Class: Precision

Synthetics: Long call A, Long put A. Long calls A, Short instrument

Long puts A, Long instrument

(All done to initial delta neutrality. A delta neutral spread is a ratio spread established as a neutral position by using the deltas of the options involved. The neutral ratio is determined by dividing the delta of the

written option)

When to use:

If market is near A and you expect it to start moving but are

not sure which way. Especially good position if market has

been quiet, then starts to zigzag sharply, signaling potential

eruption.

Profit Characteristics:

Profit open – ended in either direction. At expiration, break-

even is at A, plus or minus cost of spread. However, position is

seldom held to expiration because of increasing decay levels

with time.

Loss Characteristics:

loss limited to cost of spread (assuming most common version,

the call-put spread). Maximum loss incurred if market is at

A at expiration.

Decay Characteristics:

Decay accelerates as options approach expiration. For this

reason, position is adjusted to neutrality by frequent profit-

taking. It is normally taken off well before expiration.