Chapter 42: The Best Strategy? 933 
is generally called volatility trading. If the net change in the market is small over a 
period of time, these strategies should perform well: ratio writing, ratio spreading 
(especially "delta neutral spreads"), straddle and strangle writing, neutral calendar 
spreading, and butterfly spreads. On the other hand, if options are cheap and the 
market is expected to be volatile, then these would be best: straddle and strangle 
buys, backspreads, and reverse hedges and spreads. 
Certain other strategies overlap into more than one of the three broad 
categories. For example, the bullish or bearish calendar spread is initially a neutral 
position. It only assumes a bullish or bearish bias after the near-term option expires. 
In fact, any of the diagonal or calendar strategies whose ultimate aim is to generate 
profits on the sale of shorter-term options are similar in nature. If these near-term 
profits are generated, they can offset, partially or completely, the cost oflong options. 
Thus, one might potentially own options at a reduced cost and could profit from a 
definitive move in his favor at the right time. It was shown in Chapters 14, 23, and 
24 that diagonalizing a spread can often be very attractive. 
This brief grouping into three broad categories, does not cover all the strategies 
that have been discussed. For example, some strategies are generally to be avoided 
by most investors: high-risk naked option writing (selling options for fractional prices) 
and covered or ratio put writing. In essence, the investor will normally do best with 
a position that has limited risk and the potential of large profits. Even if the profit 
potential is a low-probability event, one or two successful cases may be able to over­
come a series of limited losses. Complex strategies that fit this description are the 
diagonal put and call combinations described in Chapters 23 and 24. The simplest 
strategy fitting this description is the T-bill/option purchase program described in 
Chapter 26. 
Finally, many strategies may be implemented in more than one way. The 
method of implementation may not alter the profit potential, but the percentage risk 
levels can be substantially different. Equivalent strategies fit into this category. 
Example: Buying stock and then protecting the stock purchase with a put purchase 
is an equivalent strategy in profit potential to buying a call. That is, both have limit­
ed dollar risk and large potential dollar profit if the stock rallies. However, they are 
substantially different in their structure. The purchase of stock and a put requires 
substantially more initial investment dollars than does the purchase of a call, but the 
limited dollar risk of the strategy would normally be a relatively small percentage of 
the initial investment. The call purchase, on the other hand, involves a much small­
er capital outlay; in addition, while it also has limited dollar risk, the l~ss may easily 
represent the entire initial investment. The stockholder will receive cash dividends 
while the call holder will not. Moreover, the stock will not expire as the call will. This