Iron Condor Options Combinations Explained Options spreads involve the purchase or sale of two or more options covering the same underlying stock or security ref.
These options can be puts or calls or sometimes stock too and be of different options expiries and strike prices. Each combination produces a different risk and profitability profile, often best visualised using a profit and loss diagram.
In all such strategies, a trader uses the chosen combinations of puts and calls to make a profit should an forecast outcome occur. This is usually that the underlying stock moves a particular way types of combination of options up in the case of the call types of combination of options above — but in more complex trades can be an expected movement in volatility, or to take advantage of the passage of time we will see how later.
There are three main types of basic options strategies: 1. Vertical Call and Put Spreads So called because options with the same expiry date are quoted on an options chain quote board vertically.
Hence, vertical spreads involve put and call combination where the expiry date is the same, but the strike price is different. It involves buying an option and selling a call option with a higher strike price; an example of a debit spread where there is a net outlay of funds to put on the trade.
It involves selling a call option and buying another with a higher strike price. Note that this is a credit spread: ie that we receive money for a trade and, if we are correct and the stock does fall, weget to keep this if both options expire worthless. The trade expectation is therefore that IBM will fall moderately over the next month. We covered the bear put spread in more detail here. Horizontal Call and Put Strategies So called because of options with different expiries being displayed horizontally on an options chain quote board.
They, therefore, involve buying and selling options with different expiry dates, but the same strike price and, of course, underlying.
Further Reading On Options Trading...
A calendar spread, is a good example or horizontal call or put spread see more here. Diagonal Spreads These, as the name suggest, are a combination of the two and are complex trades involved options of differening strike prices and expiry dates. An example is the LEAP covered call spread detailed later. More details on the covered call are available by clicking here.
Advanced Options Combinations: Complex Put and Call Trades 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.
When the trader believes that in the near short term, the underlying asset would display volatility, the straddle is apt. When Does It Make Money?
In this Option strategy, unlimited money is made when the underlying asset makes a volatile move. A 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. If it declines, the put would be ITM and the call would have no value.
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 the trader believes that in the near short term, the underlying asset will display significant volatility, a straddle strategy is used.
Money is made by the strategy no matter which direction the underlying asset moves towards. The move has to be pretty strong, though. 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.
About Combination Orders
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.
Combinations made easy
Butterfly In a butterfly spread strategy, there are three strike prices. Two ATM calls are sold. When the trader believes that the rise or fall of the underlying stock would not be a lot by expiration, butterfly verum option entry is the best.