Class: Precision

Synthetics:
Short put belong puts A
Short Call B, long Puts A, Long instrument

(All done to initial delta neutrality)

When to use:

Normally entered when market is near A and shows signs

of increasing activity, with greater probability to downside

(for example, if last major move was up, followed by

stagnation).

Profit Characteristics:

Profit limited on upside (to net credit taken in when

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

ended in collapsing market.

Loss Characteristics:

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

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

equivalent long straddle, the trade-off for sacrificing profit

potential on the upside.

Decay Characteristics:

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

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

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

greatest rate of profit accrual by decay of short option.