Trading strategies implemented on python Part I : Options

Chenjie LI, Maxime LE FLOCH, ESILV Msc Financial Engineering

July 16, 2024

Abstract
We would like to firstly thank Zura Kakushadze and Juan Andrés Serur for their work on 151
trading strategies and also the inspiration that this paper gave us. The aim of our work is to
reproduce these strategies in Python and have a clear view on the P&L of each strategy. You can
find the Python implementation on: Chenjie’s Github Trading strategies. For more mathematical
and trading description details, please refer to Zura Kakushadze and Juan Andrés Serur ’s work
on 151 trading strategies.
This first edition contains all options linked trading strategies with numerical and python imple-
mentation of P&L. Other strategies on other products would be implemented in further editions.

introduction
conventional notation of our paper
• ST is the stock price at expiration.
• S0 is the initial stock price.

• K is the strike price of the call option.

• C is the premium received
• D is the premium paid

Capital Gain Strategy: A capital gain strategy is designed to profit from significant movements in
the price of the underlying asset, whether up or down. These strategies typically involve buying op-
tions, which have a limited downside (the premium paid) and unlimited upside potential. The goal is to
achieve a substantial increase in the value of the options as the underlying asset’s price moves favorably.

Net Credit Strategy: A net credit strategy involves selling options to collect premium income.
The initial cash inflow from selling the options creates a net credit. These strategies are often designed
to profit from a neutral or sideways market, where the underlying asset’s price is not expected to move
significantly.

Income Strategy: An income strategy focuses on generating regular income through the collec-
tion of premiums by writing (selling) options. These strategies are typically employed by traders who
expect the underlying asset’s price to remain within a certain range. Income strategies are designed
to take advantage of time decay and the fact that most options expire worthless.

1
Contents
1 Options Strategies 4
1.1 Strategy: Covered Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Strategy: Covered Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Strategy: Protective Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4 Strategy: Protective Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.5 Strategy: Bull Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.6 Strategy: Bull Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.7 Strategy: Bear Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.8 Strategy: Bear Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.9 Strategy: Long Synthetic Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.10 Strategy: Short Synthetic Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.11 Strategy: Long Combo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.12 Strategy: Short Combo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.13 Strategy: Bull Call Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.14 Strategy: Bull Put Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.15 Strategy: Bear Call Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.16 Strategy: Bear Put Ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.17 Strategy: Calendar Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.18 Strategy: Calendar Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.19 Strategy: Diagonal Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.20 Strategy: Diagonal Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.21 Strategy: Long Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.22 Strategy: Long Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.23 Strategy: Long Guts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.24 Strategy: Short Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.25 Strategy: Short Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.26 Strategy: Short Guts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.27 Strategy: Long Call Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1.28 Strategy: Long Put Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.29 Strategy: Short Call Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.30 Strategy: Short Put Synthetic Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1.31 Strategy: Covered Short Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.32 Strategy: Covered Short Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.33 Strategy: Strap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.34 Strategy: Strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.35 Strategy: Call Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.36 Strategy: Put Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1.37 Strategy: Ratio Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.38 Strategy: Ratio Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1.39 Strategy: Long Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1.40 Strategy: Modified Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.41 Strategy: Long Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1.42 Strategy: Modified Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
1.43 Strategy: Short Call Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1.44 Strategy: Short Put Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
1.45 Strategy: Long Iron Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
1.46 Strategy: Short Iron Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
1.47 Strategy: Long Call Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
1.48 Strategy: Short Call Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
1.49 Strategy: Long Put Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
1.50 Strategy: Short Put Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
1.51 Strategy: Long Iron Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
1.52 Strategy: Short Iron Condor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
1.53 Strategy: Long Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
1.54 Strategy: Collar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

2
1.55 Strategy: Bullish Short Seagull Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
1.56 Strategy: Bullish Long Seagull Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
1.57 Strategy: Bearish Short Seagull Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
1.58 Strategy: Bearish Long Seagull Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

3
1 Options Strategies
1.1 Strategy: Covered Call
Key Components
• Stock Purchase: Buy the underlying stock at the current price S0 .

• Call Option Writing: Sell a call option with a strike price K and receive a premium C.

Payoff and P&L

Payoff et expiration = ST − S0 − max(0, ST − K) + C (1)

Max Profit = K − S0 + C (2)

Max Loss = S0 − C (3)

• Current stock price (S0 ): 100

• Strike price (K): 105

• Net premium received (C): 5

4
1.2 Strategy: Covered Put
Key Components
• Stock Shorting: Short the underlying stock at the current price S0 .

• Put Option Writing: Sell a put option with a strike price K and receive a premium C.

Payoff and P&L

Payyoff = S0 − ST − max(0, K − ST ) + C (4)

Max Profit = S0 − K + C (5)

Max Loss = Unlimited (6)

• Current stock price (S0 ): 100

• Strike price (K): 95

• Net premium received (C): 5

P&L

5
1.3 Strategy: Protective Put
Key Components
• Stock Purchase: Buy the underlying stock at the current price S0 .

• Put Option Purchase: Buy a put option with a strike price K ≤ S0 and pay a premium D.

Payoff and P&L

Payyoff = ST − S0 + max(0, K − ST ) − D (7)

Max Profit = Unlimited (8)

Max Loss = S0 − K + D (9)

• Current stock price (S0 ): 100

• Strike price (K): 95

• Net premium paid (D): 5

P&L

6
1.4 Strategy: Protective Call
Key Components
• Stock Shorting: Short the underlying stock at the current price S0 .

• Call Option Purchase: Buy a call option with a strike price K ≥ S0 and pay a premium D.

