/2)
49(11/2) 0(11/2)
-3
48(11/2) (1)(21/2)
-4
47(11/2)(2)(31/2)
-5
STRATEGY:
ShortSplit-StrikeSynthetic
EXAMPLE:
Sell1$55Call@11/2and
Buy1$50Put@1
SHORTSPLIT-STRIKESYNTHETIC
P/(L)
StockPriceShortCallLongPutTotal 5
P/(L)P/(L)P/(L)
atExpiration
4
59(21/2)(1)(31/2)
58
(11/2) (1)(21/2)
57
(1/2) (1)(11/2)
561/2
(1)(1/2)
5511/2
(1)1/2
5311/2
(1)1/2
5111/2
(1)1/2
5011/2
(1)1/2
-2
4911/2
011/2
-3
4811/2
121/2
-4
1
0
-1
4711/2231/2
-5
32
50
55
60
Stock
Price
ANSWERS: Ratio Spreads

STRATEGY:
EXAMPLE:
1X2RatioVerticalSpreadWithCalls
Buy1$50Call@3and
Sell2$55Calls@1each
1X2RATIOVERTICALSPREAD
WITHCALLS
(FRONTSPREAD)
StockPrice LongCallShortCallsTotal
P/(L)
629(12)(3)
607(8)(1)
596(6)0
585(4)1
574(2)2
56303
0
55224
54123
-1
53022
-2
52(1)21
-3
51(2)20
50
55
60
Stock
Price
-4
50(3)2(1)
-5
48(3)2(1)
STRATEGY:
EXAMPLE:
1X2RATIOVOLATILITYSPREAD
WITHCALLS
(BACKSPREAD)
1X2RatioVolatiltySpreadWithCalls
Sell1$50Call@3and
Buy2$55Calls@1each
StockPrice ShortCallLongCallsTotal
P/(L)
5
62(9)123
60(7)81
59(6)60
58(5)4(1)
57(4)2(2)
56(3)0(3)
0
55(2)(2)(4)
54(1)(2)(3)
-1
530(2)(2)
-2
521(2)(1)
-3
512(2)0
-4
503(2)1
-5
483(2)1
33
50
55
60
Stock
Price
ANSWERS: Butterfly Strategies

STRATEGY:
EXAMPLE:
CallButterfly
Buy1$45Call@6and
Sell2$50Calls@3ea.and
Buy1$55Call@1
LONGCALLBUTTERFLY
P/(L)
StockPriceLongCallShortCallsLongCallTotal
565(6)0(1)
554(4)(1)(1)
543(2)(1)0
5320(1)1
5212(1)2
1
Stock
Price
5104(1)3
50(1)6(1)4
49(2)6(1)3
-1
48(3)6(1)2
-2
45
50
55
47(4)6(1)1
-3
46(5)6(1)0
45(6)6(1)(1)
-4
44(6)6(1)(1)
-5
STRATEGY:
EXAMPLE:
ShortButterflywithCalls
Sell1$45Call@6and
Buy2$50Calls@3ea.and
Sell1$55Call@1
SHORTCALLBUTTERFLY
P/(L)
StockPriceShortCallLongCallsShortCallTotal
56(5)601
55(4)411
54(3)210
53(2)01(1)
52(1)(2)1(2)
510(4)1(3)
501(6)1(4)
492(6)1(3)
-1
483(6)1(2)
-2
474(6)1(1)
45
50
-3
465(6)10
456(6)11
-4
446(6)11
-5
34
55
Stock
Price
ANSWERS: Condor Strategies

STRATEGY:
EXAMPLE:
LongCondorwithCalls
Buy1$45Call@6and
Sell1$50Call@4and
Sell1$55Call@2and
Buy1$60Call@1
LONGCALLCONDOR
P/(L)
5
StockPriceLong45Short50Short55Long60Total
6211(8)(5)1(1)
609(6)(3)(1)(1)
587(4)(1)(1)1
565(2)1(1)3
554(1)2(1)4
54302(1)4
52122(1)4
-1
50(1)42(1)4
50
55
60
-2
48(3)42(1)2
46(5)42(1)0
-3
45(6)42(1)(1)
-4
44(6)42(1)(1)
STRATEGY:
EXAMPLE:
45
Stock
Price
-5
ShortCondorwithCalls
Sell1$45Call@6and
Buy1$50Call@4and
Buy1$55Call@2and
Sell1$60Call@1
SHORTCALLCONDOR
P/(L)
StockPriceShort45Long50Long55Short60Total
5
62(11)85(1)1
60(9)6311
58(7)411(1)
56(5)2(1)1(3)
55(4)1(2)1(4)
54(3)0(2)1(4)
52(1)(2)(2)1(4)
-1
501(4)(2)1(4)
483(4)(2)1(2)
-2
465(4)(2)10
-3
45
50
55
456(4)(2)11
-4
446(4)(2)11
-5
35
60
Stock
Price
ANSWERS: Iron Strategies

