OPTIONS

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Sturm Und Drang

The Lightning Spread And Other Strategies

by Jesse Chen

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Here are some strategies you can apply by combining two or more options.

Options spreads are essentially the combination of two or more options. There are six components that you can build from. These are:
 

1. Buy call (bc)
2. Buy put (bp)
3. Sell call (sc)
4. Sell put (sp)
5. Buy underlying (bu)
6. Underlying (su)

You can have three variations on the first four options strategies on this list. They are:

• In-the-money (i)
• At-the-money (a)
• Out-of-the-money (o)

The phrase "the money" denotes the current price of the underlying stock or future. For example, if Microsoft is at 30:
 

• A 30 call and 30 put are at-the-money
• A 40 call and 20 put are out-of-the-money
• A 20 call and 40 put are in-the-money

FIGURE 1: BUY CALL STRATEGY. Here you see the profit/loss graph of this particular strategy.

  ...Continued in the September issue of Technical Analysis of STOCKS & COMMODITIES

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Excerpted from an article originally published in the September 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.

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