Strategies and At-Expiration
Diagrams
One of the great strengths of options is that there are so many different
ways to use them. There are simple, straightforward strategies like buying a
call. And there are complex spreads with creative names like jelly roll, guts,
and iron butterfly. A spread is a strategy that involves combining an option
with one or more other options or stock. Each component of the spread is
referred to as a leg. Each spread has its own unique risk and reward
characteristics that make it appropriate for certain market outlooks.
Throughout this book, many different spreads will be discussed in depth.
For now, it’s important to understand that all spreads are made up of a
combination of four basic option positions: buy call, sell call, buy put, and
sell put. Understanding complex option strategies requires understanding
these basic positions and their common, practical uses. When learning
options, it’s helpful to see what the option’s payout is if it is held until
expiration.