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Advanced Options Spreads: Complex Put and Call Trades

Advanced Options Trading Strategies

Contents [hide]

1 Advanced Options Trading Strategies

2 Strangle Option Spread
3 Straddle Option Spread
4 Butterfly
5 Iron Condor

Options have a lot of advantages; but in order to enjoy those advantages, the right strategy is essential. If traders
understand how to use all the trading strategies, they can be successful.

We already been through some basic options spreads; now it’s time to go through some more complex strategies.

In particular we’ll look at some 4 option spread strategies such as the iron condor and butterfly spreads.

Strangle Option Spread

This strategy is a neutral one where an out-of-money put and out-of-money call are bought together
simultaneously for the same expiration date and asset. It is also called “Long Strangle”.

When Would You Put One On? – When the trader believes that in the near short term, the underlying asset would
display volatility, the straddle is apt.

When Does The Spread Make Money? – In this Option strategy, unlimited money is made when the underlying
asset makes a volatile move. It could be downwards or upwards, that doesn’t matter.

Profit = Underlying Asset Price (>) Long Call’s Strike Price + Net Premium
Profit = Underlying Asset Price (>) Long Put’s Strike Price – Net Premium

When Does The Spread Lose Money?

The spread loses money when the price of the asset on expiration is between the Options’ strike prices.

Loss = Underlying Asset Price = Between Long Call’s Strike Price and Long Put’s Strike Price

Option Greeks

The Delta is neutral, the gamma is always positive, Theta is worst when asset doesn’t move, and Vega is always
positive.

Illustration

Assume that Apple Stock is currently trading around $98. Strangle could be a good strategy if the trader is unsure
about the direction in which the stock will go. So, the trader will buy a 97 put and a 99 call. Let us assume they
have the same expiration date and value = $1.65. If the stock rallies past $102.3 (3.3+99), the put would have no
value and the call would be in-the-money. If it declines, the put would be ITM and the call would have no value.
Here’s an excellent video (from OptionAlpha) with more information:

Straddle Option Spread

This strategy is also called “Long Straddle”. When a put and call are bought for the same asset, with the same
expiration date and same strike price, it is called a straddle.

When Would You Put One On?

When the trader believes that in the near short term, the underlying asset will display significant volatility, a
straddle strategy is used.

When Does The Spread Make Money?

Money is made by the strategy no matter which direction the underlying asset moves towards. The move has to
be pretty strong, though.

Profit = Underlying Asset Price (greater than) Long Call’s Strike Price + Net Premium
Profit = Underlying Asset Price (greater than) Long Put’s Strike Price – Net Premium

When Does The Spread Lose Money?

If the price of the underlying asset during expiration is same as the strike price of the bought call and put, the
spread loses money.

Loss = Underlying Asset Price = Long Call/Long Put’s Strike Price

Option Greeks

The Delta is neutral, the Gamma is always positive, Theta rises during expiration, and Vega is always positive.

Illustration

Take a new example and assume that Apple stock is currently around $175. Straddle would be a good strategy if
the trader thinks that a huge move would be made on either side. A call and put with the same expiration date as
the stock would be bought by the trader. Assume that the 175 Call and the 175 Put cost $10 each. If the stock
rallies past $195, the call would be ITM by at least $20 and profits will pour in. If the stock falls below $175, the
cost of the straddle would be covered. There is a 50/50 chance of being right about the direction because the cost
of the straddle is the maximum loss a trader can incur.

Butterfly
In a butterfly spread strategy, there are three strike prices. Two calls are bought – one ITM and one OTM. Two
ATM calls are sold.

When Would You Put One On?

When the trader believes that the rise or fall of the underlying stock would not be a lot by expiration, butterfly
spread is the best.

When Does The Spread Make Money?

When the price of the underlying stock does not change at all during expiration, this strategy achieves its
maximum profit.

Profit = Underlying Asset Price = Short Calls’ Strike Price

When Does This Spread Lose Money?

When the price of the underlying stock is less than or equal to the strike price ITM long call OR when its price is
greater than or equal to the strike price of OTM long call, this spread loses money.

Loss = Underlying Asset Price (lesser than or =) ITM Call Strike Price
Loss = Underlying Asset Price (greater than or =) OTM Call Strike Price

Option Greeks

Delta is always positive, Gamma is lowest at ATM and highest at ITM and OTM, Theta is best when it remains in
the profit area, and Vega stays positive as long as the volatility is not too much.

Illustration

Assume that Apple stock is trading at $90. Assume that an 80 call is purchased at $1100, two 90 calls are written
at $400 (x2), and a 100 call is purchased at $100. The maximum loss would be the net debit = $400. If the price of
Apple at expiration remains the same, the 40 calls and the 50 call would have no value and the profit would be
$600. If, however, the stock trades below $80, all the options would be useless. If it trades above $100, the loss
from the ITM and OTM calls would be set off by the profit from the ATM calls.

Here’s an excellent video (from Options Genius) with more information:

Iron Condor
In this strategy, one OTM put with lower strike is sold after buying one OTM put with strike even lower, and one
OTM call with higher strike is sold after buying one OTM call with a strike even higher.

When Would You Put One On?

When the trader believes that low volatility is to be expected, Iron Condor is chosen.

When Does The Spread Make Money?

When the price of the underlying asset is between the strike prices of the sold call and put, this strategy makes
money.

Profit = Underlying Asset Price = Between Short Put Strike Price and Short Call Strike Price

When Does The Spread Lose Money?

The spread loses money when the price of the stock falls below purchased put’s strike price or rises above
purchased call’s strike price. Loss can sometimes be greater than profit.

Loss = Underlying Asset Price (greater than or =) Long Call Strike Price
Loss = Underlying Asset Price ( lesser than or =) Long Put Strike Price

Option Greeks
The Delta is neutral, the Theta should stay positive, Gamma shouldn’t be too large, and negative Vega should be
minimized.

Illustration

It Apple Stock is trading at $45, Iron Condor would be – buying 35 Put at $50, writing 40 Put at $100, writing 50
Call at $100, and buying 55 Call at $50. The net credit ($100) is the maximum profit. If the expiration value is the
same, all long and short options would be useless and maximum profit would be realized. If it falls to $35 or rises
to $55, only the 40 Long Put would be useful and the maximums loss of $400 would be realized.

Here’s a video:

Here’s an excellent video (from Option Genius) with more information:

The following Complex Options Spreads are dealt with on separate Pages:

Backspread

LEAP Covered Call

calendar spread (click here for more).

And you can continue your options trading education by going back to the home page.