Mastering Option Part 5

Synthetic Short

If you read the section on synthetics, you should have a handle on how they work. Now we'll show you how powerful they can be.

Shorting stock

Before we talk about synthetic short stock, let's go through the basic short sale.

A popular strategy among bearish investors is shorting stock. When you short stock, you are selling it first and then buying it back later at hopefully a lower price. Short sellers are attempting to sell high and buy low -- just in the reverse order of bullish investors.

In order to sell stock you don't own, you must borrow it from another investor. While this may sound complicated, it is a seamless transaction and usually takes a matter of seconds to execute.

Notice how the short stock position is exactly opposite the long position:

This means the investor who is short stock has unlimited upside liability. As the stock moves higher, the short position increases its losses.

Uptick

There is one catch with selling stock short; the sale must be done on an uptick or a zero-plus tick. What is an uptick? Say a stock is quoted bid $25 and offered at $25-1/2 with the last trade at $25. If the next trade is higher than the last trade of $25, that new trade is an uptick. If the trade is lower, it is a downtick.

When you look at the last trade of a stock, you will usually see a "+" or "-" sign to the side (or on some systems, an up or down arrow). The "+" indicates and uptick and the "-" a downtick. Using the above example, if the next trade is $25-1/4, you will see the last trade reported as +$25-1/4. If the following trade is back to $25, you will see -$25.

If the next trade is $25-1/4, again, you will see +$25. What if the following trade is also $25- 1/4? That is called a zero-plus tick indicating that the last change was an uptick but the recent prices are unchanged.

The uptick rule was created to prevent investors from selling into a sharp downtrend, thereby nearly guaranteeing a profit. The rule is of little significance to the investor other than it must be met. There is nothing the trader needs to do other than place the order -- either it will fill or it won't.

Because of the uptick rule, it is possible for a short sale to not execute even if it is a market order!

We've seen there are two main obstacles to overcome when shorting stock: shares must be located to be borrowed and the sale must occur on an uptick.

Locating shares

Although it is fairly uncommon, it is possible for shares to not be available for shorting. Around April of 1999, there was a four-month period where Amazon.com (AMZN) was starting to fall after being on a record climb to the upside (shown in red circle below). Prior to that, investors saw it fall from nearly $100 to just above $40 (blue circle). So once it started falling again in late April, investors were eager to sell it short hoping it would fall back to $40.

But many investors were unable to capitalize on the situation, as there was a two-week period or so where no shares were available to short!

Most investors would let the situation pass as an unfortunate market technicality, and miss out on a potentially terrific trading opportunity.

But if these same investors understood synthetic options, they would have participated fully on the short side. Better yet, they would avoid the uptick rule.

Synthetic short stock

If you read our section on synthetics, you will recall the equation for synthetic options is Stock + Put - Call = ? Because we want to find out the synthetic equivalent of short stock, we need to get short stock (minus stock) by itself in the equation. If we subtract stock from both sides, we get Put - Call = - Stock and there's the answer: Long put + short call = short stock.

Basically what investors are doing with synthetic short sales is buying puts, and that gives them the right to sell the stock so, will appreciate as the stock falls -- just like a short stock position. However, puts can be very expensive especially under the conditions in the chart above. So in order to pay for the puts, investors will sell calls and use the proceeds to buy the puts. If the stock is trading for $100, the trader should theoretically receive a credit from the trade. But due to bid-ask spread and commissions, the synthetic short sale will usually result in a slight debit.

From a profit and loss standpoint, the synthetic short position looks like this:

We can see that is looks exactly like our short stock position shown earlier; at expiration, the investor gains point-for-point if the stock falls, and loses point-for-point if it rises. The synthetic position, at expiration, is behaving exactly like short stock.

It is important to remember that options do not behave like stock until expiration unless they are very deep-in-the-money. So if a trader executes a synthetic short at a strike of $100, the profit and loss diagram will not have the above shape until expiration. If a trader wishes to have the options behave more like stock, he should consider buying an in-the-money put and selling and in-the-money call.

What's great about the synthetic short is that it does not need an uptick to execute. You simply place your order to buy the put and sell the call. Of course, it is usually suggested these two trades be placed simultaneously to prevent execution or risk -- the risk of an unfavorable market move while you are executing two separate orders.