Payoff and P&L

Payyoff = S0 − ST + max(0, ST − K) − D (10)

Max Profit = S0 − D (11)

Max Loss = K − S0 + D (12)

• Current stock price (S0 ): 100

• Strike price (K): 105

• Net premium paid (D): 5

P&L

7
1.5 Strategy: Bull Call Spread
Key Components
• Long Call Option: Buy a call option with a strike price K1 and pay a premium D.

• Short Call Option: Sell a call option with a higher strike price K2 and receive a premium.

Payoff and P&L

Payyoff = (max(0, ST − K1 )) − (max(0, ST − K2 )) − D (13)

Max Profit = K2 − K1 − D (14)

Max Loss = D (15)

• Current stock price (S0 ): 100

• Strike price of the long call (K1): 95

• Strike price of the short call (K2): 115

• Net premium paid (D): 5

8
1.6 Strategy: Bull Put Spread
Key Components
• Long Put Option: Buy an OTM put option with a strike price K1 and pay a premium.

• Short Put Option: Sell an OTM put option with a higher strike price K2 and receive a premium
C.

Payoff and P&L

Payyoff = (max(0, K1 − ST )) − (max(0, K2 − ST )) + C (16)

Max Profit = C (17)

Max Loss = K2 − K1 − C (18)

• Current stock price (S0 ): 100

• Strike price of the long put (K1): 95

• Strike price of the short put (K2): 115
• Net premium recieved (C): 5

9
1.7 Strategy: Bear Call Spread
Key Components
• Long Call Option: Buy an OTM call option with a strike price K1 and pay a premium.

• Short Call Option: Sell an OTM call option with a lower strike price K2 and receive a premium
C.

Payoff and P&L

Payyoff = (max(0, ST − K1 )) − (max(0, ST − K2 )) + C (19)

Max Profit = C (20)

Max Loss = K1 − K2 − C (21)

• Current stock price (S0 ): 100

• Strike price of the long call (K1): 115

• Strike price of the short call (K2): 95
• Net premium recieved (C): 5

10
1.8 Strategy: Bear Put Spread
Key Components
• Long Put Option: Buy a close to ATM put option with a strike price K1 and pay a premium
D.

• Short Put Option: Sell an OTM put option with a lower strike price K2 and receive a premium.

Payoff and P&L

Payyoff = (max(0, K1 − ST )) − (max(0, K2 − ST )) − D (22)

Max Profit = K1 − K2 − D (23)

Max Loss = D (24)

• Current stock price (S0 ): 100

• Strike price of the long put (K1): 115

• Strike price of the short put (K2): 95

• Net premium Paid (D): 5

11
1.9 Strategy: Long Synthetic Forward
Key Components
• Long Call Option: Buy an ATM call option with a strike price K = S0 and pay a premium
H.

• Short Put Option: Sell an ATM put option with a strike price K = S0 and receive a premium.

Payoff and P&L

Payyoff = (max(0, ST − K)) − (max(0, K − ST )) − H (25)

Max Profit = Unlimited (26)

Max Loss = K + H (27)

• Current stock price (S0 ): 100

• Strike price of option (K): 100
• Net premium Paid or received (H): 5

12
1.10 Strategy: Short Synthetic Forward
Key Components
• Long Put Option: Buy an ATM put option with a strike price K = S0 and pay a premium H.

• Short Call Option: Sell an ATM call option with a strike price K = S0 and receive a premium.

Payoff and P&L

Payyoff = (max(0, K − ST )) − (max(0, ST − K)) − H (28)
Max Profit = K − H (29)

Max Loss = Unlimited (30)

• Current stock price (S0 ): 100

• Strike price of option (K): 100
• Net premium Paid or received (H): 5

13
1.11 Strategy: Long Combo
Key Components
• Long Call Option: Buy an OTM call option with a strike price K1 and pay a premium H.

• Short Put Option: Sell an OTM put option with a strike price K2 and receive a premium.

Payoff and P&L

Payyoff = (max(0, ST − K1 )) − (max(0, K2 − ST )) − H (31)

Max Profit = Unlimited (32)

Max Loss = K2 + H (33)

• Current stock price (S0 ): 100

• Strike price of long call (K1): 110

• Strike price of short put (K1): 85

• Net premium Paid or received (H): 5

14
1.12 Strategy: Short Combo
Key Components
• Long Put Option: Buy an OTM put option with a strike price K1 and pay a premium H.

• Short Call Option: Sell an OTM call option with a strike price K2 and receive a premium.

Payoff and P&L

Payyoff = (max(0, K1 − ST )) − (max(0, ST − K2 )) − H (34)

Max Profit = K1 − H (35)

Max Loss = Unlimited (36)

• Current stock price (S0 ): 100

• Strike price of long put (K1): 90

• Strike price of short call (K1): 115

• Net premium Paid or received (H): 5

15
1.13 Strategy: Bull Call Ladder
Key Components
• Long Call Option: Buy a close to ATM call option with a strike price K1 and pay a premium
H.

• Short Call Option 1: Sell an OTM call option with a strike price K2 and receive a premium.
• Short Call Option 2: Sell another OTM call option with a higher strike price K3 and receive
a premium.

Payoff and P&L

Payyoff = (max(0, ST − K1 )) − (max(0, ST − K2 )) − (max(0, ST − K3 )) − H (37)

Max Profit = K2 − K1 − H (38)

Max Loss = Unlimited (39)

• Current stock price (S0 ): 100

• Strike price of long call (K1): 95
• Strike price of first short call (K2): 105
• Strike price of second short call (K3): 115

• Net premium Paid or received (H): 5

16
1.14 Strategy: Bull Put Ladder
Key Components
• Short Put Option: Sell a close to ATM put option with a strike price K1 and receive a
premium.

