CDP Trading Strategies & Execution Flashcards

What is the purpose of a 'protective put' strategy?

Answer: To protect a long stock position from significant losses while retaining upside potential

A protective put involves buying a put option against an existing long stock position, limiting downside losses while allowing for unlimited upside gains.

What is 'gamma scalping' in options trading?

Answer: Repeatedly delta-hedging an options position to profit from realized volatility exceeding implied volatility

Gamma scalping involves continuously rebalancing a delta-hedged options position as the underlying moves, profiting when realized volatility exceeds implied volatility.

What does a 'covered call' strategy entail?

Answer: Selling a call option while holding the underlying stock

A covered call involves selling a call option against an existing long stock position, generating premium income but capping upside potential at the call's strike price.

What is a 'strangle' options strategy?

Answer: Buying an out-of-the-money call at a higher strike and an out-of-the-money put at a lower strike

A strangle involves buying an out-of-the-money call and an out-of-the-money put at different strikes, profiting from large price moves in either direction at a lower cost than a straddle.

What is 'slippage' in derivatives trading execution?

Answer: The difference between the expected execution price and the actual execution price

Slippage is the difference between the price a trader expects to execute at and the actual price received, often occurring due to market impact or rapid price movement.

What is a TWAP execution strategy in derivatives trading?

Answer: Time-Weighted Average Price strategy that spreads orders evenly over a time period to minimize market impact

TWAP (Time-Weighted Average Price) is an execution algorithm that breaks large orders into smaller pieces distributed evenly over a specified time period to minimize market impact.