Bear in mind that the short call position is naked. This means you will generally need level-3 option approval and, in addition, will have an option requirement in order to hold the naked call position. Be sure to check with your broker if you are unsure as to how that works. The requirement is not a huge offset for the synthetic position compared to short stock; the short stock position will be charged with a 50% Reg T requirement, which is not applicable to the synthetic.

Bullet strategy

There is an interesting strategy known as a "bullet" where investors can actually intensify the fall of a stock and increase the odds that they will make money. Here's how it works, Say a stock is in a rapid decline. You'd like to short it, but you're concerned there may not be an uptick. However, if you buy a put, the market maker will be forced to short the stock and buy a call to create the long put position for you. Market makers are not subject to the uptick rule; they can just hit the bid and execute a short sale.

One strategy is to buy deep-in-the-money puts, which force market makers to hedge nearly dollar-for-dollar and short an equal number of shares. For example, say a stock is trading for $100 and falling sharply. If you buy a deep-in-the-money put such as a $130 (or wherever delta is near 1), the market maker will sell nearly 100 shares for each put, thereby putting more downward pressure on the underlying. Because you hold a deep-in-the-money put, it will appreciate nearly dollar-for-dollar with each point fall in the underlying.

To exacerbate the fall further, you can enter the deep-in-the-money synthetic short position by selling the calls, too. Now the market maker will be forced to short the stock again nearly point-for-point. So if you buy 10 puts and sell 10 calls (both deep-in-the-money), the market maker will be forced to short nearly 2,000 shares without an uptick.

Semifutures

There is a related strategy that has a little less risk called a semifuture. The strategy can be used as a long or short position. If you want a synthetic short position with a little less risk, you can split the strike prices, such as buy the $50 put and sell the $55 call. The more distance you put between the strikes the less upside risk there is. From a profit and loss standpoint, the short semifuture position looks like this:

You can see that the flat area between $50 and $55 creates less risk to the upside. In other words, with synthetic stock at $50, the trader is exposed to losses for any stock price above $50. With the semifuture, the trader is not exposed to losses until the stock is above $55.

The semifuture strategy can be split further. For example, the trader may buy the $45 put and sell the $55 call. Now there will be less risk to the upside, but also less profit to the downside as shown in the following chart:

Market downturns can be fast and furious, which is what attracts speculators to short sales. Many investors recognize potential situations, but are unable to capitalize on them due to market restrictions. If you understand synthetics, you can overcome many restrictions and profit from your outlook on the market.

Systematic Writing

The strategy called "systematic put writing" or sometimes just "systematic writing" is a hedged variation of naked, or uncovered, put writing. This strategy will be appealing to investors ranging from conservative to speculative. If you like writing naked puts, this strategy will be of great interest to you. If you think you would never attempt it, you may change your mind!

Before we start, we should clarify some misconceptions about naked put writing. When you sell a put, you are effectively acting as an insurance company by entering into an agreement to potentially buy stock at a fixed price over a given amount of time. For this protection, the buyer will pay you a premium. It's a mutually beneficial relationship; you are willing to insure their stock and they are willing to pay for the peace of mind.

Many investors shy away from naked puts because of the large downside risk, to a stock price of zero, if the stock should fall. But these same investors are usually willing to buy stock and hold it. Let's see what the real risk is.

Example:

Say we have two investors, A and B. A only buys stock and B only sells naked puts. In the eyes of many investors, A is conservative, and B is a loose cannon that speculates with options.

A and B each have $50,000 in their accounts.

XYZ stock is selling for $50 per share. A buys 1,000 shares but B sells 10 $50 puts, with 3 months of time, for $8. Investor A now has $50,000 worth of stock and no cash while B has $58,000 cash ($50,000 cash + $8,000 from sale of put) and no stock. What happens at expiration?

If the stock is down, say $30, A's account will be worth $30,000 but B's will be worth $38,000. Why? Because B started with $58,000 but is forced to buy stock 3 months later for $50,000 due to the option assignment. He will pay $50,000 but receive stock worth $30,000. His transactions are:

Portfolio value at start: +$58,000
Pays for option assignment: -$50,000
Receives stock: +$30,000
Net account value: +$38,000

In fact, B's total account value will always dominate A's for all stock prices at $58 ($50 strike price plus $8 premium for the put) or below. Any stock price above $58 at expiration, B's account will be worth $58,000 and no more. From a profit and loss standpoint, the two accounts look like this at expiration:

Investor B's account dominates A's for all prices below $58. His tradeoff for this privilege is that he does not participate in any upside potential of the stock if it moves above $50. Investor B is giving up upside potential in exchange for a downside hedge. In addition, B has deferred his payment for buying the stock by three months in exchange for the premium. So, B actually appears conservative compared to A, the long stock position!

