Class: Precision

Synthetics: Short Calls A, long Call B

Short Put A, long Calls B, Short instrument.

(All done to initial delta neutrality)

When to use:

Normally entered when market is near B and shows signs

of increasing activity, with greater probability to upside (for

example, if last major move was down, followed by

stagnation).

Profit Characteristics:

Profit limited on downside (to net credit taken in when

position was set up in call-vs. call version) but open-

ended in rallying market.

Loss Characteristics:

Maximum loss, in amount of B – A – initial credit, is realized

if market is at B at expiration. This loss is less than for

equivalent long straddle, the trade-off for sacrificing profit

potential on the downside.

Decay Characteristics:

If market is at B, loss from decay will accelerate the most

rapidly Therefore, you may want to exit early if market is

near B as you enter last month. At A, you have the

greatest rate of profit accrual by decay of short option.