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Investment Bank

Investment Bank

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Equity Flow Volatility Disclosures

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Risks associated with specific option strategies

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Certain option strategies involve a high degree of risk and complexity. Prior to entering into a transaction an investor should understand all inherent risks of the transaction. 
Below is a description of risks as it relates to certain option strategies, however, not all scenarios or risks may be discussed below:

Call or put purchasing: If you buy options, the maximum loss is the premium

Uncovered call writing: If you sell call options, the risk is unlimited

Uncovered Put Writing: If you sell put options, the risk is the entire notional below the strike

Call or put vertical spread purchasing (same expiration month for both options): Risk is limited to the premium paid when the position is established

Call or put vertical spread writing (same expiration month for both options): Risk is limited to the difference between the strike prices less the amount received in premiums
Call or put calendar spread purchasing (different expiration months & short must expire prior to the long): Risk is limited to the premium paid when the position is established

Risk Reversals (buy 1 put, sell 1 call at a higher strike): If you are long the put and short the higher priced call, risk is unlimited, if you are short the put and long the higher priced call, the risk is the entire notional below the strike

1x2 call spread (buy 1 call, sell 2 calls at higher strike): If you are long the lower strike and short the two higher strikes, risk is unlimited, if you are short the lower strike and long the two higher strikes, risk is limited

Butterflies/Condors (sell 2 calls, buy one call at a higher strike, buy one call at a lower strike): Rrisk is limited for both buyers and sellers

Straddles/Strangles (buy a call and a put): If you are long the call and put, risk is limited, if you are short the call and put, risk is unlimited

Call Ladders (buy an ITM call, sell an ATM call, sell an OTM call): If you are long the ITM call and short the ATM and OTM calls , risk is unlimited, if you are short the ITM call and long the ATM and OTM calls, risk is limited

Put Ladders (buy an ITM put, sell an ATM put, sell an OTM put): If you are long the ITM put and short the ATM and OTM puts, the risk is equal to the entire notional below the lower strike plus any premium paid, if you are short the ITM put and long the ATM and OTM puts, the risk is limited

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