If the call option sold is out-of-the-money, the strategy has return potential comprised of both structuring options and capital gains. A covered put seller expects the share price to stay above the strike price of the put option, causing it to expire worthless allowing the investor to keep the option premium.
It has the same payoff pattern as a structuring options call.
To construct a long call spread, one buys a call option and sells one with a higher strike price using the same expiration date on both options. To construct a long put spread, one buys a put option and sells one with a loser strike price using the same expiration date on both options. It is created by purchasing a call and selling a put to cover some or all the premium.
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This is a short volatility strategy. It combines the characteristics of a directional trade and a short volatility trade.
It is a long volatility strategy designed to profit from a big move without regard to direction. The strike price for the call is usually set above the asset price and the strike of the put is usually set below the asset price.
To protect that long position, one buys a put and pays for it by selling a call. The upper and lower strikes wings are usually equidistant from the middle strike bodyand all the options have the same expiration date.
The wings are usually equidistant from the middle strike bodyand all the options have the same expiration. Instead of using options on a 1 x 1 basis, different numbers of options are used for each leg of a trade to create unique payoff patterns.
Example 1 x 3 Ratio Call Spread.