The Strangle Stock Option Spread
Outlook: High Stock Volatility

When you setup a strangle option position you are going long volatility, which means you are betting that the underlying equity will shift significantly by the time the options expire.  The beauty of the strangle position is that the underlying equity can either go significantly up or significantly down, and you will make money either way.  You lose money if the underlying equity doesn't fluctuate that much.

A strangle is very similar to a straddle, but it is slightly more risky.  To setup a strangle, you go long (buy) an equal amount of call options and put options.  The call options have a strike price higher than the current market price, and the puts have a strike price lower than the current market price.  That way if the underlying equity goes way up, the put options expire worthless and you make a profit on the call.  If the underlying equity goes way down, the call options expire worthless and you profit on the put options.  In order for you to profit, the underlying equity has to go up or down by an amount greater than the price your paid for both the call and the put.  In order word, you have to cover your cost for both the call and the put to break even.

The Straddle Option Spread
Outlook: High Stock Volatility

When you setup a straddle option position you are going long volatility, which means you are betting that the underlying asset will shift significantly by the time the options expire.  The beauty of the straddle position is that the underlying equity can either go significantly up or significantly down, and you will make money either way.  You lose money if the underlying equity doesn't fluctuate that much.

To setup a straddle, you go long (buy) an equal amount of call options and put options with the same strike price.  That way if the underlying equity goes way up, the put options expire worthless and you make a profit on the call.  If the underlying equity goes way down, the call options expire worthless and you profit on the put options.  In order for you to profit, the underlying equity has to go up or down by an amount greater than the price your paid for both the call and the put.  In order word, you have to cover your cost for both the call and the put to break even.

For more information on Calendar Spreads please visit TerrysTips.com.

A calendar spread is when you buy an option with a longer time to expiration (such as a LEAP) and you sell an option with the same strike price and underlying stock with a shorter expiration.  This can be done with either calls or puts, but you have to either buy and sell puts or calls, you cannot buy puts and sell calls, or visa versa.  The basic idea of a calendar spread is to profit on the different rates of decay on the two options: The long-term option you buying will decay, or decline in value, at a rate slower than a short-term option, all else being equal.

Calendar spreads are also referred to as horizontal spreads because the spread is based on time.  They're also called a vertical spread because option quotes are listed top to bottom, and the spread involves buying near the bottom and selling near the top.

Example: QLogic 12-month $50 calls sell for $5.30, while 1-month $50 calls sell for $.85.  If the stock stays flat, the 1-month calls will decay $.85 in 30 days, while the 12-month calls will decay $.44 ($5.30 / 12 months).  Thus, if you buy the 12-month calls and sell the 1-month calls, you make $.44 per share.

The above example assumes that the stock stays flat, which is rarely ever the case in the real world.  If the stock fluctuates wildly in price, you are likely to lose money on the spread.  That is why the Calendar Spread is risky.  It is best to do this spread on stocks you think will stay relatively flat in price.