Option strategy short call long put
Buying the call gives you the right to buy the stock at strike price A. Selling the put obligates you to buy the stock at strike price A if the option is assigned. Furthermore, if you remain in this position until expiration, you will probably wind up buying the stock at strike A one way or the other. If the stock is above strike A at expiration, it would make sense to exercise the call and buy the stock. You can achieve the same end without the up-front cost to buy the stock.
At initiation of the strategy, you will have some additional margin requirements in your account because of the short putand you can also expect to pay a net debit to establish your position. But those costs will be fairly small relative to the price of the stock. If the stock price is above strike A, the long call will usually cost more than the short put. So the strategy will be established for a option strategy short call long put debit. If the stock price is below strike A, you will usually receive more for the short put than you pay for the long call.
So the strategy will be established for a net credit. The net debit paid or net credit received to establish this strategy will be affected by where the stock price is relative to the strike price. Dividends and carry costs can also play a large role in this strategy. As a result, put prices will option strategy short call long put and call prices will decrease independently of stock price movement in anticipation of the dividend.
If the cost of puts exceeds the price of calls, then you will be able to establish this strategy for a net credit. The moral of this story is: Dividends will affect whether or not you will be able to establish option strategy short call long put strategy for a net credit instead of a net debit. The short put in this strategy creates substantial risk. That is why it is only for the most advanced option traders. Potential loss is substantial, but limited to strike price A plus the net debit paid or minus net credit received.
If established for a net credit, the proceeds may be applied to the initial margin requirement. After option strategy short call long put position is established, an ongoing maintenance margin requirement may apply.
That means depending on how the underlying performs, an increase or decrease in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-unit basis. For this strategy, time decay is somewhat neutral. It will erode the value option strategy short call long put the option you bought bad but it will also erode the value of the option you sold good.
After the strategy is established, increasing implied volatility is somewhat neutral. It will increase the value of the option you sold bad but it will also increase the value of the option you bought good. Options involve risk and are not suitable for all investors.
For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve option strategy short call long put risksand may result in complex tax treatments.
Please consult a tax professional prior to implementing these strategies. Implied volatility option strategy short call long put the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.
There is no guarantee that the forecasts of implied volatility legitimate binary option close now trading tips and strategies the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.
System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
The projections or other information regarding the option strategy short call long put of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.
The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy Buying the call gives you the right to buy the stock at strike price A. Break-even at Expiration Strike A plus the net debit paid or minus the net credit received to establish the strategy.
Maximum Potential Profit There is a theoretically unlimited profit potential if the stock price keeps rising. Maximum Potential Loss Potential loss is substantial, option strategy short call long put limited to strike price A plus the net debit paid or minus net credit received. Ally Invest Margin Requirement Margin requirement is the short put requirement.
As Time Goes By For this strategy, time decay is somewhat neutral. Implied Volatility After the strategy is established, increasing implied volatility is somewhat neutral. Use the Technical Analysis Tool to look for bullish indicators.
The Sweet Spot You want the stock to shoot through the roof.