Posts Tagged ‘Mastery’

Options Trading Mastery: Option Strangles

The Strangle is another option strategy that features the use of options in unison with each other. The Strangle is philosophically identical to its ‘cousin’ the Straddle. However, whereas the Straddle has a single strike as its focal point, the Strangle has its focal point spread out over two strikes.

The effect of this as compared to the Straddle is that the Strangle will produce wider break-even points and lower prices. The widening of the break-even points changes the risk/reward scenarios for both the buyer and the seller of the Strangle as opposed to the Straddle.

The benefit to the buyer of the Strangle is that it will cost less than a Straddle (thus less risk) but, like all risk/reward scenarios, less risk equals less reward. The buyer’s trade-off for lower cost and less risk is that the stock will have to move significantly more than if the buyer had purchased a Straddle.

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The benefit to the seller of the Strangle is that it offers a larger margin of error in terms of the anticipated stock movement. The wider range of the break-even prices allows the stock to have more movement while still allowing the seller to profit. The seller’s trade-off for this luxury is price. The seller will not bring in as much premium from the sale of a Strangle as opposed to the sale of a Straddle.

With that said, let’s look at the Strangle. The Strangle, like the Straddle, consists of two options. In the Strangle, however, the two options are not at-the-money options of the same strike (Straddle), but out-of-the-money options (both a call and a put) of different strikes.

The Strangle features one position (either long or short) and two options: an out-of-the-money call and an out-of-the-money put.

When you put together a Strangle the construction should be as follows:

- Different options (out-of-the-money call & an out-of-the-money put)

- Same stock

- Same expiration

- One to one ratio

Strangle positions are referred to as ‘long Strangle’ or ‘short Strangle’ depending on whether you purchase the call and the put (long) or sell the call and the put (short).

For example, with the stock trading at .50, you would construct the long Strangle by purchasing both the July 60 call and the July 55 put. You would construct the short Strangle by selling both the July 60 call and the July 55 put.

It is important to note that the Strangle is a one to one ratio strategy. For every call that you buy (or sell), you must purchase (or sell) exactly one put to properly construct a Strangle.

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New Options Trading Video Library, The Options Mastery Series, Sells Out In One Week – Limited Re-release in March 2007

New Options Trading Video Library, The Options Mastery Series, Sells Out In One Week – Limited Re-release in March 2007

Boca Raton, FL (PRWEB) January 4, 2007

The financial industry is abuzz with new developments and activity, and investors are excited to reap the benefits. In September, NASDAQ announced that it would enter the options product market for the first time. The US Exchange also petitioned the US Securities and Exchange Commission (SEC) to allow options trading in penny increments, a change from the usual minimum nickel increments. The SEC also revealed it is considering altering an archaic rule that could drastically change the way brokerage firms assess margin requirements on stock and options trading investors. When initiated in 2007, investors will be basking in an optimal climate for success.    

“This should set off a huge quake in the investment community because, for the first time, this affects individual investors,” says Ron Ianieri, options expert and chief options strategist at The Options University. Novice and experienced investors flock to the company’s seminars, teleseminars and webinars to hear his veteran advice and coveted tips for options trading.

Their latest learning release, The Options Mastery Series, launched on December 7, offers rookie option traders all the tools and training to master options in the shortest possible time. Investor’s response was tremendous selling out 500 copies in just one week. It is evident investors have embraced Ianieri’s wisdom to jumpstart their success in the options market. For those who missed out on purchasing this first of its kind program, a new release will be available in March 2007. The innovative tool, consisting of 28 interactive CDs with video instruction, shows former floor trader Ron Ianieri teaching his profitable and safe options trading secrets gleaned from 15 years experience on the Philadelphia Stock Exchange.

In a market flooded with dubious options education companies, it is difficult to cut through the clutter with real-world options trading tactics. “Most of what investors see out there is concocted by some wannabe that has never seen the inside of any of the five major trading floors,” explains Ianieri on why he joined The Options University. The University focuses on comprehensive, professional-level education rather than the incomplete piece-by-piece upselling by other leading options education firms. Ianieri warns that investors who learn options strategies without understanding their fundamentals are just training to fail.

