Easy to Execute and Manage

BEARISH PLAYS

LIMITED RISK

Long Put

·  Easy to execute and manage

·  The delta of a put tells you your exposure to changes in the stock

·  The delta of a put will change with stock price movement and the passage of time

·  Don't forget about time decay (negative theta)

·  Keep in mind that volatility of the underlying and fluctuations in implied volatility (supply and demand for premium) affect option prices

Put Back Spread

·  Long more lower strike puts and short higher strike put at same expiration

·  Like a long put, it has unlimited downside profit potential with limited risk

·  At expiration, the stock needs to be significantly below the long strike to make money

·  This position has net long options, and is usually long volatility (vega)

·  Be aware that a backspread can be initiated for a debit (pay for it) or credit (receive money for it)

·  The potential liability is the difference between the strikes

Bear Vertical (long put vertical or short call vertical)

·  Long higher strike put (call) and short lower strike put (call) at same expiration

·  The bigger the difference between the strikes, the bigger the potential profit. And also the bigger the cost

·  Your maximum loss and profit are limited

·  Generally speaking, it's an inexpensive way to play the downside in a stock or index

·  It is a conservative way to get short, less expensively, and with limited risk.

Long Lower Strike Butterfly

·  Relatively inexpensive option strategy that has limited risk and limited profit potential

·  The closer a butterfly is to expiration, the more it will react to changes in the stock price

·  A strategy used by professional traders for years because of its protective characteristics

·  For a long butterfly, you want the stock to drop to the middle strike

Long Lower Strikes Time Spread

·  Long back month option and short front month option at the same strike

·  Time spreads have limited risk and limited profit potential

·  Relatively low cost position with no margin required

·  Be aware that implied volatility can change at different rates in each month

·  This spread works best if the stock moves down to the strike price slowly, allowing the premium of the short call to erode at a quicker rate

UNLIMITED RISK

Short Stock

·  Sell short, close your eyes, and pray that it tanks – and don't forget that you owe the dividends

·  Check the hard-to-borrow list before you short a stock

·  Short stock requires the sale to occur on an up-tick or zero-plus tick in the stock

·  Isolate your speculation – and you may find an option position that has more desirable risk characteristics than short stock

Short Combo

·  "Synthetically" short stock

·  Long put and short call at same strike and expiration

·  Has the same risk exposure as short stock, with interest and dividends built into the combo price

·  Remember: there is no short stock rebate for retail customers

·  A short combo is a way of getting past the down-tick ruleTemplate for shorting stock

·  Unlike short stock, short combos expire, and unless it is exactly at the money, short stock will be the result of the put exercise or the call assignment.

Short Semi-Stock (off strike combo)

·  Similar to short combo, but has smaller negative delta

·  Long lower strike put and short higher strike call at same expiration

·  The position is generally initiated as premium-neutral but that can change quickly as the stock price moves

·  Requires less margin than either short stock or same-strike combo

Short Call

·  Potential profit is limited to the price of the call

·  Risk is unlimited

·  Generally requires less margin than shorting stock

Call Ratio Spread for Credit

·  Long lower strike call and short more higher strike calls at same expiration

·  The most common ratio between short and long is 2:1

·  Ratio spreads have unlimited upside risk – monitor your position carefully

·  At expiration, greatest profit at the higher strike price

·  Because the position is net short options, there is an increased volatility risk