Options Trading Account Levels

When you apply for a brokerage account, brokerage firm will assign you the account trading level ranging from level 1 to level 5 based on your Trading Experience and Net Worth.

Level 1

• Covered Call writing
• Protective Put

Level 2

• Level 1 
• Calls and Puts Buying
• Writing of cash Covered Puts 
• Purchases of straddles or combinations

Level 3

• Levels 1 and 2
• Equity DEBIT spreads 
• Covered Put writing

Level 4

• Levels 1, 2, and 3, 
• Equity CREDIT spreads, 
• Naked (uncovered) writing of equity options 
• Uncovered writing of straddles or combinations on equities

Level 5

• Levels 1, 2, 3, and 4, 
• Uncovered writing of index options, 
• Uncovered writing of straddles or combinations on indexes, and index spreads.

Long Iron Condor

Outlook: Neutral

Long Iron Condor  -  Buy one lower strike put, sell one middle lower strike put, sell one higher middle strike call  and buy one higher strike call.
     
Strategies...

•              Buy ONE lower Strike Put (OTM)
•              Sell ONE lower middle strike Put (OTM) with same expiration.
•              Sell ONE higher middle strike Call (OTM) with same expiration.
•              Buy ONE higher Strike Call (OTM) with same expiration.
•              Seeking for little movement in the stock.
•              Maximum profit if the the stock at between the lower middle and higher middle strike price.
•              Preferably options with one month or less to expiration.

Linkedin Corporation(NYSE:LNKD), is traded at $92.50 on June, 2012. To do a Long Iron Condor.

• Buy July 2012 $85 Put at $1.40.
• Sell July 2012 $90 Put at $2.60.
• Sell July 2012 $95 Call at $2.20.
• Buy July 2012 $100 Call at $0.80.

Long Iron Condor

Long Iron Condor

 Advantages...

•             Profit from little movement in the stock.
•             Premium gain and capped downside risk.

Disadvantages...

•             Narrow range for high profit.

Premium Gain:            $2.60 + $2.20 - $1.40 - $0.80 = $2.60

Maximum Profit:         Premium gain

Maximum Loss:          $5.00 - $2.60 = $2.40
                                     (Different in strike - premium gain)
                         
Breakeven Up:            $95.00 + $2.60 = $97.60
                                     (Upper Middle Strike Price +  Premium gain)

Breakeven Down :       $90.00 - $2.60 = $87.40                          
                                      (Lower Middle Strike Price -  Premium gain)

Long Iron Butterfly

Outlook: Neutral

Long Iron Butterfly  -  Buy one lower strike put, sell one middle strike put, sell one middle strike call  and buy one higher strike call.
     
Strategies...

•              Buy ONE lower Strike Put (OTM)
•              Sell ONE middle Strike Put (ATM) with same expiration.
•              Sell ONE middle Strike Call (ATM) with same expiration.
•              Buy ONE higher Strike Call (OTM) with same expiration.
•              Seeking for little movement in the stock
•              Maximum profit if the the stock at middle strike price.
•              Preferably options with one month or less to expiration.

Yum! Brands, Inc.(NYSE:YUM), is traded at $65 on June, 2012. To do a Long Iron butterfly.

• Buy July 2012 $60 Put at $1.20.
• Sell July 2012 $65 Put at $2.70.
• Sell July 2012 $65 Call at $3.00.
• Buy July 2012 $70 Call at $0.95.

Long Iron Butterfly

Long Iron Butterfly

 Advantages...

•             Profit from little movement in the stock.
•             No cost and low downside risk.

Disadvantages...

•             Narrow range for high profit.

Premium Gain:            $2.70 + $3.00 - $1.20 - $0.95 = $3.55

Maximum Profit:         Premium gain

Maximum Loss:           $5.00 - $3.55 = $1.45
                                   (Different in strike - premium gain)
                         
Breakeven Up:            $65.00 + $3.55 = $68.55
                                   (Middle Strike Price +  Premium gain)

Breakeven Down :       $65.00 - $3.55 = $61.45                          
                                    (Middle Strike Price -  Premium gain)

Long Put Butterfly

Outlook: Neutral

Long Put Butterfly  -  Buy One lower strike put, sell two middle strike puts and buy one higher strike put.
     
