This article was originally published in The Option Strategist Newsletter Volume 19, No. 4 on February 25, 2010.
We have recently recommended a couple of butterfly spreads involving earnings situations, while in the past we’ve used dual calendar spreads. In addition, we sometimes use straddle purchases for other events – such as FDA hearings. Butterflies and calendars are apropos for FDA events as well. In this article, we’re going to refine which strategy is best for which situation, for each has its own merits and deficiencies.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 12 on June 21, 1995.
When volatility increases, the option prices increase. This simple statement is the main philosophy behind owning options during periods of low volatility, especially if you think there is a fair chance of a price or volatility explosion occurring shortly after you buy your options. A strategist will generally prefer to own both puts and calls so that he can make money if the market moves up or down. Thus, owning a straddle (a put and call with the same striking price) or a combination (a put and a call with different striking prices) are the two simplest strategies that take advantage of increasing volatility. Another is the backspread, which we have been describing in a fair amount of detail all through the spring of this year. We currently have four backspread positions in place. We prefer the backspread to a straddle or a combination because it is easier to adjust the backspread as you go along, if you want to keep the position more or less neutral to market movement.
This article was originally published in The Option Strategist Newsletter Volume 9, No. 12 on June 22, 2000.
The reverse calendar spread strategy is not one that is employed too often, probably because the margin requirements for stock and index option traders are rather onerous. However, it does have a place in an option trader’s arsenal, and can be an especially useful strategy with regard to futures options. The strategy has been discussed before in The Option Strategist, and it is apropos again because it can be applied to the expensive options in the oil and natural gas sectors currently.