If you read our sections on "Profit and Loss Diagrams" and "Synthetic Options," you will understand that a naked put is really nothing more than a covered call in disguise. They are synthetic equivalents.

So, the point of all this is to understand that naked put writing really isn't as speculative or dangerous as some would think. This is assuming you are writing puts on stock you would buy regardless, not because the premiums are high!

Hopefully you are now not as reluctant to write naked puts. If so, continue reading about how systematic writing may benefit you.

The systematic writing strategy

This strategy is appealing in a number of ways. It allows investors to sell naked puts but adds a couple of new dimensions. First, it allows the investor to dollar cost average into the stock. Second, it allows for the sale of a covered straddle thereby giving the investor one more additional option premium to further reduce the downside risk.

The systematic writing recipe:

Step 1:Start by writing puts on half the amount of shares in which you are willing to buy (for example, if you are willing to buy 1,000 shares, write 5 puts).

Note: Repeat step 1 until you are assigned. Again, it is very important to use this strategy only for stocks you would be willing to buy at the strike price regardless.

Step 2:Once you are assigned in step 1, write covered straddles (sell a call and sell a put). In this example, the investor will write 5 calls and 5 puts. The position is considered covered, because the investor can always deliver the shares if assigned on the short calls.

Step 3:If the investor gets assigned from the calls in step 2, start with step 1 again. If assigned on the puts again, write covered calls against the entire position.

Example:

Let's use our two investors above, A and B, and see how they would fare using naked puts versus systematic writing.

Investor A is now convinced that naked put writing may not be so bad. He likes the stock and would be willing to buy 1,000 shares so he sells 10 $50 puts for $8. The time to expiration is a matter of preference, but all else equal, investors are usually better selling shorter-term options.

Step 1 for systematic writing

Investor B uses the systematic strategy. He will write puts on one-half of the position, to represent the 500 shares he's willing to purchase. So he writes only 5 of the contracts for $8.

At expiration, the stock is trading for $35. While A is at least hedged by the amount of the original premium, he's not willing to buy any more stock because he is now long 1,000 shares -- his original limit -- from the assignment. His cost basis is $42 per share ($50 for the stock less $8 for put premium). He must sit and be patient for the stock to rally. While it is possible for A to write calls at this point, if the stock is down far enough, this strategy may not be sufficient, as there may be no premium in a $45 strike that would be necessary to bring him to a profit if called away.

Step 2 for systematic writing

Because B is using the systematic principle, he bought only 500 shares from the put assignment. Now he enters the second step of the strategy: writing covered straddles. Investor B will now write 5 $35 puts (assume they are $5) and 5 $35 calls (assume they are $6).

Investor B will bring in an additional $2,500 for the puts and $3,000 for the calls.

At this point, two only two things can happen for the stock: It will either be above or below $35 at expiration. If the stock is above $35 (the strike price) at expiration, B will have his shares called away due to the short call option. But that's okay, as we will see shortly that his average cost is only $33, and he will make 2 points profit. But, let's assume the stock is down again to $30. Investor B will buy his second lot of 500 shares at a price of $35, the strike of the short put.

Investor A's cost basis is $50 for the stock, less $8 for the put, for a total of $42. Investor B's cost basis is effectively $42-1/2 for the purchase of stock alone (500 shares at $50 and 500 shares at $35). But in addition, B took in $4,000 for the original put sale, and $5,500 for the covered straddle (500 * $5 for the puts and 500 * $6 for the calls). The total proceeds from the options is $9,500, for a total cost basis of $33,000 or $33 per share for investor B.

Now, investor A has a cost basis of $42, and B has one of $33 with the stock trading at $30.

Notice the large difference in cost basis between the two investors. The majority of the difference in costs is due to B being able to average into the stock. He bought 500 shares at $50 and 500 at $35 with 3 option premiums along the way to boot.

Step 3 for systematic writing

The third step for the systematic writing would require B to write 10 calls (covered call position) against his 1,000 shares. The market is at $30 and his average cost is $33. Say he can sell 10 $30 calls trading at $5 to bring his cost basis to $28 per share. If he gets assigned, he will sell 1,000 shares at $30. If not, he will continue to write calls against the entire position until called out. At that point, he will look to start with step 1 again in the strategy.

