Options Strategies: Iron Condor, Long Straddle, Iron Butterfly, Short Straddle, Covered Call and Covered Put

This document explains different options strategies such as Iron Condor, Long Straddle, Iron Butterfly, Short Straddle, Covered Call, and Covered Put. It provides step-by-step instructions on how to build these strategies and their purposes. Real-life examples and option contracts are included.

Module 3 Quiz to Complete:
 Please answer these questions thoroughly and answer each question appropriately,
including examples, thoughts and opinions
 Try and use less citing, but if need be, then that is fine.
 Each question should be a few paragraphs, thank you
 SOURCES: use sources as needed, try and not source too much. But you can if need
be
QUESTIONS TO ANSWER:
Q1: Explain how to build an Iron condor, what are the purposes of an iron condor
strategy? Build a real life iron condor for a stock of your choice, pull the options contracts
and paste them on the answer. Please explain each part of it, what the credit or debit will
be for the transaction, include every detail of each option contract you will use to build the
iron condor trade.
An iron condor strategy is an option strategy which has four different contracts. The
contract is build up by selling one call spread and one put spread on the same underlying stock
with same expiration date. These call and put spread are of equal width. Therefore the strike
price of the two call options is 20 points apart than the two puts option should also be 20 points
apart. These options are generally out of money option. When one sell the call and put spreads,
one is buying the iron condor. The cash collected from this strategy represents the maximum
profit for the position — the underlying assets one of the broad-based market indexes. But many
investors tend to own iron condor positions on stock or smaller indexes (G. Sharma, Rodrigues,
& Dhanuka, 2019).
Iron Condor with Google Inc.
Current price of Google stock $ 1,159.98
Call options :
GOOG Jul 2018 1162.500 call price 5.00 sell strike price 1162
GOOG Jul 2018 1167.500 call price 3.51 buy strike price 1167
Difference in premium 5- 3.51 = $ 1.49
Put options :
GOOG Jul 2018 1157.500 put price 7.94 sell strike 1157

GOOG Jul 2018 1152.500 put price 4.60 buy strike 1152
Difference in premium 7.94 – 4.60 = $ 3.34
If the price of Google stock remains in between $1162 and $ 1157 all the options expire
worthless
And the profit is 1.49 + 3.34 = $ 4.83 . If the price moves beyond 1162 we exit the call option. If
the
Stock moves below 1157 we exit the put options (Crowder, 2017).
Q2: Explain how to build a long straddle, what are the purposes of a long straddle
strategy? Build a real life long straddle for a stock of your choice, pull the options contracts
and paste them on the answer. Please explain each part of it, what the credit or debit will
be for the transaction, include every detail of each option contract you will use to build the
long straddle trade.
A long straddle basically means an options strategy where the investor holds both Call
and Put options with the same exercise price and expiration date. This strategy is more useful
when the investor thinks that the price of the stock may move significantly but unable to predict
in which direction it will be. In other words, a small movement in the price of the stock may lead
a loss to the investor (Sharma & Gopal, 2018). As a result of this, we can say its extremely risky.
We can take this example:
Suppose a call option on a stock with an exercise price of 70 is available for 6 and a put
option for the same stock is available with the same strike price for 8.
Now we are going to buy a call and put options. See the table below
Here S = Stock price
E = Exercise price
Put option
Holder will
Call option
holder will
Gross
profit Premium Net
payoff
Break
even
S<E Exercise Lapse E-S -14 (70-S)-
14 56

S=E Lapse Lapse NIL -14 -14 NA
E<S Lapse Exercise S-E -14 (S-70)-
14 84
Or otherwise, we can say that
If the stock price (on expiration date ) is ,
1-55 Profit is decreasing
56 Break even
57-70 Loss is Increasing
71-83 Loss is decreasing
84 Break even
85 and above Profit is increasing
From the table we can conclude that the investor is making profits when there is a significant
movement in the stock price
Q3: Explain how to build an Iron butterfly, what are the purposes of an iron butterfly
strategy? Build a real life iron butterfly for a stock of your choice, pull the options
contracts and paste them on the answer. Please explain each part of it, what the credit or
debit will be for the transaction, including every detail of each option contract you will use
to build the iron butterfly trade.
In an iron butterfly strategy, there are basically 2 strategies (Lee & Maley, 2017):
Long butterfly: In this, the portfolio consists of
 1 long call with a high strike price
 1 long call with a low strike price
 2 short call with an average strike price
For the same underlying and the same strike date. It is beneficial when the market falls between
the high strike price and low strike price.
Short butterfly: In this, the portfolio consists of

