Part XII · Strategy atlas · Chapter 12A

Choosing a strategy by purpose

Start from what you want the position to do

1 · How the atlas is built

Every options strategy you meet, in retail content or on an institutional desk, reduces to a combination of the four primitives of Chapter 5A, sometimes with a position in the underlying added. The primitives are the long call, the short call, the long put and the short put. The atlas catalogs approximately 58 named strategies, from the long call to the double diagonal, in four tiers of difficulty: novice, intermediate, advanced and expert (Chapters 12B to 12E). Within a tier, strategies are grouped by category: basic, income, credit spreads, neutral, calendar, debit spreads, directional, naked, ratio, ladders, synthetic, arbitrage and other.

Each entry gives the same things in the same order. It starts with the legs, the market view the position expresses, its maximum profit and loss, its breakevens and its net Greeks at entry. Where it adds something, it gives the dealer's side of the trade: who takes the other side, and why. It closes with the regime the strategy fits, its common variations, how it fails and a worked example with strikes, premiums and profit or loss.

The treatment is reference-grade, so read it as a lookup rather than a narrative. Three chapters follow the tiers: Chapter 12F maps market views to structures, Chapter 12G gives the margin each structure ties up, and Chapter 12H covers exercise and assignment.

Reading any structure: add the legs

A structure is a sum of legs, so its profit or loss (P&L) at expiry is the sum of the legs' P&Ls. Write $S_T$ for the underlying's price at expiry and $K$ for a strike. A call pays $\max(S_T - K, 0)$ and a put $\max(K - S_T, 0)$, counted plus if you bought it and minus if you sold it. Add the payoffs, then subtract the net debit you paid or add the net credit you received.

Each payoff is a straight line with a single bend at its strike, so the sum is made of straight pieces that bend only at strikes. Measured per share, or per point of an index, the slope of the P&L at a price $S_T$ is

where $c$ is the net number of calls struck below $S_T$ (bought minus sold), $p$ the net number of puts struck above $S_T$, and $h$ the number of shares held for each share an option covers, so a covered call has $h = 1$.

The slope tells you where to look: the maximum profit and the maximum loss sit at a strike, or far out at one end of the range. A profit or loss is unbounded only if the slope beyond the highest strike is not zero. Each breakeven lies on a sloped piece, where you can solve a straight-line equation for it.

Every formula in Chapters 12B to 12E comes from this counting. Where an entry gives no formula, as for calendars, the reason is that one leg is still alive when the other expires.

2 · The four-question filter

The strategies in the atlas are vehicles, not edges. Do not ask which strategy you know. Ask instead: "what am I trying to express, and which structure expresses it most cleanly given current conditions?" Read this section before you open any entry.

Before choosing a structure, answer four questions in writing:

1. Direction: is your view bullish, bearish, or neutral (range-bound, or no view)?
2. Conviction time horizon: does the view play out over days, weeks or months?
3. IV regime: is implied volatility cheap, with an IV percentile below 30, normal (30 to 70) or rich (above 70)?
4. Catalyst: is the view driven by a scheduled event, such as earnings, a Federal Reserve (FOMC) meeting or a Food and Drug Administration (FDA) decision, or by trend and structure?

The four answers typically narrow the 58 strategies to 1 to 3 candidates.

3 · The selection matrix

The matrix maps the answers to preferred structures. It has no column for the horizon, because the horizon sets the expiry of the structure you choose (Chapter 11M), not the structure itself.

Two names in the table recur throughout the atlas. A debit spread is a spread bought for a net payment, and a credit spread a spread sold for a net receipt. An IV crush is the fall in implied volatility once an awaited event is past, which cuts the value of every option bought before it.

4 · Four worked examples

The two traditions this book draws on disagree about this example, and both positions stand. The atlas allows the condor at a quarter of normal risk. The Edge Book rejects systematic iron condors for retail accounts on the CNDR record, allowing only occasional, discretionary condors at extreme implied volatility, sized small (Chapter 10I). Whether a condor chosen for its regime escapes the systematic result is the open question between them (Chapter 10A).

