Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 17

The Big Picture . . . So Far

“I’m getting the ideas piece by piece, but it would help to have some kind of picture or table I can refer to that will help me understand the whole better.”

“Sure,” replied Shorty. “Let me draw this table for you. See if it helps.” (See Figure 17.1.)

“Now let’s see if we can fill in the blanks,” suggested Shorty. (See Figure 17.2.)

“When you look at it this way, you might say we’ve developed four option ‘instruments,’ ” said Shorty.

“I see,” agreed Sharon. “If you think a stock is going to trend either stagnant or bearish—stay even or go down in value—you can optimize that trend, so to speak, by doing a short call, or, you might say, by shorting a call. Since you like being in the selling position, this is great for you.”

Between the two of us, we have four instruments to choose from: long call, short call, long put, short put.

“But that’s not all,” Shorty jumped in. “I can also optimize a bullish trend—a stock that is going up in value—by creating a short put, or by ‘shorting a put.’ I’m still in the selling position and taking in a credit, but I’m now able to profit on stocks that are bullish. As long as I’m willing to buy the stock, I’m okay.”

FIGURE 17.1 Summary of Calls and Puts

FIGURE 17.2 Review of Calls and Puts

“And for Lon,” said ...