While NASDAQ and the SEC’s historic announcements on options are in beginning stages, individual investors must now reconsider the investment tool once thought of as risky. Says Ianieri,”You are going to be much happier with your portfolio once you learn the hedging power of options. After you learn about options, you will probably never want to trade stocks alone again.”

About The Options University, LLC:

The Options University is the leading source for options education for safer investing and better profits. Co-founder Ron Ianieri was a floor trader for 14 years on the Philadelphia Stock Exchange, and ‘The Specialist’ or lead market maker in DELL computer options, one of the busiest books in history. Maximizing his experience, the educational company is uniquely qualified to teach investors how to make consistent profits while limiting risk. For more information on The Options University, visit http://www.optionsuniversity.com.

Contact:

Laura Powers

The Options University, LLC

(212) 505-8388

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©Copyright 1997-

, Vocus PRW Holdings, LLC.
Vocus, PRWeb, and Publicity Wire are trademarks or registered trademarks of Vocus, Inc. or Vocus PRW Holdings, LLC.

The Buzz About Options University’s Forex Mastery Review Has Taken America By Storm

The Buzz About Options University’s Forex Mastery Review Has Taken America By Storm

Boca Raton, FL (PRWEB) November 17, 2009

Over 10,000 people awaiting the Tuesday 11/17/09 release of OU’s Forex Mastery Series.

The Options University is a leading global resource for options trading education and training, teaching investors option strategies for safer investing and bigger profits. Founded in 2004, the educational company teaches investors how to enhance portfolio profits and limit risk in today’s markets using options. The Option University offers courses for investors at every level of experience. From The Options 101 Home Study Course to the Options Mastery Series online classes, it has many different products and services to choose from including home study courses, live interactive web classes, and live seminars all over the world plus proprietary options trading software that is provided to students.

One of the Options University’s most highly anticipated product launches is the Forex Mastery Series. People have been blogging about it for weeks and it finally becomes available this Tuesday, 11/17/09.

Forex Mastery is a three part trading system for the currency markets. It was created by the Options University team of Forex experts, all veterans of the market with years of experience and personal trading success. The Options University team takes their extensive knowledge in the field to teach others how to be successful as well.

Forex Mastery is generating so much publicity because people have heard how simple to use it is by itself; and the software tools make it even simpler. The video modules are clear and come with many examples to show people how to trade in a simple fashion. Apart from helping people place high probability trades, ForexMastery can also help people manage their money and risk better and to become not only a more profitable but a more efficient trader.

When asked what the buzz is all about regarding Forex Mastery, Brett Fogle, President and founder of Options University states, “The risk of Forex trading is virtually eliminated and people can be consistently profitable trading Forex in as little as 12 minutes a day. It’s the secret Forex project we’ve been quietly working on for the past few months, known simply as Project X. It is, by far, our best training package we’ve ever produced, times ten. That’s a promise.”

Responding to the question of why Forex Mastery is different from any other training materials out there, Fogle stated, “I’ve gathered the greatest Forex talent available anywhere- a mathematician and a Forex trading veteran, who has actually cracked the hidden levels of the Forex with what some are calling magical precision. Plus an interpreter who has translated the rules of this mathemetician into simple and easy to use software that shows people how and when to enter and exit their Forex trades safely, profitably and consistently, nearly every single time and in any time frame. Whether you’ve never traded Forex before, or you’re a professional Forex trader, Forex mastery will be a game trader for Forex trader.”

The Options University, based in Boca Raton, Florida, has been named as one of Inc. Magazine’s Top 500 privately held companies in the United States. In only four years, the Options University has grown from zero employees to 25 full-time and virtual staff worldwide, with over $ 3 million in revenues for 2007.

According to Inc.com, “(Options University) is uniquely qualified to become a market leader in this industry based on the quality of the instructors, many of which are former professional floor traders and market makers. It teaches people how to trade options through online trainings, web seminars and home study courses.” Responding to why they believe the Options University is growing, Inc.com states, “More brokers offer options, but not as many investors understand what options are. The service has become popular with baby boomer retirees who have a retirement account but aren’t happy with their returns.

