Class: Precision

Synthetics: Long Put A, Short Put A

Long Call B, short Put A, Short instrument.

(All done to initial delta neutrality)

When to use:

Usually entered when market is near B and you expect

market to fall slightly but see a potential for sharp rise.

One of the most common spreads, seldom done more

than 1:3 (two excess shorts) because of downside risk.

Profit Characteristics:

Maximum profit, in amount of B – A – net cost of position

( for put-vs.-put version), realized if market is at A at

expiration.

Loss Characteristics:

Loss limited on upside (to net cost of position in put vs.

put) but open-ended if market falls. Rate of loss, if market

falls below A, is proportional to number of excess shorts in

position.

Decay Characteristics:

If market is at A, profit from option decay accelerate the most

rapidly with passage of time. At B, you have the greatest rate

of loss accrual by decay of long option.