• Long Put Option 1: Buy an OTM put option with a lower strike price K2 and pay a premium.
• Long Put Option 2: Buy another OTM put option with a lower strike price K3 and pay a
premium.

Payoff and P&L

Payyoff = (max(0, K3 − ST )) + (max(0, K2 − ST )) − (max(0, K1 − ST )) − H (40)

Max Profit = K3 + K2 − K1 − H (41)

Max Loss = K1 − K2 + H (42)

• Current stock price (S0 ): 100

• Strike price of short put (K1): 105
• Strike price of first long put (K2): 95
• Strike price of second long put (K3): 85

• Net premium Paid or received (H): 5

17
1.15 Strategy: Bear Call Ladder
Key Components
• Short Call Option: Sell a close to ATM call option with a strike price K1 and receive a
premium.

• Long Call Option 1: Buy an OTM call option with a higher strike price K2 and pay a premium.
• Long Call Option 2: Buy another OTM call option with a higher strike price K3 and pay a
premium.

Payoff and P&L

Payyoff = (max(0, ST − K3 )) + (max(0, ST − K2 )) − (max(0, ST − K1 )) − H (43)

Max Profit = Unlimited (44)

Max Loss = K2 − K1 + H (45)

• Current stock price (S0 ): 100

• Strike price of short call (K1): 95
• Strike price of first long call (K2): 105
• Strike price of second long call (K3): 115

• Net premium Paid or received (H): 5

18
1.16 Strategy: Bear Put Ladder
Key Components
• Long Put Option 1: Buy a close to ATM put option with a strike price K1 and pay a premium
H.

• Short Put Option: Sell an OTM put option with a lower strike price K2 and receive a premium.
• Short Put Option 2: Sell another OTM put option with a lower strike price K3 and receive a
premium.

Payoff and P&L

Payyoff = (max(0, K1 − ST )) − (max(0, K2 − ST )) − (max(0, K3 − ST )) − H (46)

Max Profit = K1 − K2 − H (47)

Max Loss = K3 + K2 − K1 + H (48)

• Current stock price (S0 ): 100
• Strike price of long put (K1): 105

• Strike price of first short put (K2): 95

• Strike price of second short put (K3): 85
• Net premium Paid or received (H): 5

19
1.17 Strategy: Calendar Call Spread
Key Components
• Long Call Option: Buy a close to ATM call option with a strike price K and TTM T ′ and
pay a premium D.

• Short Call Option: Sell a call option with the same strike price K and shorter TTM T < T ′
and receive a premium.

Payoff and P&L

Using the Black-Scholes Model
To model the Calendar Call Spread strategy accurately, we need to account for the value of the long
call option at the expiration of the short call option. The Black-Scholes model is used to calculate the
theoretical price of options, considering factors such as the current stock price (S), the strike price
(K), the time to maturity (T ), the risk-free rate (r), and the volatility (σ) of the stock.
The Black-Scholes formula for the price of a call option is given by:

C(S, K, T, r, σ) = S · N (d1 ) − K · e−rT · N (d2 ) (49)

where
ln(S/K) + (r + 0.5σ 2 )T
d1 = √ (50)
σ T
√
d2 = d1 − σ T (51)
Here, N (·) represents the cumulative distribution function of the standard normal distribution.

Parameters Used
For our example, we use the following parameters:

• Current stock price (S0 ): 50

• Strike price (K): 50

• Time to expiration for the short call (T ): 2 months (2/12 years)

• Time to expiration for the long call (T ′ ): 12 months (12/12 years)
• Volatility (σ): 20% (0.2)

• Risk-free rate (r): 3% (0.03)

• Net premium paid (D): 2

Calculating the Value of the Long Call Option

At the expiration of the short call option, the remaining time to expiration for the long call option is
T ′ − T . Using the Black-Scholes model, we calculate the value of the long call option at this time as:

Clong = C(ST , K, T ′ − T, r, σ) (52)

20
Total PnL Calculation
The total profit or loss (PnL) for the Calendar Call Spread at the expiration of the short call option
is given by:

PnL = Clong − Payoffshort call − D (53)

where Payoffshort call = max(ST − K, 0) is the payoff of the short call option at expiration.

21
1.18 Strategy: Calendar Put Spread
Key Components
• Long Put Option: Buy a close to ATM put option with a strike price K and TTM T ′ and pay
a premium D.

• Short Put Option: Sell a put option with the same strike price K and shorter TTM T < T ′
and receive a premium.

Payoff and P&L

Using the Black-Scholes Model
The Black-Scholes formula for the price of a put option is given by:

P (S, K, T, r, σ) = K · e−rT · N (−d2 ) − S · N (−d1 ) (54)

where
ln(S/K) + (r + 0.5σ 2 )T
d1 = √ (55)
σ T
√
d2 = d1 − σ T (56)
Here, N (·) represents the cumulative distribution function of the standard normal distribution.

Parameters Used
For our example, we use the following parameters:

• Current stock price (S0 ): 50

• Strike price (K): 50
• Time to expiration for the short put (T ): 2 months (2/12 years)
• Time to expiration for the long put (T ′ ): 12 months (12/12 years)

• Volatility (σ): 20% (0.2)

• Risk-free rate (r): 3% (0.03)
• Net premium paid (D): 2
• V is the value of the long put option (expiring at t = T ′ )

Calculating the Value of the Long Put Option

At the expiration of the short put option, the remaining time to expiration for the long put option is
T ′ − T . Using the Black-Scholes model, we calculate the value of the long put option at this time as:

Plong = P (ST , K, T ′ − T, r, σ) (57)

22
Total PnL Calculation
The total profit or loss (PnL) for the Calendar Put Spread at the expiration of the short put option is
given by:

PnL = Plong − Payoffshort put − D (58)

where Payoffshort put = max(K − ST , 0) is the payoff of the short put option at expiration.