Notice too that, although a two-point profit may not seem like such a big deal, the stock has fallen 34% from $50 to $33. There is not much an investor who paid $50 for the stock can do at this point. But our systematic writer is able to potentially capture a two-point profit despite the fall.

Using the strategy

This is an outstanding strategy for naked put writers; especially for stocks you expect to be volatile. The average cost basis on your stock will be greatly reduced if you are assigned on the short put written at the time of the covered straddle.

The strategy is very versatile. Investor B, in the above example, could have written calls and puts with different strike prices (called a strangle or combo) for step 2 instead of the covered straddle. Investors can select different time frames or strikes to meet their needs. You can even mix and match some of the steps. For example, if you are very bullish on the stock, you may elect to enter step 2 initially. This way you own half the shares you are willing to purchase and have a short put to provide a small hedge. Now, if the stock runs to the upside, at least you have some shares to fully participate in the rally unlike the investor who starts with step 1 and only writes puts on half the position.

Again, it should be emphasized that naked put writing can actually be viewed as a conservative strategy if you are writing puts on stock you would be willing to buy at the strike price regardless. If, however, you are writing puts on stocks solely for a high premium that is present and would rather not own the stock, be aware that this is an extremely speculative position and you should invest accordingly.

Hopefully this strategy adds some interesting insights as to how valuable options can be for conservative and speculative investors alike.

Jelly Rolls

Breakfast menu? No, it's an actual options strategy. There doesn't appear to be any particular reason for the name, although rumor has it that market makers on the floor of the Chicago Board Options Exchange (CBOE) created it.

Jelly rolls are primarily used by market makers, but are a great tool for retail investors to evaluate the fair price between calendar spreads in the same way that box spreads can be used to evaluate vertical spreads.

While you may never enter a jelly roll, they are crucial to understand if you are placing calendar spreads -- spreads where you buy and sell calls or puts of the same strike, but at different expiration months.

Jelly rolls

There are many ways to view and understand the jelly roll strategy, but it is probably easiest to view from the market makers perspective. If you read our section on synthetics, you will recall that market makers like to enter conversions and reversals -- three sided positions -- involving stock, calls and puts.

Conversions (long stock, long puts and short calls) and reversals (short stock, short puts and long calls) are ways for market makers to lock in profits, so they are always looking for orders that allow them to create these positions.

Say a market maker has the following reversal for January expiration:

Short 1,000 shares at $50
Long 10 $50 calls
Short 10 $50 puts

And also has the following conversion for March expiration:

Long 1,000 shares at $50
Long 10 $50 puts
Short 10 $50 calls

This is a jelly roll -- a conversion in one month and a reversal in another.

Notice the market maker is short 1,000 shares in the reversal and long 1,000 shares in the conversion -- a net zero position. This leaves him with long calls and short puts (synthetic long position) in January, and long puts and short calls (synthetic short position) in March as follows:

January reversal March conversion Short 1,000 shares at $50 Long 1,000 shares at $50 Long 10 $50 calls Long 10 $50 puts Short 10 $50 puts Short 10 $50 calls The long and short stock positions cancel each other (shown in red). The remaining positions are a synthetic long position (blue) in January and a synthetic short position (black) in March.

One way to interpret the January synthetic is that the market maker will buy stock for $50 at expiration. How? If the stock is above $50, he can exercise the call and pay $50; if it's below $50, he will be assigned on the puts and be forced to buy stock at $50. Similarly in March he must sell stock for $50. If the stock is above $50, he will be assigned on the short calls and be forced to sell stock at $50; if the stock is below $50, will exercise the $50 puts and receive that amount for the sale.

The market maker is therefore left with a position that forces him to buy stock for $50 in January and sell it for $50 in March. What is the cost? It should be evident that the market maker is not losing any principal as he's buying and selling at $50; however, he is missing out on the interest he could have earned during the three months had he not been forced to purchase the stock in January. Assuming the risk-free rate of interest is 6% and exactly three months to expiration, the cost is $50 * 3/12 months * 6% = $3/4.

Therefore, the difference in cost between the synthetic long position in January and synthetic short position in March should be about $3/4. If the January synthetic costs $10, the March synthetic should cost $10-3/4.