 1 short call with a high strike price
 1 short call with a low strike price
2. Long call with average strike price for the same underlying and the same strike date. It is
beneficial when the market moves beyond high strike price and low strike price.
In the following example, we'll construct a long iron butterfly from the following option chain:
In
this case, we'll buy the 300 calls and 300 put for a total debit of $24.25, and we'll sell the 250 put
and 350 call for a total credit of $1.31. Let's also assume the stock price is trading for $300 when
we put this trade on:
Initial Stock Price: $300
Short Strikes: $250 short put, $350 short call
Long Strikes: $300 long put, $300 long call
Credit Received for Short Options: $1.31
Debit Paid for Long Options: $24.25
Total Debit Paid: $24.25 Debit - $1.31 Credit = $22.94
Q4: Explain how to build a short straddle, what are the purposes of an short straddle
strategy? Build a real life short straddle for a stock of your choice, pull the options
Call Price Strike Price Put Price
$50.42 250 $0.39
$28.18 275 $3.15
$12.14 300 $12.11
$3.88 325 $28.85
$0.92 350 $50.89

contracts and paste them on the answer. Please explain each part of it, what the credit or
debit will be for the transaction, include every detail of each option contract you will use to
build the short straddle trade.
Straddle is a peculiar combined option strategy that behaves in much a way that several
other strategies do not behave. That is, this strategy has the potential of ensuring that regardless
of the direction of price movement on stock market, the trader makes gain. To make this
possible, the trader must either buy or sell specific option derivatives that have its determinant of
profit on movements with the price of the underlying asset that is bought. Traders are often faced
with two types of straddle, be it long straddle or short straddle (Isynuwardhana & Surur, 2018).
Generally, when the trader buys both a call option and a put option from a single underlying
security, we say a long straddle has been made. On the other hand traders sell a put and a call in
a simultaneous manner from one underlying security we say a short straddle has taken place.
Short straddle is regarded as non-directional option because they have their profit margins
hanging on the premiums of the put and call respectively.
Assume,
The expiration date of the option be T
Present date be t
The current price of the option be Ct
Price of that option at expiration CT
The present price of the put be Pt
Price of the put at expiration be PT
Using the above, the cost of the long straddle is Ct + Pt
Value of the straddle at expiration will be CT + PT =MAX {0, ST-X} + MAX {0, X-ST}
Short straddle position costs -Ct-Pt
The value of short straddle at the expiration
-CT - PT = -MAX {0, ST-X}- MAX {0, X-ST}
A short straddle is a neutral position as most of the time a short straddle trader will sell them at
the money options. Combining the sale of an at the money call is bearish and selling a put is a
bullish result in a neutral position.
Short straddle realizes a maximum profit when the stock price is trading at short strike at
expiration.