23
1.19 Strategy: Diagonal Call Spread
Key Components
• Long Call Option: Buy a deep ITM call option with a strike price K1 and TTM T ′ and pay
a premium D.

• Short Call Option: Sell an OTM call option with a higher strike price K2 and shorter TTM
T < T ′ and receive a premium.

Payoff and P&L

Using the Black-Scholes Model
The Black-Scholes formula for the price of a call option is given by:

C(S, K, T, r, σ) = S · N (d1 ) − K · e−rT · N (d2 ) (59)

where
ln(S/K) + (r + 0.5σ 2 )T
d1 = √ (60)
σ T
√
d2 = d1 − σ T (61)
Here, N (·) represents the cumulative distribution function of the standard normal distribution.

Parameters Used
For our example, we use the following parameters:

• Current stock price (S0 ): 50

• Strike price of long call (K1 ): 45
• Strike price of short call (K2 ): 60
• Time to expiration for the short call (T ): 2 months (2/12 years)

• Time to expiration for the long call (T ′ ): 12 months (12/12 years)

• Volatility (σ): 20% (0.2)
• Risk-free rate (r): 3% (0.03)
• Net premium paid (D): 2

• V is the value of the long call option (expiring at t = T ′ )

Calculating the Value of the Long Call Option

At the expiration of the short call option, the remaining time to expiration for the long call option is
T ′ − T . Using the Black-Scholes model, we calculate the value of the long call option at this time as:

Clong = C(ST , K1 , T ′ − T, r, σ) (62)

24
Total PnL Calculation
The total profit or loss (PnL) for the Diagonal Call Spread at the expiration of the short call option
is given by:

PnL = Clong − Payoffshort call − D (63)

where Payoffshort call = max(ST − K2 , 0) is the payoff of the short call option at expiration.

25
1.20 Strategy: Diagonal Put Spread
Key Components
• Long Put Option: Buy a deep ITM put option with a strike price K1 and TTM T ′ and pay a
premium D.

• Short Put Option: Sell an OTM put option with a lower strike price K2 and shorter TTM
T < T ′ and receive a premium.

Payoff and P&L

Using the Black-Scholes Model
To model the Diagonal Put Spread strategy accurately, we need to account for the value of the long
put option at the expiration of the short put option. The Black-Scholes model is used to calculate the
theoretical price of options, considering factors such as the current stock price (S), the strike price
(K), the time to maturity (T ), the risk-free rate (r), and the volatility (σ) of the stock.
The Black-Scholes formula for the price of a put option is given by:

P (S, K, T, r, σ) = K · e−rT · N (−d2 ) − S · N (−d1 ) (64)

where
ln(S/K) + (r + 0.5σ 2 )T
d1 = √ (65)
σ T
√
d2 = d1 − σ T (66)
Here, N (·) represents the cumulative distribution function of the standard normal distribution.

Parameters Used
For our example, we use the following parameters:

• Current stock price (S0 ): 50

• Strike price of long put (K1 ): 55

• Strike price of short put (K2 ): 45

• Time to expiration for the short put (T ): 2 months (2/12 years)
• Time to expiration for the long put (T ′ ): 12 months (12/12 years)

• Volatility (σ): 20% (0.2)

• Risk-free rate (r): 3% (0.03)
• Net premium paid (D): 2
• V is the value of the long put option (expiring at t = T ′ )

Calculating the Value of the Long Put Option

At the expiration of the short put option, the remaining time to expiration for the long put option is
T ′ − T . Using the Black-Scholes model, we calculate the value of the long put option at this time as:

Plong = P (ST , K1 , T ′ − T, r, σ) (67)

26
Total PnL Calculation
The total profit or loss (PnL) for the Diagonal Put Spread at the expiration of the short put option is
given by:

PnL = Plong − Payoffshort put − D (68)

where Payoffshort put = max(K2 − ST , 0) is the payoff of the short put option at expiration.

PnL Diagram
To visualize the PnL of the Diagonal Put Spread strategy, we plot the PnL against different underlying
prices at expiration.

27
1.21 Strategy: Long Straddle
Key Components
• Long Call Option: Buy an ATM call option with a strike price K and pay a premium D.

• Long Put Option: Buy an ATM put option with a strike price K and pay a premium D.

Payoff and P&L

Payyoff = (ST − K)+ + (K − ST )+ − D (69)

• Sup = K + D
• Sdown = K − D

• Max Profit = unlimited

• Max Loss = D
• Current stock price (S0 ): 50

• Strike price (K): 50

• Net premium paid (D): 5

28
1.22 Strategy: Long Strangle
Key Components
• Long Call Option: Buy an OTM call option with a strike price K1 and pay a premium D.

• Long Put Option: Buy an OTM put option with a strike price K2 and pay a premium D.

Payoff and P&L

Payyoff = (ST − K1 )+ + (K2 − ST )+ − D (70)

• Sup = K1 + D
• Sdown = K2 − D

• Max Profit = unlimited

• Max Loss = D
• Current stock price (S0 ): 50

• lower Strike price (K1 ): 45

• higher strike price (K2 ): 55
• Net premium paid (D): 5

29
1.23 Strategy: Long Guts
Key Components
• Long Call Option: Buy an ITM call option with a strike price K1 and pay a premium D.

• Long Put Option: Buy an ITM put option with a strike price K2 and pay a premium D.