If the stock pays a dividend, this must be subtracted from the position as well, because it represents a cash inflow. If the above stock pays a 1/4-point dividend in March, the spread value would be reduced by 1/4 point from $10-3/4 to $10-1/2.

Calendar spreads

We can also view the synthetic long and short positions as calendar spreads:

January March
Short 10 $50 puts + Long 10 $50 puts = Long calendar spread
Long 10 $50 call + Short 10 $50 calls = Short calendar spread
= Long synthetic stock =Short synthetic stock

If we view the positions vertically, we see the market maker has a long synthetic stock position in January and short synthetic stock position in March. This is the way we were viewing the positions earlier. However, we can also view them horizontally and say he is long a put calendar spread (long Mar $50 puts and short Jan $50 puts) and short a call calendar spread (short Mar $50 calls and long Jan $50 calls).

An equally valid way, then, to view the jelly roll is the difference between two calendar spreads (also called time or horizontal spreads).

If you trade calendar spreads, here's where the jelly roll can help!

Example:

Intel (INTC) is currently trading for $36-7/8 with the following quotes:

	Calls		Puts
Month/Strike	Bid	Ask	Bid	Ask
Jan $35	5-3/8	5-3/4	3-1/8	3-1/4
Apr $35	7-1/4	7-5/8	4-1/4	4-5/8

Say you are interested in the following long calendar spread: Long April $35 calls and short January $35 calls. The natural quote is currently $2-1/4 debit:

Buy Apr $35 calls = $7-5/8
Sell Jan $35 calls = $5-3/8
Net debit $2-1/4

Because there is a net payment (debit), this is a long calendar spread.

Traders often ask if this is a fair price. Is there room to negotiate? If so, how much?

To answer these questions, let's look at the value of the synthetic long and short stock positions from the retail investor's side. An investor buying a synthetic long position will pay the asking price and sell at the bid price. As a guide, these numbers are highlighted below: red is a debit and blue is a credit.

	Calls		Puts
Month/Strike	Bid	Ask	Bid	Ask
Jan $35	5-3/8	5-3/4	3-1/8	3-1/4
Apr $35	7-1/4	7-5/8	4-1/4	4-5/8

The retail investor can create the January synthetic long and April synthetic short for: +7 1/4 - $5 3/4 + $3 1/8 - $4 5/8 = $0. So a retail investor will receive zero credit for the trade. How much should it be worth theoretically? There are approximately 135 days to expiration, so the cost of carry is roughly $35 * 135/360 * 6% = 0.79 cents.

In addition, any dividends received must be subtracted. Intel is currently paying 2 cents per share. The dividend is expected during the life of the jelly roll, so the cost is reduced from 79 cents to about 77 cents[*]. Most of the time dividends are not a big concern, especially for tech companies. But in cases where the dividends are sizeable, be sure to factor it into the cost.

[*]Technically, the credit will be reduced by the present value of the dividend. This is because the investor must wait to receive the dividend. However, since most dividends are small as well as the time between buying and selling the stock, most traders will just subtract off the full amount of the dividend as a very close estimate.

The trade should be worth a credit of 77 cents, but the retail investor receives zero. The spread is clearly not priced fairly at the bid and ask prices for the retail investor.

How about from the market makers' perspective? Using the same color coded notation as before, the market maker can create the synthetic January $35 long position by buying the Jan $35 call at the bid and selling the Jan $35 put at the ask. He can also create the synthetic short April position by purchasing the Apr $35 put on the bid and selling the Apr $35 call at the ask as shown in the chart below:

	Calls		Puts
Month/Strike	Bid	Ask	Bid	Ask
Jan $35	5-3/8	5-3/4	3-1/8	3-1/4
Apr $35	7-1/4	7-5/8	4-1/4	4-5/8

The synthetic positions will create a net credit of: -$5-3/8 + $7-5/8 - $4-1/4 + $3-1/4 = + $1-1/4.

We said earlier the fair price of the package should be about 77 cents; however, the retail investor receives nothing, and the market maker wants $1-1/4.

Notice a key point here. The market maker is able to construct the synthetic long and short positions with the color coded trades above. If you recall from the beginning, we were assuming you were interested in the calendar spread consisting of long April $35 calls, and short January $35 calls. You would pay the asking price on the April $35 calls and sell for the bid price on the January $35 calls -- exactly two of the pieces the market maker needs to construct his synthetic positions!