STRATEGY:
EXAMPLE:
IronButterfly
Buy1$45Put@1and
Sell1$50Put@3and
Sell1$50Call@3and
Buy1$55Call@1
IRONBUTTERFLY
56(1)3(3)0(1)
P/(L)
5
55(1)3(2)(1)(1)
54(1)3(1)(1)0
53(1)30(1)1
52(1)31(1)2
51(1)32(1)3
50(1)33(1)4
-1
49(1)23(1)3
50
55
-2
48(1)13(1)2
47(1)03(1)1
-3
46(1)(1)3(1)0
-4
45(1)(2)3(1)(1)
440(3)3(1)(1)
STRATEGY:
EXAMPLE:
45
Stock
Price
IronCondor
Buy1$45Put@1and
Sell1$50Put@3and
Sell1$55Call@3and
Buy1$60Call@1
-5
IRONCONDOR
P/(L)
StockPriceLongPutShortPutShortCallLongCallTotal 5
4
62(1)3(4)0(1)
60(1)3(2)(1)(1)
58(1)30(1)1
56(1)32(1)3
55(1)33(1)4
54(1)33(1)4
52(1)33(1)4
-1
45
50
55
50(1)33(1)4
-2
48(1)13(1)2
46(1)(1)3(1)0
-3
45(1)(2)3(1)(1)
-4
440(3)3(1)(1)
-5
36
60
Stock
Price
ANSWERS: Synthetic Positions

STRATEGY:
SyntheticLongStock
EXAMPLE:
Buy1$50Call@2and
Sell1$50Put@2
StockPrice
atExpiration
SYNTHETICLONGSTOCK
P/(L)
P/(L)P/(L)P/(L)
55325
54224
53123
52022
51(1)21
50(2)20
49(2)1(1)
-1
48(2)0(2)
-2
47(2)(1)(3)
-3
46(2)(2)(4)
SyntheticShortStock
EXAMPLE:
Sell1$50Call@2and
Buy1$50Put@2
StockPrice
atExpiration
45
50
55
-4
45(2)(3)(5)
STRATEGY:
Stock
Price
-5
SYNTHETICSHORTSTOCK
P/(L)
ShortCallLongPutTotal
5
P/(L)P/(L)P/(L)
55(3)(2)(5)
54(2)(2)(4)
53(1)(2)(3)
520(2)(2)
511(2)(1)
502(2)0
492(1)1
-1
48202
-2
47213
45
50
-3
46224
45235
-4
-5
37
55
Stock
Price

STRATEGY:
SyntheticLongCall
EXAMPLE:
BuyStock@50and
Buy1$50Put@2
StockPrice
atExpiration
SYNTHETICLONGCALL
P/(L)
P/(L)P/(L)P/(L)
555(2)3
544(2)2
533(2)1
522(2)0
511(2)(1)
500(2)(2)
49(1)(1)(2)
-1
48(2)0(2)
-2
47(3)1(2)
-3
46(4)2(2)
-4
45(5)3(2)
STRATEGY:
SyntheticShortCall
EXAMPLE:
Sell1$50Put@2
StockPrice
atExpiration
Stock
Price
0
45
50
55
-5
SYNTHETICSHORTCALL
P/(L)
ShortStockShortPutTotal
5
P/(L)P/(L)P/(L)
55(5)2(3)
54(4)2(2)
53(3)2(1)
52(2)20
51(1)21
50022
49112
-1
48202
-2
473(1)2
45
50
-3
464(2)2
455(3)2
-4
-5
38
55
Stock
Price

STRATEGY:
SyntheticLongPut
EXAMPLE:
Buy1$50Call@2
StockPrice
atExpiration
ShortStockLongCallTotal
P/(L)P/(L)P/(L)
SYNTHETICLONGPUT
P/(L)
5
55(5)3(2)
3
54(4)2(2)
53(3)1(2)
52(2)0(2)
51(1)(1)(2)
500(2)(2)
-1
45
50
55
Stock
Price
491(2)(1)
-2
482(2)0
473(2)1
-3
464(2)2
-4
455(2)3
-5
STRATEGY:
SyntheticShortPut
EXAMPLE:
BuyStock@50and
Sell1$50Call@2
SYNTHETICSHORTPUT
P/(L)
StockPriceLongStockShortCallTotal5
P/(L)P/(L)P/(L)
atExpiration
555(3)2
544(2)2
533(1)2
52202
51112
50022
-1
49(1)21
48(2)20
-2
47(3)2(1)
-3
46(4)2(2)
-4
45(5)2(3)
45
50
-5
Workbook created by William Gaynor - The Optons Institute, 1998.

39
55
Stock
Price
400 S. LaSalle, Chicago, IL 60605

40
1-877-THE-CBOE www.cboe.com

Mastering Options Strategies

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Mastering Options Strategies

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Mastering Options Strategies

A step-by-step guide to understanding profit & loss diagrams

Because Money Doesnt Grow on Trees

Written by the Staff of The Options Institute

Mastering Options Strategies

Why You Need This Workbook

Learning the basics of options involves three steps:

To learn more about The Options Institute classes,

How to Draw Profit and Loss Diagrams

Strategy: Long Call

EXAMPLE: Buy a 50 Call @ $2

Step 2: Make a profit/loss table and a grid for the diagram.

How to Draw Profit and Loss Diagrams

Step 5: Plot the profit or loss

Step 6: Repeat steps 3, 4 and 5

Stock and Option Strategies

Stock and Option Strategies

Stock and Option Strategies

ANSWERS: Call Strategies

ANSWERS: Put Strategies

ANSWERS: Call Spreads

ANSWERS: Put Spreads

ANSWERS: Stock and Option Strategies

ANSWERS: Stock and Option Strategies

ANSWERS: Stock and Option Strategies

ANSWERS: Synthetic Combinations

ANSWERS: Ratio Spreads

ANSWERS: Butterfly Strategies

ANSWERS: Condor Strategies

ANSWERS: Iron Strategies

ANSWERS: Synthetic Positions

ANSWERS: Synthetic Positions

ANSWERS: Synthetic Positions

Workbook created by William Gaynor - The Optons Institute, 1998.

400 S. LaSalle, Chicago, IL 60605

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