Payoff and P&L

Payyoff = (ST − K1 )+ + (K2 − ST )+ − D (71)

• Sup = K1 + D
• Sdown = K2 − D

• Max Profit = unlimited

• Max Loss = D
• Current stock price (S0 ): 50

• lower Strike price (K1 ): 45

• higher strike price (K2 ): 55
• Net premium paid (D): 5

30
1.24 Strategy: Short Straddle
Key Components
• Short Call Option: Sell an ATM call option with a strike price K and receive a premium C.

• Short Put Option: Sell an ATM put option with a strike price K and receive a premium C.

Payoff and P&L

Payyoff = −(ST − K)+ − (K − ST )+ + C (72)

• Sup = K + C
• Sdown = K − C

• Max Profit = C
• Max Loss = unlimited
• Current stock price (S0 ): 50

• Strike price (K1 ): 50

• Net premium received (C): 5

31
1.25 Strategy: Short Strangle
Key Components
• Short Call Option: Sell an OTM call option with a strike price K1 and receive a premium C.

• Short Put Option: Sell an OTM put option with a strike price K2 and receive a premium C.

Payoff and P&L

Payyoff = −(ST − K1 )+ − (K2 − ST )+ + C (73)

• Sup = K1 + C
• Sdown = K2 − C

• Max Profit = C
• Max Loss = unlimited
• Current stock price (S0 ): 50

• lower Strike price (K1 ): 45

• higher strike price (K2 ): 55
• Net premium received (C): 5

32
1.26 Strategy: Short Guts
Key Components
• Short Call Option: Sell an ITM call option with a strike price K1 and receive a premium C.

• Short Put Option: Sell an ITM put option with a strike price K2 and receive a premium C.

Payoff and P&L

Payyoff = −(ST − K1 )+ − (K2 − ST )+ + C (74)

• Sup = K1 + C
• Sdown = K2 − C

• Max Profit = C − (K2 − K1 )

• Max Loss = unlimited
• Current stock price (S0 ): 50

• lower Strike price (K1 ): 45

• higher strike price (K2 ): 55
• Net premium received (C): 5

33
1.27 Strategy: Long Call Synthetic Straddle
Key Components
• Short Stock: Short the underlying stock.

• Long Call Options: Buy two ATM call options with a strike price K and pay a premium D.

Payoff and P&L

Payyoff = S0 − ST + 2 × (ST − K)+ − D (75)

• Sup = 2 × K − S0 + D
• Sdown = S0 − D

• Max Profit = unlimited

• Max Loss = D − (S0 − K)
• Current stock price (S0 ): 50

• Strike price (K): 50

• Net premium paid (D): 5

34
1.28 Strategy: Long Put Synthetic Straddle
Key Components
• Long Stock: Buy the underlying stock.

• Long Put Options: Buy two ATM put options with a strike price K and pay a premium D.

Payoff and P&L

Payyoff = ST − S0 + 2 × (K − ST )+ − D (76)

• Sup = S0 + D
• Sdown = 2 × K − S0 − D

• Max Profit = unlimited

• Max Loss = D − (K − S0 )
• Current stock price (S0 ): 50

• Strike price (K): 50

• Net premium paid (D): 5

35
1.29 Strategy: Short Call Synthetic Straddle
Key Components
• Long Stock: Buy the underlying stock.

• Short Call Options: Sell two ATM call options with a strike price K and receive a premium
C.

Payoff and P&L

Payyoff = ST − S0 − 2 × (ST − K)+ + C (77)

• Sup = 2 × K − S0 + C

• Sdown = S0 − C
• Max Profit = K − S0 + C
• Max Loss = unlimited

• Current stock price (S0 ): 50

• Strike price (K): 50
• Net premium received (C): 5

36
1.30 Strategy: Short Put Synthetic Straddle
Key Components
• Short Stock: Short the underlying stock.

• Short Put Options: Sell two ATM put options with a strike price K and receive a premium
C.

Payoff and P&L

Payyoff = S0 − ST − 2 × (K − ST )+ + C (78)

• Sup = S0 + C

• Sdown = 2 × K − S0 − C
• Max Profit = S0 − K + C
• Max Loss = unlimited

• Current stock price (S0 ): 50

• Strike price (K): 50
• Net premium received (C): 5

37
1.31 Strategy: Covered Short Straddle
Key Components
• Long Stock: Buy the underlying stock.

• Short Call Option: Sell an ATM call option with a strike price K and receive a premium C.
• Short Put Option: Sell an ATM put option with a strike price K and receive a premium C.

Payoff and P&L

Payyoff = ST − S0 − (ST − K)+ − (K − ST )+ + C (79)

• Sup = 21 (S0 + K − C)

• Max Profit = K − S0 + C
• Max Loss = S0 + K − C
• Current stock price (S0 ): 50

• Strike price (K): 50

• Net premium received (C): 5

38
1.32 Strategy: Covered Short Strangle
Key Components
• Long Stock: Buy the underlying stock.

• Short Call Option: Sell an ATM call option with a strike price K and receive a premium C.
• Short Put Option: Sell an OTM put option with a strike price K ′ and receive a premium C.

Payoff and P&L

Payyoff = ST − S0 − (ST − K)+ − (K ′ − ST )+ + C (80)

• Max Profit = K − S0 + C

• Max Loss = S0 + K ′ − C
• Current stock price (S0 ): 50
• Strike price for call (K): 50

• Strike price for put (K ′ ): 45

• Net premium received (C): 5

39
1.33 Strategy: Strap
Key Components
• Long Call Options: Buy two ATM call options with a strike price K and pay a premium D.

