1. Risk Parameters of Debit and Credit Spreads


Debit Call Spread (Bullish)
Debit Put Spread (Bearish)
Credit Call Spread (Bearish)
Credit Put Spread (Bullish)
Description
Buy call with low strike price, sell call with high strike price.
Buy put with higher strike price, sell put with lower strike price.
Buy call with high strike price, sell call with low strike price.
Buy put with low strike price, sell put with high strike price.
Maximum Gain
Futures price equals or exceeds strike price of higher option (in the money)
Futures price equals or is less than put with lower strike price. (in the money)
Net premium received
Net premium received.
Maximum Loss
Net premium (futures prices drops below lower option\'s strike price)
Net premium (futures equals or exceeds strike price of higher option)
Strike price –net premium (Futures contract exceeds higher strike price)
Strike price-net premium
Break Even
Lower strike price + net premium
Strike price –net premium.
Lower strike price + net premium.
Higher strike price-net premium received.
Profitability
Premium difference widens.
Premium difference widens.
Premium difference narrows
Premium difference narrows
Other Strategies
Combinations: Akin to straddles but the strike prices and/or expiration dates.
Long - Call and put purchased on same futures contract with different
Short - Call and put sold on same futures contract with different strike prices and/or expiration dates.

2. Risk Parameters of Straddles
As distinct from spreads where an investor articulates a view on the direction of the market (bullish or bearish), the use of straddles signals a certain degree of ambivalence as the trader is unsure of the market's direction and wants to plan for multiple outcomes.


Long Straddle
Short Straddle
Description
Purchase of a Call and a Put on the same underlying commodity, expiration month and strike price.
Sale of a Call and a Put on the same underlying commodity, expiration month and strike price.
Maximum Gain
Unlimited
Initial premia received.
Maximum Loss
The premia
Unlimited (the short call)
Breakeven
Two points-one above and one below the strike price. Market price=strike price+/-total premia paid
Two points-one above and one below the strike price. Market price=strike price+/-total premia paid
3. Risk Parameters of Strangles
Similar to a straddle, strangles use different strike prices. Both options are out of the money, requiring more considerable price movement to reach or exceed breakeven. Because both positions are out of the money, this strategy is less expensive.


Long Strangle
Short Strangle
Description
Purchase both a put and a call. Both are out of the money
Sell a put and a call. Both are out of the money.
Maximum Gain
Unlimited
Premia received
Maximum Loss
Premia paid
Unlimited
Breakeven
Call strike price + premium
Put strike price - premium
Call strike price + premium
Put strike price - premium
Guts: the purchase in the money calls and puts. The call strike price is lower than the put strike price. As both options are in the money, this approach is used much less as it is quite expensive.

LOOK OUT!
Calculating return on equity:
For options is done the same was as it is done for futures: (gross profit – amount invested) / amount invested


LOOK OUT!
The covered call, which is equivalent to the protypical futures hedge long future, short spot), will likely be on the Series 3 exam. The rest of the covered/uncovered call/put discussion is just for your background

LOOK OUT!
This will probably be on the Series 3 exam: In a call bull spread or a put bear spread, the investor benefits when the basis widens; in a call bear spread or a put bull spread, the investor benefits when the basis narrows.

Summary And Review

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