The last example steps outside its own row, since the matrix lists the call debit spread only where IV is cheap or normal. Read the matrix as a starting list, not a verdict.

5 · The selection tree

The figure turns the filter into a lookup, with one row of buttons for each question. Direction offers five answers: bullish, bearish, neutral or range, long volatility and short volatility. The horizon offers days, weeks or months, and the catalyst none, positive or negative. The IV regime offers cheap, normal or rich, labeled by IVp, the IV percentile: below 30, 30 to 70 and above 70.

The figure starts at bullish, weeks, normal and no catalyst, and lists the structures its rules recommend, ranked, with the preferred one starred. Change the horizon first, then try bearish with rich IV and a negative catalyst, and short volatility with normal IV.

1 · direction

Bullish Bearish Neutral / range

Long vol (move expected, direction unknown)

Short vol (no move expected)

2 · time horizon

Days Weeks Months

3 · IV regime

Cheap (IVp < 30) Normal (30-70)

Rich (> 70)

4 · catalyst

None / trend-driven

Catalyst (positive) Catalyst (negative)

Recommended structures (ranked)	Note
★ Call debit spreadPreferred	Balanced cost vs upside cap
2. Put credit spread	Capture VRP on the bullish thesis
3. Shares	If horizon ≥ weeks and IV not a factor

At the start the table lists a call debit spread, starred, then a put credit spread and shares. Changing the horizon changes nothing: the figure asks the question, but no rule reads the answer, as its caption says. The figure keeps the app's rules word for word. They differ from the matrix above in these places:

• Bearish, rich IV and a negative catalyst give the trend list, a bear call spread and a put debit spread, where the matrix gives a diagonal put spread and a bear call spread.
• Bullish, cheap IV and a positive catalyst give a long call and a call ratio backspread, leaving out the matrix's call debit spread.
• "Extreme" gets a number: the figure's condors are "at IVp > 80", where the matrix says only "at an extreme IV percentile".
• The figure ranks what the matrix only lists. It also adds a list for long volatility with normal IV or no catalyst: a long straddle, then a long back-month calendar.
• Where the matrix has no row, such as short volatility when IV is not rich, the figure answers "No clean fit".

Where the two differ, treat both lists as candidates and let the rest of the filter decide.

6 · Three principles that override the matrix

1. Defined risk over naked risk for single-stock positions through an event week, always. The matrix may suggest a long call or a short put. If the position is on a single name through a catalyst, spread it: the short put becomes a put credit spread, and the long call a call debit spread.
2. When in doubt, choose the simpler structure: a two-leg debit spread you understand executes better than a four-leg structure you sort of understand. Complexity has its own friction, since every leg crosses its own bid-ask spread (Chapter 2D).
3. Match the instrument to size and tax bracket. Use XSP for retail swings on the index, SPX for size and the Mag-7 single names for momentum plays (Chapter 11L). Use anything else only if its liquidity is verified. XSP and SPX options are Section 1256 contracts, taxed 60/40 (Chapter 2E).

7 · The structure is not the thesis

Every strategy in the atlas needs five things before it becomes a trade. The first two are a market thesis (Chapter 11B) and a regime check against the dashboard and the composite (Chapters 11A and 11G). The other three are a conviction score (Chapter 13B), explicit sizing (Chapter 13C) and kill conditions committed in advance (Chapter 13C). The structure expresses the thesis without constituting it.

Choosing iron condors for their high probability of profit, without understanding the regime, is how retail traders lose money systematically over long horizons. The CNDR index, drawn against SPX in Chapter 12C, is the evidence, and Chapters 10I and 13F take it further. Choosing long straddles before earnings without analyzing the volatility surface (Chapter 5G) is how event-volatility traders give the entire risk premium back to the dealer.

8 · Check yourself