• Long Put Option: Buy an ATM put option with a strike price K and pay a premium D.

Payoff and P&L

Payyoff = 2 × (ST − K)+ + (K − ST )+ − D (81)

• Sup = K + D
2

• Sdown = K − D

• Max Profit = unlimited

• Max Loss = D
• Current stock price (S0 ): 50

• Strike price for call (K): 50

• Net premium paid (D): 5

40
1.34 Strategy: Strip
Key Components
• Long Call Option: Buy an ATM call option with a strike price K and pay a premium D.

• Long Put Options: Buy two ATM put options with a strike price K and pay a premium D.

Payoff and P&L

Payyoff = (ST − K)+ + 2 × (K − ST )+ − D (82)

• Sup = K + D
• Sdown = K − D
2

• Max Profit = unlimited

• Max Loss = D
• Current stock price (S0 ): 50

• Strike price for call (K): 50

• Net premium paid (D): 5

41
1.35 Strategy: Call Ratio Backspread
Key Components
• Short Call Options: Sell NS close to ATM call options with a strike price K1 and receive a
premium H.

• Long Call Options: Buy NL OTM call options with a strike price K2 and pay a premium H.

Payoff and P&L

Payyoff = NL × (ST − K2 )+ − NS × (ST − K1 )+ − H (83)

• Sdown = K1 + H
NS

• Sup = NL ×K2 −NS ×K1 +H

NL −NS

• Max Profit = unlimited

• Max Loss = NS × (K2 − K1 ) + H

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 55 (Higher strike price)

• NS = 1 (Number of short options)

• NL = 2 (Number of long options)
• H = 5 (Premium difference)

42
1.36 Strategy: Put Ratio Backspread
Key Components
• Short Put Options: Sell NS close to ATM put options with a strike price K1 and receive a
premium H.

• Long Put Options: Buy NL OTM put options with a strike price K2 and pay a premium H.

Payoff and P&L

Payyoff = NL × (K2 − ST )+ − NS × (K1 − ST )+ − H (84)

• Sup = K1 + H
NS

• Sdown = NL ×K2 −NS ×K1 −H

NL −NS

• Max Profit = NL × K2 − NS × K1 − H
• Max Loss = NS × (K1 − K2 ) + H

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 55 (Higher strike price)

• NS = 1 (Number of short options)

• NL = 2 (Number of long options)
• H = 5 (Premium difference)

43
1.37 Strategy: Ratio Call Spread
Key Components
• Short Call Options: Sell NS close to ATM call options with a strike price K1 and receive a
premium H.

• Long Call Options: Buy NL ITM call options with a strike price K2 and pay a premium H.

Payoff and P&L

Payyoff = NL × (ST − K2 )+ − NS × (ST − K1 )+ + H (85)

• Sup = K2 + H
NL

• Sdown = NS ×K1 −NL ×K2 +H

NS −NL

• Max Profit = NL × (K2 − K1 ) − H

• Max Loss = unlimited

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 55 (Higher strike price)

• NS = 2 (Number of short options)

• NL = 1 (Number of long options)
• H = 5 (Premium difference)

44
1.38 Strategy: Ratio Put Spread
Key Components
• Short Put Options: Sell NS close to ATM put options with a strike price K1 and receive a
premium H.

• Long Put Options: Buy NL OTM put options with a strike price K2 and pay a premium H.

Payoff and P&L

Payyoff = NL × (K2 − ST )+ − NS × (K1 − ST )+ + H (86)

• Sup = K1 + H
NS

• Sdown = NL ×K2 −NS ×K1 +H

NL −NS

• Max Profit = NL × (K2 − K1 ) + H

• Max Loss = unlimited

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 55 (Higher strike price)

• NS = 1 (Number of short options)

• NL = 2 (Number of long options)
• H = 5 (Premium difference)

45
1.39 Strategy: Long Call Butterfly
Key Components
• Long Call Options: Buy an OTM call option with a strike price K1 and pay a premium D.

• Short Call Options: Sell two ATM call options with a strike price K2 and receive a premium
D.
• Long Call Options: Buy an ITM call option with a strike price K3 and pay a premium D.

Payoff and P&L

Payyoff = (ST − K1 )+ + (ST − K3 )+ − 2 × (ST − K2 )+ − D (87)

• Sup = K1 − D
• Sdown = K3 + D
• Max Profit = κ − D
• Max Loss = D

• S0 = 50 (Current stock price)

• K1 = 40 (Lower strike price)
• K2 = 52 (Higher strike price)

• K3 = 60 (Higher strike price)

• D = 2 (Premium paid)
• Kappa = K2 − K1 (strike distance)

46
1.40 Strategy: Modified Call Butterfly
Key Components
• Long Call Options: Buy an OTM call option with a strike price K1 and pay a premium D.

• Short Call Options: Sell two ATM call options with a strike price K2 and receive a premium
D.
• Long Call Options: Buy an ITM call option with a strike price K3 and pay a premium D.

Payoff and P&L

Payyoff = (ST − K1 )+ + (ST − K3 )+ − 2 × (ST − K2 )+ − D (88)

• S∗ = K3 + D
• Max Profit = K2 − K3 − D
• Max Loss = D

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 50 (Higher strike price)
• K3 = 60 (Higher strike price)

• D = 2 (Premium paid)

47
1.41 Strategy: Long Put Butterfly
Key Components
• Long Put Options: Buy an OTM put option with a strike price K1 and pay a premium D.

• Short Put Options: Sell two ATM put options with a strike price K2 and receive a premium
D.
• Long Put Options: Buy an ITM put option with a strike price K3 and pay a premium D.