For more information, visit: http://www.OUForexTrader.com/iscript.php?10892_u59

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©Copyright 1997-

, Vocus PRW Holdings, LLC.
Vocus, PRWeb, and Publicity Wire are trademarks or registered trademarks of Vocus, Inc. or Vocus PRW Holdings, LLC.

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Options Mastery Series Re-released March 1st Due to High Demand

Options Mastery Series Re-released March 1st Due to High Demand

Boca Raton, FL (PRWEB) March 7, 2007

Investors have embraced The Options Mastery Series to prepare them for optimal money making, in the wake of NASDAQ’s announcement regarding entering the options product market in the third quarter of 2007. NASDAQ is also waiting for a change to penny increments from the usual minimum nickel increments as the SEC revealed it is considering altering an archaic rule, which could drastically change the way brokerage firms assess margin requirements on stock and options trading investors.

Savvy investors have paid attention to these transformative market developments to maximize their investments. With baby boomers concerned about the future of social security, retirees worried about running out savings, and Generation X’ers lacking liquid assets, the options market will open a whole new platform to maximize earnings. Many have turned to The Options Mastery Series to learn all the tips, tools and training necessary to fully master options trading for sound investments.

The Options Mastery Series initially sold out in just one week, followed by a bevy of requests to re-release the series quickly, in preparation for the third quarter 2007 NASDAQ options trading start date. The popular series of 28 interactive CDs with video instruction, shows options expert and Chief Option Strategist at The Options University, Ron Ianieri revealing his options trading secrets, based on his 15 years of experience on the Philadelphia Stock Exchange and as ‘The Specialist’ in DELL computer options, one of the busiest books in history. He provides the practical knowledge, guided focus, insider tips and insight needed for the rookie to the experienced trader to successfully profit from options trading. Ianieri and Options University also offer online seminars, teleseminars and webinars.

Options University and its Options Mastery Series provide an in-depth education, beginning with the fundamentals, so traders learn all aspects of options trading, putting them ahead of the game – positioned to succeed. “Although options have been around since the early 70′s, it has only been over the past few months that they have really received the recognition they deserve as a risk management tool. In actuality, options are, and always have been, the only perfect form of hedge available,” says Ianieri. Recent announcements by the SEC and the NASDAQ have finally brought this fact to light and have fully legitimized options as the ultimate risk management tool for individual investors. “The key now for individual investors is education. To really get optimal use out of options, investors must spend some time learning how to use these powerful tools properly. Education will be the key going forward,” explains Ron Ianieri.

About Options University, LLC: The Options University is the leading source for options education for safer investing and better profits. Co-founder Ron Ianieri was a floor trader for 14 years on the Philadelphia Stock Exchange, and ‘The Specialist’ or lead market maker in DELL computer options, one of the busiest books in history. Maximizing his experience, the educational company is uniquely qualified to teach investors how to make consistent profits while limiting risk. For more information on The Options University, visit http://www.optionsuniversity.com

###

©Copyright 1997-

, Vocus PRW Holdings, LLC.
Vocus, PRWeb, and Publicity Wire are trademarks or registered trademarks of Vocus, Inc. or Vocus PRW Holdings, LLC.

More Option Trading Tips Press Releases

Option Trading | Selling Stock Options | Strategies With Options Mastery

www.1stmoneyopportunities.com Stock options offer a wide range of trading opportunities. But just buying options can cause you to profit a lot only in rare cases. The strategy here is to change the sides and begin to sell options… http

Forex Mastery Review- The Buzz About Options University’s Forex Mastery Series Has Taken America By Storm

The Options University is a leading global resource for options trading education and training, teaching investors option strategies for safer investing and bigger profits. Founded in 2004, the educational company teaches investors how to enhance portfolio profits and limit risk in today’s markets using options. The Option University offers courses for investors at every level of experience. From The Options 101 Home Study Course to the Options Mastery Series online classes, it has many different products and services to choose from including home study courses, live interactive web classes, and live seminars all over the world plus proprietary options trading software that is provided to students.

One of the Options University’s most highly anticipated product launches is the Forex Mastery Series. People have been blogging about it for weeks and it finally becomes available this Tuesday, 11/17/09.

