Futures & Options Strategies Overview
Long Futures - When you are bullish on the market and uncertain about volatility. You will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turns out to be correct, one of the other strategies may have greater profit potential and/or less risk.
Long Synthetic Futures - When you are bullish on the market and uncertain about volatility. You will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turns out to be correct, one of the other strategies may have greater profit potential and/or less risk. May be traded into from initial long call or short put position to create a stronger bullish position.
Short Synthetic Futures - When you are bearish on the market and uncertain about volatility. You will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turns out to be correct, one of the other strategies may have greater profit potential and/or less risk. May be traded into from initial short call or long put position to create a stronger bearish position.
Long Risk Reversal - When you are bullish on the market and uncertain about volatility. Normally this position is initiated as a follow-up to another strategy. Its risk/reward is the same as a LONG FUTURES except that there is a flat area of little or no gain/loss.
Short Risk Reversal - When you are bearish on the market and uncertain about volatility. Normally this position is initiated as a follow-up to another strategy. Its risk/reward is the same as a SHORT FUTURES except that there is a flat area of little or no gain/loss.
Long Call - When you are bullish to very bullish on the market. In general, the more out-of-the-money (higher strike) calls, the more bullish the strategy.
Short Call - When you are bearish on the market. Sell out- of-the-money (higher strike) puts if you are less confident the market will fall, sell at-the-money puts if you are confident the market will stagnate or fall.
Long Put - When you are bearish to very bearish on the market. In general, the more out-of-the-money (lower strike) the put option strike price, the more bearish the strategy.
Short Put - If you firmly believe the market is not going down. Sell out-of-the-money (lower strike) options if you are only somewhat convinced, sell at-the-money options if you are very confident the market will stagnate or rise. If you doubt market will stagnate and are more bullish, sell in-the-money options for maximum profit.
Bull Spread - If you think the market will go up, but with limited upside. Good position if you want to be in the market but are less confident of bullish expectations. You’re in good company. This is the most popular bullish trade.
Bear Spread - If you think the market will go down, but with limited downside. Good position if you want to be in the market but are less confident of bearish expectations. The most popular position among bears because it may be entered as a conservative trade when uncertain about bearish stance.
Long Butterfly - One of the few positions which may be entered advantageously in a long-term options series. Enter when, with one month or more to go, cost of the spread is 10 percent or less of B – A (20 percent if a strike exists between A and B). This is a rule of thumb; check theoretical values.
Short Butterfly - When the market is either below A or above C and position is overpriced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent move in either direction.
Long Iron Butterfly - When the market is either below A or above C and the position is underpriced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent breakout move in either direction.
Short Iron Butterfly - Enter when the Short Iron Butterfly’s net credit is 80 percent or more of C – A, and you anticipate a prolonged period of relative price stability where the underlying will be near the mid-point of the C – A range close to expiration. This is a rule of thumb; check theoretical values.
Long Straddle - If market is near A and you expect it to start moving but are not sure which way. Especially good position if market has been quiet, then starts to zigzag sharply, signaling potential eruption.
Short Straddle - If market is near A and you expect market is stagnating. Because you are short options, you reap profits as they decay — as long as market remains near A.
Long Strangle - If market is within or near (A-B) range and has been stagnant. If market explodes either way, you make money; if market continues to stagnate, you lose less than with a long straddle. Also useful if implied volatility is expected to increase.
Short Strangle - If market is within or near (A-B) range and, though active, is quieting down. If market goes into stagnation, you make money; if it continues to be active, you have a bit less risk then with a short straddle.
Ratio Call Spread - Usually entered when market is near A and user expects a slight to moderate rise in market but sees a potential for sell-off. One of the most common option spreads, seldom done more than 1:3 (two excess shorts) because of upside risk.
Ratio Put Spread - Usually entered when market is near B and you expect market to fall slightly to moderately, but see a potential for sharp rise. One of the most common option spreads, seldom done more than 1:3 (two excess shorts) because of downside risk.
Ratio Call Backspread - Normally entered when market is near B and shows signs of increasing activity, with greater probability to upside.
Ratio Put Backspread - Normally entered when market is near A and shows signs of increasing activity, with greater probability to downside (for example, if last major move was up, followed by stagnation).
Box or Conversion - Occasionally, a market will get out of line enough to justify an initial entry into one of these positions. However, they are most commonly used to “lock” all or part of a portfolio by buying or selling to create the missing “legs” of the position. These are alternatives to closing out positions at possibly unfavorable prices.
