US Tactical Derivatives Strategy: WFC: All‘s Well that ends Well(s)

Research evidence excerpt

US Tactical Derivatives Strategy: WFC: All‘s Well that ends Well(s)

collar is not costless, investors

risk losing 100% of the premium paid. Since investors are selling a call option, they give up any price appreciation in the underlying asset above

the strike price of the call option.

Call Purchase: Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is below the

strike price of the call option.

Put Purchase: Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is above the

strike price of the put option.

Straddle or Strangle: The seller of a straddle or strangle is exposed to increases in the underlying asset’s price above the call strike and declines

in the underlying asset’s price below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the

underlying asset would have limited losses should the underlying asset rally. Covered writers are exposed to declines in the underlying asset

position as well as any additional exposure should the underlying asset decline below the strike price of the put option. Having sold a covered

call option, the investor gives up all appreciation in the underlying asset above the strike price of the call option.

Put Spread: The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher-ratio put spread has unlimited downside

below the lower strike (down to zero), dependent on the number of lower-struck puts sold. The maximum gain is limited to the spread between

the two put strikes, when the underlying is at the lower strike. Investors who own the underlying asset will have downside protection between

the higher-strike put and the lower-strike put.