Wheeling and dealing
Professional options traders use other, in some cases
far more complex, tech¬niques. For instance, under
a break forwards, the options buyer can break the
contract with the writer. Under participating forwards,
the buyer can benefit from the upside of an option
while having some protection from the downside.
Butterflies and condors
If you imagined that bulls and bears were the only
animals in the stock market farmyard, think again.
Market professionals use various combinations of Puts
and Calls to protect their positions while they speculate
on the future direction of a stock or index. One such
strategy is the butterfly, which uses four options
and three exercise prices. Alternatively, there is
the condor spread, also known as the top hat spread.
Spider power
The tarantula is an options strategy that can be as
formidable as it sounds. This spider has eight legs,
each representing different futures and options contracts
that expire on the same date. If a contract lapses,
a leg breaks but it can heal. If several legs are
damaged, the tarantula can become crippled, but may
recover when markets turn volatile.
Alternatively, a second tarantula may be introduced
with thicker legs that correct the failed legs of
its predecessor. In this case, the spiders are said
to have mated.
For a list of further such techniques, with succinct
explanations, visit the options strategies page of
Sucden at www.sucden.co.uk.