Strategies...

•              Buy ONE lower Strike Put (OTM)
•              Sell TWO middle strike Puts (ATM) with same expiration.
•              Buy ONE higher Strike Put (ITM) with same expiration.
•              Seeking for little movement in the stock
•              Maximum profit if the the stock at middle strike price.
•              Preferably options with one month or less to expiration.

McDonald's Corporation (NYSE:MCD), is traded at $85 on June, 2012. To do a long put butterfly.

• Buy July 2012 $80 Put at $0.45.
• Sell July 2012 $85 Put at $1.15.
• Buy July 2012 $90 Put at $3.25.

Long Put Butterfly

Long Put Butterfly

 Advantages...

•             Profit from little movement in the stock.
•             Low cost.

Disadvantages...

•             Narrow range for high profit.

Premium Paid:            $0.45 - ($1.15 x 2) + $3.25 = $1.40

Maximum Profit:         $5.00 - $1.40 = $3.60
                                  (Different in strike - net premium paid)

Maximum Loss:           Net Premium paid
                         
Breakeven Up:            $90.00 - $1.40 = $88.60
                                   (Higher Strike Price -  Premium paid)

Breakeven Down :       $80.00 + $1.40 = $81.40                            
                                   (Lower Strike Price + Premium paid)

Long Call Butterfly

Outlook: Neutral

Long Call Butterfly  -  Buy One lower strike call, sell two middle strike calls and buy one higher strike call
       
Strategies...

•              Buy ONE lower Strike Call (ITM)
•              Sell TWO middle strike Calls (ATM) with same expiration.
•              Buy ONE higher Strike Call (OTM) with same expiration.
•              Seeking for little movement in the stock
•              Maximum profit if the the stock at middle strike price.
•              Preferably options with one month or less to expiration.

McDonald's Corporation (NYSE:MCD), is traded at $85 on June, 2012. To do a long call butterfly.

• Buy July 2012 $80 Call at $7.30.
• Sell July 2012 $85 Call at $3.40.
• Buy July 2012 $90 Call at $1.05.

Long Call Butterfly

Long Call Butterfly

 Advantages...

•             Profit from little movement in the stock.
•             Low cost.

Disadvantages...

•             Narrow range for high profit.

Premium Paid:            $7.30 - ($3.40 x 2) + $1.05 = $1.55

Maximum Profit:         $5.00 - $1.55 = $3.45
                                  (Different in strike - net premium paid)

Maximum Loss:           Net Premium paid
                          
Breakeven Up:            $90.00 - $1.55 = $88.45
                                   (Higher Strike Price -  Premium paid)

Breakeven Down :       $80.00 + $1.55 = $81.55                             
                                   (Lower Strike Price + Premium paid)

Short Guts

Outlook: Neutral

Short Guts  -  Sell In-the-Money Strike Calls, Sell In-the-Money Strike Put.
        
Strategies...

•          Sell lower Strike Call (ITM)
•          Sell higher Strike Put (ITM) with same expiration.
•          Seeking for sideways movement of the stock
•          Unlimited downside risk, capped profit.

Example...

Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a Guts,

•     Sell June 16, 2012 $17 Call at $1.40.
•     Sell June 16, 2012 $20 Put at $2.00.

Short Guts

Short Guts

Advantages...

•         Profit from sideways movement of the stock.
•         Received options premium

Disadvantages...

