Most of us would have heard about the classical derivatives strategies like Straddles and Strangles, but the world of derivatives trading has much more to offer. Jelly Roll and Put Ladder are two of the lesser known strategies which are quite useful in volatile times.
Long Jelly Roll
This is a time value trade (involving the sale and purchase of options with different expiry months) and as such cannot be adequately plotted in terms of its risk/reward profile.
Buy put, sell call at same strike price in near expiry month, sell put, buy call at same strike in far expiry month (the strike price in the far expiry need not be equal to the strike price in the near expiry).
Direction neutral/volatility neutral. This trade consists of a short synthetic underlying in the near month and a long synthetic underlying in the far month. The holder will benefit if the differential between the futures prices of the two expiries (or the cost of carry differential in the case of premium up front options) widens.
Profit & loss characteristics at expiry (of near synthetic):
The potential profit of this trade is restricted as it arises from a widening of the futures price differential of the expiry months in question. After the expiry of the near term options, the holder is left with a long synthetic underlying position. The holder will therefore benefit from a rising market after the first expiry, and will be adversely affected by a falling market after the first expiry.
Long Put Ladder
The trade: Sell put (A), sell put at higher strike (B), buy put at an even higher strike (C).
Market expectation: Direction bullish/volatility bearish. Holder expects underlying to(continue to) be between strikes A and B and firmly believes that the market will not fall.
Profit & loss characteristics at expiry:
Profit: Limited to the difference B-C, plus (minus) net credit (debit). Maximised between
strikes A and B.
Loss: Unlimited if underlying falls. At C or above, loss limited to net cost of position.
Break-even: Lower break-even reached when the intrinsic value of the purchased put C
plus (minus) net credit (cost) is equal to the intrinsic value of the sold options A and B.
Higher break-even reached when underlying falls below strike C by the same as the net cost of the position.