Payoff and P&L

Payyoff = (K1 − ST )+ + (K3 − ST )+ − 2 × (K2 − ST )+ − D (89)

• Sup = K3 − D
• Sdown = K1 + D
• Max Profit = κ − D
• Max Loss = D

• S0 = 50 (Current stock price)

• K1 = 40 (Lower strike price)
• K2 = 52 (Higher strike price)

• K3 = 60 (Higher strike price)

• D = 2 (Premium paid)
• Kappa = K2 − K1 (strike distance)

48
1.42 Strategy: Modified Put Butterfly
Key Components
• Long Put Options: Buy an OTM put option with a strike price K1 and pay a premium H.

• Short Put Options: Sell two ATM put options with a strike price K2 and receive a premium
H.
• Long Put Options: Buy an ITM put option with a strike price K3 and pay a premium H.

Payoff and P&L

Payyoff = (K1 − ST )+ + (K3 − ST )+ − 2 × (K2 − ST )+ − H (90)

• Sdown = 2 × K2 − K3 + H
• Max Profit = K3 − K2 − H
• Max Loss = 2 × K2 − K1 − K3 + H

• S0 = 50 (Current stock price)

• K1 = 45 (Lower strike price)
• K2 = 50 (Higher strike price)
• K3 = 53 (Higher strike price)

• H = 5 (Premium paid)

49
1.43 Strategy: Short Call Butterfly
Key Components
• Short ITM Call Option: Sell a call option with a strike price K1 .
• Long ATM Call Options: Buy two ATM call options with a strike price K2 .
• Short OTM Call Option: Sell a call option with a strike price K3 .

• All strikes are equidistant: K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = 2 × (ST − K2 )+ − (ST − K1 )+ − (ST − K3 )+ + C (91)

Max Profit = C (92)

Max Loss = κ − C (93)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100

• Strike price 3 (K3 ): 110
• Net premium received (C): 5

50
1.44 Strategy: Short Put Butterfly
Key Components
• Short ITM Put Option: Sell a put option with a strike price K1 .
• Long ATM Put Options: Buy two ATM put options with a strike price K2 .
• Short OTM Put Option: Sell a put option with a strike price K3 .

• All strikes are equidistant: K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = 2 × (K2 − ST )+ − (K1 − ST )+ − (K3 − ST )+ + C (94)

Max Profit = C (95)

Max Loss = κ − C (96)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100

• Strike price 3 (K3 ): 110
• Net premium received (C): 5

51
1.45 Strategy: Long Iron Butterfly
Key Components
• Long OTM Put Option: Buy a put option with a strike price K1 .
• Short ATM Put Option: Sell a put option with a strike price K2 .
• Short ATM Call Option: Sell a call option with a strike price K2 .

• Long OTM Call Option: Buy a call option with a strike price K3 .
• All strikes are equidistant: K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K1 − ST )+ − (K2 − ST )+ − (ST − K2 )+ + (ST − K3 )+ + C (97)

Max Profit = C (98)

Max Loss = κ − C (99)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K2 ): 110
• Net premium received (C): 5

52
1.46 Strategy: Short Iron Butterfly
Key Components
• Short OTM Put Option: Sell a put option with a strike price K1 .
• Long ATM Put Option: Buy a put option with a strike price K2 .
• Long ATM Call Option: Buy a call option with a strike price K2 .

• Short OTM Call Option: Sell a call option with a strike price K3 .
• All strikes are equidistant: K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K2 − ST )+ + (ST − K2 )+ − (K1 − ST )+ − (ST − K3 )+ − D (100)

Max Profit = κ − D (101)

Max Loss = D (102)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K2 ): 110
• Net premium received (D): 5

53
1.47 Strategy: Long Call Condor
Key Components
• Long ITM Call Option: Buy a call with a strike price K1 .
• Short ITM Call Option: Sell a call option with a strike price K2 .
• Short OTM Call Option: Sell a call option with a strike price K3 .

• Long OTM Call Option: Buy a call option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (ST − K1 )+ − (ST − K2 )+ − (ST − K1 )+ + (ST − K4 )+ − D (103)

Max Profit = κ − D (104)

Max Loss = D (105)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (D): 5

54
1.48 Strategy: Short Call Condor
Key Components
• Short ITM Call Option: Sell a call with a strike price K1 .
• Long ITM Call Option: Buy a call option with a strike price K2 .
• Long OTM Call Option: Buy a call option with a strike price K3 .

• Short OTM Call Option: Sell a call option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (ST − K2 )+ + (ST − K3 )+ − (ST − K1 )+ − (ST − K4 )+ + C (106)

Max Profit = C (107)

Max Loss = κ − C (108)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (C): 5

55
1.49 Strategy: Long Put Condor
Key Components
• Long OTM Put Option: Buy a put with a strike price K1 .
• Short OTM Put Option: Sell a put option with a strike price K2 .
• Short ITM Put Option: Sell a put option with a strike price K3 .

• Long ITM Put Option: Buy a put option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K1 − ST )+ − (K2 − ST )+ − (K3 − ST )+ + (K4 − ST )+ − D (109)

Max Profit = κ − D (110)

Max Loss = D (111)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (D): 5

56
1.50 Strategy: Short Put Condor
Key Components
• Short OTM Put Option: Sell a put with a strike price K1 .
• Long OTM Put Option: Buy a put option with a strike price K2 .
• Long ITM Put Option: Buy a put option with a strike price K3 .

