- Bull Call Spread & Bear Put Spread (Trading P.I.T. Sessions 1 & 2):
Buy ATM & Sell equal number of OTM
This is a debit trade used when expecting a strong directional move. This spread trade reduces our downside risk and limits our upside potential.
- Bull Put Spread & Bear Call Spread (Trading P.I.T. Sessions 1 & 2):
Buy OTM & Sell equal number of ITM
This is the credit trade equivalent of the Bull Call Spread (Bear Put Spread) but it has some advantages. It's ideal to hold to expiration and it tends works on less movement (which doesn't necessarily match our market outlook for a bullish move). For these reasons Bill Keevan doesn't like this trade.
- Straddle/Strangle ( Trading P.I.T. Session 3):
Buy ATM/OTM Bulls & Puts
This is a debit trade where we stand to make money if the stock moves in either direction, especially on increased volatility.
- Call/Put Ratio Backspread ( Trading P.I.T. Session 4):
Buy more OTM options than the number of ITM Options sold (2:1,3:1,3:2,etc...)
This is a credit trade where we make money as long as the stock moves. You have unlimited upside potential if the underlying moves in your direction or the possibility to keep the credit if it moves against you.
- Calendar Spreads (Trading P.I.T. Session 5):
Buy long-term option and sell short term at the same strike price (unless it's desirable to diagonalize the trade).
Calendar spreads are a way to take advantage of stagnation in an underlying security. If the stock trades within a certain range, you can be profitable. The strategy is similar to a covered call, except that it is pure options without owning the underlying.
There is considerably more to know about the above trades that the definition of what they are. Teach Me To Trade's entry and exit guidelines are pretty easy to follow, but do require considerable analysis of the options to put the odds in your favor and limit your downside risk. In most trades you make decisions based on the cost of the option and the delta, but if you want to know the specifics you'll need to take the class for yourself ;-). Seriously, mention my name... I don't gain anything from you doing so, but shouldn't you give credit where credit is due?
Following the review of the options strategies and the introduction of the Collar trade, Bill looked through some of our suggested trades and put them into OPUS. Bill took my suggestion which happened to be the last one of the night. I had suggested a Call Calendar Spread on COF (Capitol One Financial). The initial parameters of my trade made sense according to the entry guidelines but when we used OPUS to analyze the risk graphs of other combinations of options for a Calendar Spread, a Put Calendar Spread may make more sense. Bill suggested that it may be good to reevaluate this trade in a couple weeks and use the September expiration on the sale of the short term option to see if it works for me then. It was much easier to "see" the trade (risk graphs) using OPUS. I will be reevaluating what makes sense for this trade nearer to the August expiration.
I do plan to get OPUS or an equivalent option analysis software package to really unlock the potential of options in all market conditions. I'll be keeping all of these trades in mind and have already put in a Put Ratio Backspread and am watching it develop. The world of Options & Spread trading is very exciting and I see a ton of potential that I'll tap into soon. Stay tuned!