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Strategy View
Investor thinks that the market will not rise, but wants to cap the risk.
Conservative strategy for one who thinks that the market is more likely
to fall than rise.
Strategy Implementation
Call option is sold with a strike price of a
and another call option bought with a strike of b,
producing a net initial credit,
- or -
Put option is sold with a strike of a and another put bought
with a strike of b, producing a net
initial debit.
Upside Potential
Limited. For calls, upside is the initial credit. For puts, upside is the
difference between the strikes and the initial debit. Maximum profit occurs
if underlying trades below strike b.
Downside Risk
Limited. For calls, the risk is the difference between the strikes and
the initial credit. For puts, the risk is the net initial debit. The maximum
loss occurs if at option expiration the underlying instrument is trading
above strike a.
Margin
Possibility for margin requirements to be off-set.
Comment
Time value erosion not too significant due to the balanced position.
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