Class: Precision

Synthetics: Short call A, Short put A Short calls A, long instrument

Short puts A, Short instrument

(All done to initial delta neutrality)

When to use:

If market is near A and you expect market is stagnating.

Because you are short options, you reap profits as they

decay – as long as market remains near A.

Profit Characteristics:

Profit maximized if market, at expiration, is at A. In Call –

put scenario (most common), maximum profit is credit from

establishing position; break-even is A plus or minus that

amount.

Loss Characteristics:

loss potential open-ended in either direction. Position, therefore,

must be closely monitored and readjusted to neutrality if

market begins to drift away from A.

Decay Characteristics:

because you are only short options, you pick up time-value

decay at an increasing rate as expiration nears, maximized if

market is near A.