Forex Mastery is a three part trading system for the currency markets. It was created by the Options University team of Forex experts, all veterans of the market with years of experience and personal trading success. The Options University team takes their extensive knowledge in the field to teach others how to be successful as well.

Forex Mastery is generating so much publicity because people have heard how simple to use it is by itself; and the software tools make it even simpler. The video modules are clear and come with many examples to show people how to trade in a simple fashion. Apart from helping people place high probability trades, ForexMastery can also help people manage their money and risk better and to become not only a more profitable but a more efficient trader.

When asked what the buzz is all about regarding Forex Mastery, Brett Fogle, President and founder of Options University states, “The risk of Forex trading is virtually eliminated and people can be consistently profitable trading Forex in as little as 12 minutes a day. It’s the secret Forex project we have been quietly working on for the past few months, known simply as Project X. It is, by far, our best training package we have ever produced, times ten. That’s a promise.”

Responding to the question of why Forex Mastery is different from any other training materials out there, Fogle stated, “I have gathered the greatest Forex talent available anywhere- a mathematician and a Forex trading veteran, who has actually cracked the hidden levels of the Forex with what some are calling magical precision. Plus an interpreter who has translated the rules of this mathemetician into simple and easy to use software that shows people how and when to enter and exit their Forex trades safely, profitably and consistently, nearly every single time and in any time frame. Whether you have never traded Forex before, or you are a professional Forex trader, Forex mastery will be a game trader for Forex trader.”

The Options University, based in Boca Raton, Florida, has been named as one of Inc. Magazine’s Top 500 privately held companies in the United States. In only four years, the Options University has grown from zero employees to 25 full-time and virtual staff worldwide, with over $3 million in revenues for 2007.

According to Inc.com, “(Options University) is uniquely qualified to become a market leader in this industry based on the quality of the instructors, many of which are former professional floor traders and market makers. It teaches people how to trade options through online trainings, web seminars and home study courses.” Responding to why they believe the Options University is growing, Inc.com states, “More brokers offer options, but not as many investors understand what options are. The service has become popular with baby boomer retirees who have a retirement account but aren’t happy with their returns.

For more information, visit: Forex Mastery Official Page

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Options Trading Mastery: Buyer Risk & Reward

Like most trades, time spreads have a maximum loss for the buyer. You can only lose what you have spent. If you paid $1.00 for the spread, your maximum potential loss is $1.00. If you bought the spread for $2.00, the maximum potential loss is $2.00.

The buyer of a time spread will purchase the out-month option while selling the nearer month option of the same strike in a one-to-one ratio. Since the out-month option will have more time until expiration than the nearer month option, the out-month option will cost more. This means the buyer will put out money (debit spread) that makes sense. The buyer can only lose the amount of money they spent to purchase the spread. Thus, the buyer’s maximum risk is the cost of the spread.

The buyer can profit in several ways. First, as a time spread, the buyer can profit by the passage of time. Options are wasting assets. As the nearer month option decays more quickly than the outer-month option, the spread widens (increases in value) and the buyer sees a profit.

Second, implied volatility can increase. As implied volatility increases, the out-month option, which the buyer is long, increases in value more quickly (due to its higher Vega) than the nearer month option that the buyer is short. This will force the spread to widen or increase in value, which again is profitable for the buyer.

Third, the buyer can make money due to stock price movement. As stated before, a time spread’s value is at its maximum when the stock price and the spreads strike price are identical (at-the-money). You can have an increase in value if you own an out-of-the-money or in-the-money time spread, and the stock moves either up or down toward your strike. As the stock moves closer to your strike, the spread will expand and increase in value creating a profit for you, the buyer.

The buyer’s risks are obviously the opposite of the rewards. You cannot stop or reverse time, so the buyer of the spread can never be hurt by time. Implied volatility, however, can decrease as easily as it can increase. A decrease in implied volatility will decrease the value of the out-month option (which the buyer is long) faster than it will decrease the value of the nearer month option (which the buyer is short) due to the higher Vega of the out-month option. This will narrow the spread thereby creating a loss for the buyer.

