CDP Trading Strategies & Execution Flashcards

What is a 'synthetic long' position in options trading?

Answer: Buying a call and selling a put at the same strike, replicating a long stock position

A synthetic long is created by buying a call and selling a put at the same strike and expiration, mimicking the payoff profile of holding the underlying stock.

What does 'delta-neutral' trading aim to achieve?

Answer: Eliminating directional price risk by maintaining a portfolio delta of zero

Delta-neutral trading involves constructing a portfolio where the net delta equals zero, meaning the position has no directional sensitivity to small price moves in the underlying.

What is an 'iron condor' options strategy?

Answer: Selling a call spread and selling a put spread simultaneously

An iron condor involves selling an out-of-the-money call spread and an out-of-the-money put spread, profiting when the underlying stays within a defined price range.

What is the effect of 'contango' on a futures trader holding a long position that rolls contracts?

Answer: Rolling costs are positive (trader pays more for deferred contracts)

In contango, deferred futures prices are higher than near-term prices, so rolling a long position means selling cheap near contracts and buying more expensive deferred ones, incurring a roll cost.

What is a 'calendar spread' in options trading?

Answer: Buying and selling options at the same strike but different expirations

A calendar spread involves buying and selling options at the same strike price but with different expiration dates, profiting from differences in time decay rates between the two expirations.

In a futures market, what does 'open interest' represent?

Answer: The total number of outstanding futures contracts that have not been settled

Open interest is the total number of outstanding unsettled futures contracts, where each contract represents a buyer-seller pair that has not yet been offset or delivered.