Option Spread Trading: A Comprehensive Guide to Strategies and Tactics

by Russell Rhoads

Overview

The options industry has experienced incredible growth in recent years. With multiple exchanges now vying for orders from the public, the speed of execution has increased while the cost of trading options has decreased. This has leveled the playing field to the point where individual traders can not only compete in the options arena, but also capture consistent profits.

Nobody understands this better than author Russell Rhoads—an instructor for the Options Institute at the CBOE—who has helped thousands of people successfully incorporate various options strategies into their everyday trading endeavors.

Now, with Option Spread Trading, he shares his extensive experience in this field and reveals what it takes to put the power of option spreads to work for you. Before getting into a detailed discussions of spread trades, this reliable resource opens with a quick overview of essential option knowledge, lays out the mechanics of putting on very basic positions involving two trading instruments, explores different approaches to creating similar payoffs, and covers the "Greeks."

From there, you'll be introduced to a variety of spread strategies, with each chapter focusing on a specific one, and discover how to choose and use the best strategies for certain situations.

• STRADDLES
• STRANGLES
• BULL AND BEAR SPREADS
• BUTTERFLY SPREADS
• CONDOR SPREADS
• RATIO SPREADS
• BACKSPREADS
• CALENDAR SPREADS
• DIAGONAL SPREADS

Rounding out this comprehensive guide to option spread trading are some specialized chapters that address the concept of Delta-neutral trading—with an example of how market makers basically use isolating price risk when providing liquidity to the market place—and the issues involved in executing a spread trade.

Designed in a modular format with each chapter laid out in a similar fashion, including examples of how each spread would be constructed and key levels to focus on, Option Spread Trading is a flexible guide that will help you get the most out of every option you trade.

Product Details

ISBN-13:	9780470944325
Publisher:	Wiley
Publication date:	12/08/2010
Series:	Wiley Trading , #474
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	288
File size:	1 MB

About the Author

Russell Rhoads is an instructor for the Options Institute at the Chicago Board Options Exchange. He conducts about ninety classes a year and, in addition, conducts webinars on behalf of the CBOE and a variety of brokerage firms. Rhoads's twenty-year trading career included positions at a variety of trading firms and hedge funds. His background includes trading and analysis, and he is author of Candlestick Charting For Dummies. Rhoads graduated the University of Memphis with a MS in finance and has a master's certificate in financial engineering from the Illinois Institute of Technology.

Table of Contents

Preface xi

Acknowledgments xiii

CHAPTER 1 Essential Option Knowledge 1

The Option Basics 1

In-At-Out of the Money 5

Intrinsic and Time Value 6

Spread Basics 8

The Greeks 9

Payoff Tables and Diagrams 10

Option Pricing Calculators 12

CHAPTER 2 Spreads Using an Underlying Security 15

Covered Call 15

Covered Call Using LEAPSQR 22

Systematic Covered Call Strategies 25

Cash-Secured Put 26

Systematic Cash-Secured Put 31

Protective Put 32

The Collar 33

CHAPTER 3 Synthetic Positions 37

Put-Call Parity 39

Synthetic Long Positions 40

Synthetic Short Positions 44

Arbitrage in Put-Call Parity 50

Individuals Using Put-Call Parity 52

CHAPTER 4 The Greeks 55

Price-Related Greeks 55

Time-Related Greek 61

Volatility-Related Greek 65

Interest Rate-Related Greek 67

Conclusion 69

CHAPTER 5 Straddles 71

Long Straddle Mechanics 72

Short Straddle 81

CHAPTER 6 Strangles 89

Long Strangle Mechanics 89

Short Strangle Mechanics 98

CHAPTER 7 Bull Spreads 107

Bull Put Spread 107

Bull Call Spread 114

CHAPTER 8 Bear Spreads 121

Bear Call Spread 121

Bear Put Spread 127

CHAPTER 9 Butterfly Spreads 135

Introduction to Butterfly Spreads 136

Long Call Butterfly 136

Long Put Butterfly 139

Iron Butterfly 142

Short Straddle Comparison 146

Short Call Butterfly 149

Short Put Butterfly 152

Reverse Iron Butterfly 154

Reverse Iron Butterfly versus Straddle 156

CHAPTER 10 Condor Spreads 159

Introduction to Condor Spreads 159

Long Call Condor 160

Long Put Condor 163

Iron Condor 166

Iron Condor versus Short Strangle 170

Short Condor Spreads 172

Reverse Iron Condor 176

Reverse Iron Condor versus Long Strangle 179

CHAPTER 11 Ratio Spreads 183

Call Ratio Spread 184

Put Ratio Spread 189

Ratio Spread Comparisons 192

CHAPTER 12 Backspreads 199

Call Backspread 199

Put Backspread 203

Backspread Comparisons 207

CHAPTER 13 The Stock Repair Strategy 213

Doubling Down on a Position 214

The Stock Repair Trade 215

CHAPTER 14 Calendar Spreads 219

Time Value Effect 220

Long Call Calendar 221

Long Put Calendar 224

Combined Calendar Spread 227

CHAPTER 15 Diagonal Spreads 231

Call Diagonal Spread 231

LEAPS Call Diagonal Spread 234

Put Diagonal Spread 237

LEAPS Put Diagonal Spread 239

Double Diagonal Spread 241

CHAPTER 16 Delta Neutral Trading 245

Delta Review 245

Delta-Neutral Positions 246

Gamma 250

Market Maker Trading 251

CHAPTER 17 Executing a Spread Trade 255

Executing a Stock or Option Trade 256

A Single Option Spread 258

A Spread with Two Options 260

A Spread with Multiple Legs 261

Legging into a Spread Trade 265

About the Author 269

Index 271