• Short ITM Put Option: Sell a put option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K2 − ST )+ + (K3 − ST )+ − (K1 − ST )+ − (K4 − ST )+ + C (112)

Max Profit = C (113)

Max Loss = κ − C (114)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (C): 5

57
1.51 Strategy: Long Iron Condor
Key Components
• Long OTM Put Option: Buy a put with a strike price K1 .
• Short OTM Put Option: Sell a put option with a strike price K2 .
• Short OTM Call Option: Sell a call option with a strike price K3 .

• Long OTM Call Option: Buy a call option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K1 − ST )+ + (ST − K4 )+ − (K2 − ST )+ − (ST − K3 )+ + C (115)

Max Profit = C (116)

Max Loss = κ − C (117)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (C): 5

58
1.52 Strategy: Short Iron Condor
Key Components
• Short OTM Put Option: Sell a put with a strike price K1 .
• Long OTM Put Option: Buy a put option with a strike price K2 .
• Long OTM Call Option: Buy a call option with a strike price K3 .

• Short OTM Call Option: Sell a call option with a strike price K4 .
• All strikes are equidistant: K4 - K3 = K3 - K2 = K2 - K1 =κ.

Payoff and P&L

Payoff at expiration = (K2 − ST )+ + (ST − K3 )+ − (K1 − ST )+ − (ST − K4 )+ − D (118)

Max Profit = κ − D (119)

Max Loss = D (120)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 100
• Strike price 3 (K3 ): 110
• Strike price 4 (K4 ): 120

• Net premium received (D): 5

59
1.53 Strategy: Long Box
Key Components
• Long ITM Put Option: Buy a put with a strike price K1 .
• Short OTM Put Option: Sell a put option with a strike price K2 .
• Long ITM Call Option: Buy a call option with a strike price K2 .

• Short OTM Call Option: Sell a call option with a strike price K1 .
• Condition: (K2 + D) ≤ K1

Payoff and P&L

Payoff at expiration = (K1 −ST )+ −(K2 −ST )+ +(ST −K2 )+ −(ST −K1 )+ −D = K1 −K2 −D (121)

Max Profit = (K1 − K2 ) − D (122)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 110

• Strike price 2 (K2 ): 95
• Net premium received (D): 5

60
1.54 Strategy: Collar
Key Components
• Long Stock: Buy the stock with a price S0 .
• Long OTM Put Option: Buy a put option with a strike price K1 .
• Short OTM Call Option: Sell a call option with a strike price K2 .

• Condition: K1 ¡ K2

Payoff and P&L

Payoff at expiration = ST − S0 + (K1 − ST )+ − (ST − K2 )+ − H (123)

Max Profit = K2 − S0 − H (124)

Max Loss = S0 − K1 + H (125)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90

• Strike price 2 (K2 ): 110

• Net premium received (H): 5

61
1.55 Strategy: Bullish Short Seagull Spread
Key Components
• Short OTM Put Option: Sell a put option with a strike price K1 .
• Long ATM Call Option: Buy a call option with a strike price K2 .
• Short OTM Call Option: Sell a call option with a strike price K3 .

Payoff and P&L

Payoff at expiration = −(K1 − ST )+ + (ST − K2 )+ − (ST − K3 )+ − H (126)

Max Profit = K3 − K2 − H (127)

Max Loss = K1 + H (128)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90
• Strike price 2 (K2 ): 100

• Strike price 3 (K2 ): 110

• Net premium received (H): 5

62
1.56 Strategy: Bullish Long Seagull Spread
Key Components
• Long OTM Put Option: Buy a put option with a strike price K1 .
• Short ATM Put Option: Sell a put option with a strike price K2 .
• Long OTM Call Option: Buy a call option with a strike price K3 .

Payoff and P&L

Payoff at expiration = (K1 − ST )+ − (K2 − ST )+ + (ST − K3 )+ − H (129)

Max Profit = unlimited (130)

Max Loss = K2 − K1 + H (131)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90
• Strike price 2 (K2 ): 100

• Strike price 3 (K2 ): 110

• Net premium received (H): 5

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1.57 Strategy: Bearish Short Seagull Spread
Key Components
• Short OTM Put Option: Sell a put option with a strike price K1 .
• Long ATM Put Option: Buy a put option with a strike price K2 .
• Short OTM Call Option: Sell a call option with a strike price K3 .

Payoff and P&L

Payoff at expiration = −(K1 − ST )+ + (K2 − ST )+ − (ST − K3 )+ − H (132)

Max Profit = K2 − K1 − H (133)

Max Loss = unlimited (134)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90
• Strike price 2 (K2 ): 100

• Strike price 3 (K2 ): 110

• Net premium received (H): 5

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1.58 Strategy: Bearish Long Seagull Spread
Key Components
• Long OTM Put Option: Buy a put option with a strike price K1 .
• Short ATM Call Option: Sell a call option with a strike price K2 .
• Long OTM Call Option: Buy a call option with a strike price K3 .

Payoff and P&L

Payoff at expiration = (K1 − ST )+ − (ST − K2 )+ + (ST − K3 )+ − H (135)

Max Profit = K1 − H (136)

Max Loss = K3 − K2 + H (137)

• Current stock price (S0 ): 100

• Strike price 1 (K1 ): 90
• Strike price 2 (K2 ): 100

• Strike price 3 (K2 ): 110

• Net premium received (H): 5

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References
Kakushadze, Zura and Serur, Juan Andrés, 151 Trading Strategies (August 17, 2018)
Z. Kakushadze and J.A. Serur. 151 Trading Strategies. Cham, Switzerland: Palgrave Macmillan, an
imprint of Springer Nature, 1st Edition (2018), XX, 480 pp; ISBN 978-3-030-02791-9
Available at SSRN: https://ssrn.com/abstract=3247865

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