In the same way that stock movement in the right direction can be profitable for the buyer of a time spread, stock movement in the wrong direction can be costly. As the stock moves away from the spread’s strike, the spread decreases in value. That will create a loss for the buyer of the spread.

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Options Mastery Lesson: Straddles

In our previous reports, we discussed option strategies that feature the use of options in combination with stock such as the buy-write and the use of options against each other in the form of spreads. We will focus on the Straddle, which uses options in unison with each other.

Unlike a spread that features a long option versus a short option, the Straddle features one position (either long or short) and two options – a call and its corresponding put. A Straddle is the strategy composed of a long (or short) call and a long (or short) put where both options have the identical strike price and expiration month.

When putting together a Straddle, the construction should be as follows:

-Different options (call and its corresponding put)

-Same stock

-Same strike

-Same expiration

-One-to-one ratio

Straddle positions are referred to as ‘long Straddle’ or ‘short Straddle’ depending on whether you purchase the call and its corresponding put (long) or sell the call and its corresponding put (short). For example, we will construct the long Straddle by purchasing both the July 60 call and the July 60 put. We will construct the short Straddle by selling both the July 60 call and the July 60 put. It is important to note that the Straddle is a one-to-one ratio strategy. For every call that you buy (or sell), you must purchase (or sell) exactly one corresponding put.

Straddle Scenarios

The Straddle relies on movements in stock price or in implied volatility to establish profit opportunities. The Straddle buyer looks for the stock to move aggressively in either direction or for the anticipated perception of possible aggressive moves that will bring about an increase in implied volatility.

Sellers of the Straddle hope for the opposite scenario. A lack of stock movement or a perceived lack of movement, causing implied volatility to decrease, will create profitable scenario.

Straddle Mechanics

Let’s look at how a Straddle works. In our illustration, we see the July 65 Straddle. We can either buy or sell the Straddle. If we purchase both the July 65 call and the July 65 put simultaneously in a one-to-one ratio we have a long Straddle. To construct a short Straddle we would sell both the July 65 call and July 65 put simultaneously in a one-to-one ratio.

Continuing with our illustration, we will set the price for each of the options. With our imaginary stock trading at $65.50, the July 65 call trades at $3.13 and the July 65 put trades at $2.47. The combination of these two prices accounts for the $5.60 cost of the Straddle. Fast forward to expiration and observe what happens to the value of the Straddle at different stock prices.

Price Call Put Straddle P & L

50 0.00 15.00 15.00 9.40

55 0.00 10.00 10.00 4.40

60 0.00 5.00 5.00 -.60

65 0.00 0.00 0.00 -5.60

70 5.00 0.00 5.00 -.60

75 10.00 0.00 10.00 4.40

80 15.00 0.00 15.00 9.40

As you can see, the Straddle’s value increases the further the stock moves away from the strike. The closer the stock is to the strike, the lower the value of the Straddle at expiration. The chart clearly shows that the more the stock moves away from the strike, the higher the Straddle’s value becomes. Conversely, the closer the stock finishes to the strike, the lower the value of the Straddle. Owners of Straddles want and need movement while sellers of Straddles want and need stagnation.

How does this example influence your investment strategy? If you feel that a stock is likely to move aggressively in either direction or if you feel that implied volatility is likely to increase, possibly due to impending news (such as earnings, FDA approval, etc.), look into the purchase of a Straddle. If you feel a stock is likely to enter a stagnant phase, or if you feel that implied volatility is likely to decrease, the sale of a Straddle can be a very profitable trade for you.

Options Trading Mastery: Spread Prices

Vertical spreads will trade between its minimum and maximum values – zero and the difference between the two strikes. In the case of a vertical call spread, the spread will trade closer to zero when the stock trades closer to or lower than the lower strike price. The spread will trade closer to maximum value when the stock trades closer to or higher than the higher strike price.

Remember, this maximum gain occurs at expiration. Before that, the spread will trade with a premium.

Starting from a stock price of 37.5, a price located directly between the two strikes, (using our example of the August 35 – 40 call spread) we can see the approximate value of the spread is roughly $2.50. This is because the August 35 calls and the August 40 calls are equidistant from the current stock price of $37.50. Being equidistant from the stock, both the August 35 and 40 calls will have almost the same amount of extrinsic value in them.