The market maker can offset your trade by buying an April $35 put at $4-1/4 and selling the January $35 put at $3-1/4 (remember, market makers buy at the bid and sell at the ask). In other words, because you want to be long the calendar spread, the market maker must be short the same spread in order to fill the order. To offset the short call calendar spread, he will execute a long put calendar spread.

Because neither party -- neither you nor the market maker -- wants to execute the trade for less than 77 cents, it appears you have about 48 cents with which to work. The market maker wants $1-1/4, but theoretically should only receive 77 cents for a difference of 48 cents. You probably won't be able to shave the full 48 cents off the price, but 1/4 point certainly looks reasonable. So the calendar spread we described earlier:

Buy Apr $35 calls = $7-5/8
Sell Jan $35 calls = $5-3/8

could probably be filled for a net debit of $2 instead of the $2-1/4 natural.

Now, 1/4 point may not seem like much, but on a relative basis, it's about 11% better than the $2-1/4 debit most traders would be tempted to place.

This is the essence of great options trading -- becoming a little bit better on each trade. It's the little changes that make big differences on profits.

STRATEGIES

Wrangles

The wrangle is a complex position usually used by market makers for reasons we will see later. It consists of a long ratio spread with calls and a long ratio spread with puts. Long ratio spreads are also known as backspreads. A long call ratio spread is established by selling a lower strike call and purchasing two (or more) higher strike calls. Likewise, a long put ratio spread entails selling a higher strike put and then purchasing two (or more) lower strike puts.

Let's look at the individual pieces and then put them together. The profit and loss diagram for a long call ratio spread looks like this:

The profit and loss for the long put ratio spread looks like this:

If we put these two profit and loss diagrams together we get the wrangle:

If you read our section on the strategy of "strangles," you may recognize the above profit and loss diagram as identical. However, the wrangle, unlike the strangle, will not be exposed to the same time decay if the stock stands still. It's my guess that the wrangle gets its name from the fact that it is a ratioed strangle (which sounds like wrangle).

It may be difficult to see why the above profit and loss diagram results from two long ratio spreads but let's break down the two component positions using $50 and $55 strikes and see if we can make sense of it.

The basic long call ratio spread is:

Sell 1 $50 call
Buy 2 $60 calls

The basic long put ratio spread is:

Sell 1 $60 put
Buy 2 $50 puts

There are many ways to dissect this position but probably the easiest is to look at just the short positions: sell 1 $50 call and sell 1 $60 put. These two options, by themselves, are a short in-the-money strangle also called a "guts." The reason it is an in-the-money strangle is because the put has a higher strike thereby guaranteeing this position to be down at least $10 (the difference in strikes) at expiration. Don't let the guaranteed value bother you because we haven't even talked about price yet; the markets will have to pay you more than $10 for it. We will use the proceeds from this short strangle to purchase two $50 puts and two $60 calls, which is a long out-of-the-money strangle. Because we are long more contracts than short, this position must become profitable as the market moves either up or down. In other words, we are net long calls and puts so must make money if the market explodes to either the upside or downside.

Another way to look at this net long contract position is to look at just the calls. If we are long two $60 calls and short 1 $50 call, the effectively we are net long one $60 call. The sale of the one $50 call reduced our purchase price a bit and lessens the risk if the stock should fall. That's why the chart goes up on the right "wing" (showing profit) if the stock should move beyond $60; we are net long 1 $60 call.

A similar argument can be made for the puts.

Is this position better than a strangle? It depends on your outlook on the stock and tolerances for risk. Remember, there are no superior strategies as they all come with their own unique sets of risks and rewards (Please see course "Best Strategy" under section 1). The wrangle has less risk if the stock stands still but will also take longer to become profitable if the stock does move. That's because the short positions are competing with the deltas of the long positions -- something known as gamma risk.

The benefit of the short strangle is offset by its sluggish responsiveness to moves in the underlying stock. Which is better depends on you and the circumstances at the time of the trade.

While wrangles are generally used by market makers (after all, there are four commissions just to establish the long position!), this doesn't mean it's not useful for retail investors to understand. One scenario is that you enter into a backspread (long ratio spread) at one time and hedge at a later time by legging into a wrangle.

But probably more important is the wrangle shows, once again, the versatility that options provide and why they are so necessary to understand if you want to compete in today's markets. By finding different combinations of calls and puts, you can completely change the risk-reward characteristics to match your needs and that is something that cannot be done with stocks alone.