Option Strategies Cheat Sheet

This cheat sheet summarizes various option strategies, including floors, caps, covered positions, synthetic forwards, put-call parity, bull/bear spreads, box spreads, collars, straddles, strangles, and butterfly spreads, focusing on their construction, payoffs, and implications.

Core Principles

A floor strategy (long stock + long put) protects against downside risk by setting a minimum selling price.
A cap strategy (short stock + long call) protects against upside risk by setting a maximum repurchase price.
The no-arbitrage principle states that risk-free profits are impossible in efficient markets; any such opportunities are quickly eliminated.
Put-call parity establishes a relationship between the prices of European call and put options with the same underlying asset, strike price, and expiration date.
Spreads (bull, bear, box, etc.) involve combining multiple options to limit risk and cost, often with a specific market outlook.
Straddles and strangles profit from volatility, with straddles using identical strike prices and strangles using different strike prices for calls and puts.

Timeline

Time 0: Establishment of the investment strategy (e.g., buying options, selling options, holding underlying assets).
Time 0: Initial investment or cash flow occurs, based on the prices of the instruments involved.
Time T (Maturity): Payoff is realized based on the price of the underlying asset (ST) relative to strike prices (K, K').
Time T (Maturity): Profit or Loss (P/L) is calculated by comparing the payoff to the initial investment (adjusted for time value of money).
Ongoing: Market price movements and the passage of time affect option values and strategy P/L.