Thus, the extrinsic values of the two options cancel themselves out since you are long one call and short the other. This would leave each option value consisting of only intrinsic value. With the stock at $37.50, the value of the August 35 – 40 call spread will be $2.50. The August 35 calls will have $2.50 in intrinsic value while the August 40 calls will have $0 in intrinsic value. The difference gives you a spread with a value of $2.50.

A general rule of thumb is if the stock price is located evenly between the two strike prices, the vertical spread should be worth roughly half of the value of the distance between the two strikes. This will be true for vertical put spreads as well as call spreads. From this rule, we can roughly estimate the vertical spread’s price per different stock prices.

For vertical call spreads, if the spread is worth roughly half of the difference between the two strikes with the stock price directly between the two strikes, then as the stock falls to lower strike and beyond, the spreads value will decrease and move closer to $0. Time left until expiration and volatility will dictate how close and how quickly it will approach $0. On the other side, as the stock climbs toward and above the upper strike, the spread’s value will increase toward its maximum value described by the difference between the two strikes.

For vertical put spreads, as the stock price decreases toward the lower strike price, the spread will increase in value and approach its maximum value as defined by the difference between the two strikes. As the stock price increases toward the higher strike, the spread will decrease in value and will approach $0. Again, time until expiration and volatility will determine how quickly and how close the spread will approach $0.

Factors that Affect Spread Pricing

The determination of pricing as described above works in most cases. Be aware that it assumes that the implied volatility in both the 35 and 40 calls is the same. Most often, these two options will have a slightly different implied volatility.

This intra-month difference in implied volatility values through different strikes is known as a vertical volatility skew. The reason the markets run volatility skews is to make sure that out of the money options have enough premium in them to justify the individual option’s risk/reward scenario.

Whatever factors affect the vertical spread, they are contingent on where the stock is in relation to the spread. Changes in implied volatility affect the price of a spread as stated above but the position of the stock in relation to the strikes of the spread is a key determinate of price.

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Options Trading Mastery: Construction & Value of a Vertical Spread

Construction of a vertical spread occurs with the purchase and sale of a call (put) in the same stock and in the same month. The only difference between the two options is the strike price. For example, an investor would construct a vertical spread by purchasing the IBM June 55-call while selling the June IBM 60 call. This trade would be called the IBM June 55 – 60 call spread. Similarly, a purchase of the IBM July 45 put and sale of the IBM July 60 put would be called the IBM July 45 – 60 put spread.

The key to the constructing these vertical spreads is choosing options in the same stock and month, but different strikes and in a 1 to 1 ratio. That is, you must purchase one option for every one you sell or sell one option for every one you buy.

Value and the Vertical Spread

A vertical spread’s maximum value is the difference between the two strikes. For example, the maximum value of the June 55 60-call spread mentioned previously is $5.00. [60 - 55] = $5.

Spread- Difference in Strikes – Spread Maximum Value

August 35 – 40 call 5 $5.00

April 70 – 85 put 15 $15.00

Nov. 20 – 22.5 call 2.5 $2.50

Dec. 40 – 50 put 10 $10.00

Jan 60 – 80 call 20 $20.00

Using the June 55 – 60-call spread example, we will set the date to June expiration on Friday. On that day, all the June options will expire and the options will be worth parity, as all of the extrinsic value will have eroded away.

Where does the spread get its value? From its two components – the call (put) you buy or the call (put) you sell. Look at the spread’s value with a couple of different closing stock prices. If the stock closes at $55, then both the 55 strike and the 60 strike will be out of the money and worthless. The value of the spread will be zero since both options are worth $0. If the stock closes at $57.50, the June 55 calls will be worth $2.50. The June 60 calls will be out of the money and thus worthless, therefore the spread will be worth $2.50 (June 55 call $ 2.50 – June 60 call $0).

If the stock closes at $60.00, then the June 55 calls will be worth $5.00. Meanwhile, the June 60 calls will be worth $0. This means that the spread will be worth $5.00 (June 55 call $ 5.00 – June 60 call $0). This is the maximum value of the spread. Note that the maximum value is identical to the difference between the strikes.

