Options Strategies

There are hundreds of ways to use Options in a portfolio as both the buyer and seller of options. Each strategy may be used for a bullish or bearish trade. For all strategies listed, the strategy may be either a Bullish or Bearish trade, and a Call or Put trades. A few of these strategies include:

1. Credit/Debit Spread
2. Covered Call/Put
3. Naked Call/Put
4. Long/Short Call/Put
5. Protective Call/Put
6. Backspread
7. Synthetic Put/Call
8. Synthetic Long/Short Stock
9. Zero-Cost Collar
10. Covered Combination/Straddle
11. Straddle
12. Strangle
13. Box Spread
14. Butterfly, Iron Butterfly, Reverse Butterfly
15. Calendar Spread/Straddle
16. Condor and Iron Condor
17. Variable Ratio
18. Long/Short Guts
19. Ladders
20. Strap
21. Strip

Common Strategies Employed by JTNC Group, LLC 

JTNC Group, LLC use the most basic strategies in both its’ Play of the Day and Overnight Income services. The most common used for most trades is to buy a Call or a Put as a directional bet on the market. We use data collected from our proprietary technology to determine how the market will move over a relatively short time frame (less than 24 hours). We purchase a near the money option and exit at a level our data has predetermined to be most probable. On occasion our technology also provides a very strong, very high probability signal and we will suggest a “Risk Reversal” trade where we sell one option to help finance the purchase of another option. For example, if we believe the market will rise, we may sell an out of the money Put and buy a near the money Call. Selling the Put provides premium income to reduce the cost of buying the Call.

Vertical/Diagonal Credit Spreads – This is another basic strategy sometimes used by JTNC Group, LLC. As a writer or seller of options, these generate a “credit” or profit from the premium received hence the name, Credit Spread. This is also called a Bear Call/Put Spread. In the example below, we explain a Bear Call Spread, also known as a Call Credit Spread. The word Vertical implies both the put and call options have the same expiration date. A Diagonal Credit Spread implies differing expirations dates.

For example, a bear call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go down moderately in the near term. The bear call spread option strategy is also known as the bear call credit spread as a credit is received upon entering the trade.

Bear call spreads can be implemented by buying call options of a certain strike price and selling the same number of call options of lower strike price on the same underlying security expiring in the same month or for a diagonal spread, a later expiration.

Bear Call Spread Payoff Diagram

 Limited Downside Profit

The maximum gain attainable using the bear call spread options strategy is the credit received upon entering the trade. To reach the maximum profit, the stock price needs to close below the strike price of the lower strike call sold at the expiration date where both options would expire worthless.

The formula for calculating the maximum profit is:

• Max Profit = Net Premium Received - Commissions Paid
• Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Limited Upside Risk

If the stock price rises above the strike price of the higher strike call at the expiration date, the bear call spread strategy suffers a maximum loss equals to the difference between the strike price of the two options, minus the original credit taken in when entering the position.

The formula for calculating maximum loss is:

• Max Loss = Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
• Max Loss Occurs When Price of Underlying >= Strike Price of Long Call

Breakeven Point(s)

The underlier price at which break-even is achieved for the bear call spread position can be calculated using the following formula.

• Breakeven Point = Strike Price of Short Call + Net Premium Received

Bear Call Spread Example

Suppose XYZ stock is trading at $37 in June. An options trader bearish on XYZ  to enter a bear call spread position by buying a JUL 40 call for $100 and selling a JUL 35 call for $300 at the same time, giving him a net $200 credit for entering this trade.

The price of XYZ stock subsequently drops to $34 at expiration. As both options expire worthless, the options trader gets to keep the entire credit of $200 as profit.

If the stock rallies to $42 instead, both calls will expire in-the-money with the JUL 40 call bought having $200 in intrinsic value and the JUL 35 call sold having $700 in intrinsic value. The spread would then have a net value of $500 (the difference in strike price). Since the trader has to buy back the spread for $500, this means that he will have a net loss of $300 after deducting the $200 credit he earned when he put on the spread position.

Commissions

For ease of understanding, the calculations depicted in the above examples did not consider commission charges as they are relatively small amounts (typically around $1.30 to $1.40 for each side of this trade).

Aggressive Bear Call Spread

One can enter a more aggressive bear spread position by widening the difference between the strike price of the two call options. However, this will also mean that the stock price must move downward by a greater degree for the trader to realize the maximum profit.