Example- If sock price is not showing any signs of breaking out, sell a call and a put of the same
strike price and expiry date. There will be a profit of the stock does not show a big movement
before expiry.
Let XYZ 0.05% is trading at INR 301
Trade- Sell INR 300 call for INR 7 and INR 300 put for INR 4.60
Received- 7+4.6=11.60× lot size of 1000 shares= INR 11600
He seller will still gain if the stock does not rise beyond INR 311.60 or falls below INR 289.40
by expiry. The buyer will lose if the movement is bigger.
Q5: Explain how to build an Covered call and covered put, what are the purposes of
a Covered call and covered put strategy? Build a real life Covered call and covered put for
a stock of your choice, pull the options contracts and paste them on the answer. Please
explain each part of it, what the credit or debit will be for the transaction, include every
detail of each option contract you will use to build the Covered call and covered put trades.
(These are two separate trades)
Covered Call Strategy: The combined option strategy of covered call is used as a strategy
to enable a trader make a transaction that yields a payoff, same as writing a put option. This
means that covered call is ideal with the trader wants to earn a market share that will equate what
would have been earned if there was writing of a put option but for some reasons cannot write a
put option. To achieve a covered call, the one selling the call option must own equivalent amount
to the underlying instrument being traded. Commonly, the underlying instrument comes in
several forms including securities like shares (Diaz & Kwon, 2017). Covered call may exist to
create a buy-write strategy but this happens after key conditions such as the need for the trader to
buy the underlying instrument, when the trader sells the call at the same time. In such a situation
when there is sale of the call, a cover is created with the long position found with the underlying
instrument because the buyer has the right to demand for the shares to exercise. The mechanics
are explained below with an example of Apple stock: Current Apple stock price is $ 190.35, and
the investor believes that due to certain events, the stock is not expected to cross 200 in the next
2 weeks and may even witness minor correction. The investor can sell July 20, call option at
strike $200, which is quoting at $0.08 per unit. So if an investor holds 100 Apple shares, they can
sell 1 contract (contract size 100) at $0.08 and receive $ 8 as premium. As long as the price is
below $200 by the expiry date of July 20, 2018, the investor will retain the $8 dollar premium.

They will make loss only if the stock price moves above $200Exlcuding margin requirement; the
investor receives $8 premium as a credit on day 1 when the option is sold. On maturity the
payout will be given by = - Max [(Expiry Price-Strike Price - Premium, - Premium] which is -
Max [ (Expiry Price - 200 - 8), -8]
Covered Put is reverse of above where in an investor is short on an asset and may want to
hedge against short term price upmove and sells puts. The expectation is only short term price
upmove hence need for hedge otherwise the investor should square the short position in the
underlying asset (Klearman, 2016).
Taking same example of Apple stock, if an investor is short and current market price is
$190.35 and believes that in the next 2 week the price will not go below $ 180, they can sell July
20 Apple put option with strike $180 for $0.22If they have 100 shares of Apple, they will sell 1
put contract and receive $22 as premium as credit (ignoring the margin required for selling
option)
The pay out on expiry will be = - Max (Strike Price - Expiry Price - Premium, - Premium which
is = - Max (180 - Expiry Price - 22), -22.

References
Crowder, A. (2017, May 14). Iron Condor Trades: The Best Options Strategy in 2017. Retrieved
March 31, 2019, from Wyatt Investment Research website:
http://www.wyattresearch.com/article/iron-condor-trades-best-options-strategy-for-2017/
Diaz, M., & Kwon, R. H. (2017). Optimization of covered call strategies. Optimization Letters,
11(7), 1303–1317. https://doi.org/10.1007/s11590-016-1083-8
Isynuwardhana, D., & Surur, G. N. I. (2018). Return Analysis on Contract Option Using Long
Straddle Strategy and Short Straddle Strategy with Black Scholes. 8, 5.
Klearman, J. (2016, March 10). Covered Put Writing: Not What You Think. Retrieved March 31,
2019, from Seeking Alpha website: https://seekingalpha.com/article/3957487-covered-
put-writing-think
Lee-Koo, K., & Maley, M. (2017). The Iron Butterfly and the Political Warrior: mobilising
models of femininity in the Australian Liberal Party. Australian Journal of Political
Science, 52(3), 317–334. https://doi.org/10.1080/10361146.2017.1336202
Sharma, G., Rodrigues, J., & Dhanuka, H. (2019). Iron Butterfly and Iron Condor Option
Strategies on Indian Banking Sector. International Journal of Business and Management
Invention, 8(01), 7.
Sharma, M., & Gopal, R. (2018). Nifty Volatility Using Neutral Strategies. The Journal of
Wealth Management, 21(2), 118–127. https://doi.org/10.3905/jwm.2018.21.2.118