•         High-risk strategy
•         Unlimited risk if stock moves in either direction

Maximum Profit:          $1.40 + $2.00 - $3.00 = $0.40
                                  (Call Premium + Put Premium - Different in strikes)

Maximum Loss:           Uncapped
                            
Breakeven Up:            $20.00 + $3.40 - $3.00 = $20.40
                                   (Higher Strike Price +  Premium gain - Different in strike)

Breakeven Down :       $17.00 - $3.40 + $3.00 = $16.60                                
                                   (Lower Strike Price - Premium gain + Different in strike)

Short Strangle

Outlook: Neutral

Short Strangle -   Sell Lower Strike Put, Sell Higher Strike Call
             
Strategies...

•         Sell lower strike Puts (OTM)
•         Sell Higher Strike Calls (OTM)
•         Looking for sideways movement of the stock.       
•         Make profit with rangebound in stock trend

    
Example...

Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a strangle,

•     Sell June 16, 2012 $20 Call at $0.15.
•     Sell June 16, 2012 $17 Put at $0.23.

Short Strangle

Short Strangle

  
Advantages...

•     Profit from sideways movement of stock.
•     Receive options premium immediately

Disadvantages...

•    High-risk strategy and unlimited loss.
•    Uncapped risk

Maximum Profit:          $0.15 + $0.23 = $0.38
                                     (Call Premium + Put Premium)

Maximum Loss:           Uncapped
                             
Breakeven Up:             $20.00 + $0.38 = $20.38
                                     (Higher Strike Price +  Premium gain)

Breakeven Down :       $17.00 - $0.38 = $16.62                                 
                                    (Lower Strike Price - Premium gain)

Short Straddle

Outlook: Neutral

Short Straddle - Short Calls and Puts with the SAME Strike Price and Expiration Date.
            
Strategies...

•     Sell ATM Call and Put with one month or less to expiration.
•     Looking for NO movement in the stock.
•     Time decay is helpful to short straddle.
•     Uncapped downside risk, capped profit.

Example...

Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a straddle,

•     Sell June 16, 2012 $18 Call at $0.70.
•     Sell June 16, 2012 $18 Put at $0.55. 

Short Straddle

Advantages...

•     Profit from sideways movement of stock.
•     Receive options premium immediately

Disadvantages...

•     High-risk strategy and unlimited loss.
•     Only suitable for advanced options trader

Maximum Profit:          $0.70 + $0.55 = $1.25
                                   (Call Premium + Put Premium)
 
Maximum Loss:           Uncapped
                              
Breakeven Up:             $18.00 + $1.25 = $19.25
                                   (Strike Price +  Premium gain)

Breakeven Down :       $18.00 - $1.25 = $16.75                                  
                                   (Strike Price - Premium gain)

Long Guts

Outlook: Neutral

Guts  -  Buy In-the-Money Strike Calls, Buy In-the-Money Strike Put.
          -  An adjustment strategy to Strangle

Strategies...

•      Buy lower Strike Calls (ITM)
•      Buy higher Strike Put (ITM) with same expiration.
•      Seeking for high volatility stock (trade before announcment of earning reports or new event)
•      Make profit with stock soaring up or plummeting down. 
•      Limited downside risk, uncapped upside potential profit.

Example...

Exxon Mobil Corporation(NYSE:XOM) is traded at $78.50 on June, 2012. To do a Guts, you

•         Buy Oct 2012 $75 Calls at $6.50.
•         Buy Oct 2012 $80 Puts at $5.20.

Long Guts

Long Guts

Advantages...

•     Profit from volatile stock's movement.
•     Uncapped potential profit

Disadvantages...

•     Very expensive - ITM Options are much more expensive than ATM options
•     Significant movement of stock to cover all costs.
•     Time decay accelerates as options close to expiration.

Maximum Profit:         Uncapped Profit

Maximum Loss:          $6.50 + $5.20 - $5 = $6.70
                                     (Premium Paid - Different in strike)

Breakeven Up:           $80 + ($11.70 - $5) = $86.70    
                                     [Higher Strike + (Premium Paid - different in strike)]

Breakeven Down:      $75 - ($11.7 - $5) = $68.30                                
                                    [Lower Strike - (Premium Paid - different in strike)]