As the stock goes higher, the June 60 call becomes in-the-money and gains intrinsic value. For every penny that the stock increases in value, the June 55 calls and June 60 calls gain value equally, keeping the $5.00 spread between the two strikes constant.

To see this, refer to the Table below.

Price- June 55 Call- June 60 Call- Spread

55 0 0 0

56 1 0 1

57 2 0 2

58 3 0 3

59 4 0 4

60 5 0 5

61 6 1 5

62 7 2 5

65 10 5 5

70 15 10 5

100 45 40 5

The difference between the strikes is the maximum value of all vertical spreads regardless of the distance between the two strikes. It does not matter whether the spread is $5.00 wide, $10.00 wide, $20.00 wide, or even $50.00 wide. Its maximum value is the difference between the two strikes. Further, the vertical spread’s maximum value (the difference between the two strikes) holds true for vertical put spreads as well as vertical call spreads. Look at our other example, the July 45 – 60 put spread.

Again we set time forward to Friday, July expiration. We set the stock closing price at $60.00. At $60.00, both the July 45 puts and the July 60 puts will be out of the money and thus worthless. With the July 45 puts and July 60 puts worthless, the spread is also worthless (July 60 put $0 – July 45 put $0). If the stock finishes at $52.50, then the July 60 puts will be worth $7.50 while the July 45 puts will still be worthless. In this scenario, the July 45 – 60 put spread will be worth $7.50 (July 60 puts $7.50 – July 45 puts $0). If the stock finishes at $45.00, then the July 60 puts will be worth $15.00 while the July 45 puts will be worth $0.

At this level, the spread is worth $15.00 (July 60 puts $15.00 – July 45 puts $0). This is the maximum value of the spread. As you can see, it is identical to the $15.00 difference between the strikes.

As the stock lowers, the July 45 puts become in the money and gain intrinsic value. For every penny that the stock decreases in value, the July 60 puts and the July 45 puts will gain value equally, keeping the $15.00 spread between the two strikes constant. To see this, refer to the table below.

Price- June 60 Put- July 45 Put- Spread

65 0 0 0

62 0 0 0

60 0 0 0

57 3 0 3

55 5 0 5

50 10 0 10

47 13 0 13

45 15 0 15

42 17 2 15

40 20 5 15

As stated, the maximum value of a vertical spread is the difference between the two strikes while the minimum value of the spread is, of course, $0. This means that in this strategy, both the buyer and the seller have a limited, fixed maximum loss.

The buyer can only lose what he spent. Therefore, if the buyer spent $2.20 to purchase the August 35 – 40-call spread, the most he can lose is the $2.20 he spent.

For the seller, the maximum loss is the difference between the maximum value of the spread (difference between the strikes) and the amount of money received for the sale of the spread. For example, if you were to sell the August 35 – 40-call spread for $2.20 then your maximum loss will be $2.80. Remember, the maximum value of the spread is the difference between the 2 strikes or $5.00 (40 – 35).

The difference between the maximum value of the spread ($5.00) and the amount the seller received for the sale ($2.20) leaves a $2.80 maximum loss.

Below, the chart shows the potential amount of money, both profit and loss, that can be made or lost by both the buyer and the seller.

Closing – Aug 35-40 Call Spread – Aug 35-40 Call Closing Price - Buyer P & L – Seller P & L

30 2.20 0 -2.20 +2.20

32 2.20 0 -2.20 +2.20

34 2.20 0 -2.20 +2.20

35 2.20 0 -2.20 +2.20

36 2.20 $1.00 -1.20 +1.20

37 2.20 $2.00 - .20 + .20

38 2.20 $3.00 + .80 - .80

39 2.20 $4.00 +1.80 -1.80

40 2.20 $5.00 +2.80 -2.80

42 2.20 $5.00 +2.80 -2.80

44 2.20 $5.00 +2.80 -2.80

46 2.20 $5.00 +2.80 -2.80

48 2.20 $5.00 +2.80 -2.80

50 2.20 $5.00 +2.80 -2.80

It is important to understand and remember that vertical spreads have both a limited profit and a limited loss scenario for both the buyer and the seller.