Advanced Options Trading Strategies

Options trading offers a variety of choices for investors seeking to leverage their capital efficiently and manage risk effectively. While basic options strategies provide a foundation for understanding the market, advanced option strategy helps experienced investors to obtain deeper knowledge into complex combinations of contracts, allowing traders to navigate various market conditions with precision and confidence

What is an Option?

An option can be defined as “a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.” It is a derivative that gets its value from an underlying asset.Stock options get their value from stocks, while index options derive from the index or equity.Options have expiration dates, unlike stocks, and there are no fixed numbers.There are two types of options: call and put.

List of advanced options trading strategies 

Long Straddle:

Buying a call and put option at the same strike price and expiration date, anticipating significant price movement in either direction.

Profit from volatility increases, regardless of the direction of the underlying asset's movement.

Limited risk (premium paid) with unlimited profit potential.

Upper breakeven at call strike price + premium paid, lower breakeven at put strike price - premium paid.

Long Strangle:

Buying a call and put option with different strike prices but the same expiration date, expecting significant price movement without a specific direction.

Profit from increased volatility, with the potential for significant price movement in either direction.

Limited risk (premium paid) with unlimited profit potential.

Sum of the higher strike price and premium paid for the call, subtracted by the premium paid for the put.

Iron Condor:

Combining a short call spread and a short put spread to profit from low volatility and a range-bound market.

Generate income by selling out-of-the-money call and put options, with a limited range where maximum profit is achieved.

Limited risk (the difference between the strike prices of the spreads minus the premium received) with limited profit potential.

Upper breakeven at the higher short call strike price plus the net credit received, lower breakeven at the lower short put strike price minus the net credit received.

Iron Butterfly:

Similar to an iron condor, but the short call and put spreads share the same strike price, used when anticipating minimal price movement.

Profit from low volatility and minimal price movement, with a limited range where maximum profit is achieved.

Limited risk (the difference between the strike prices of the spreads minus the premium received) with limited profit potential.

Upper breakeven at the strike price of the short call plus the net credit received, lower breakeven at the strike price of the short put minus the net credit received.

Calendar Spread:

Buying and selling options with the same strike price but different expiration dates, capitalizing on volatility differences between short and long-term options.

Profit from time decay while limiting the impact of changes in volatility and directional movement.

Limited risk (premium paid) with limited profit potential.

Upper breakeven at the strike price plus the net debit paid, lower breakeven at the strike price minus the net debit paid.

Ratio Spread:

Buying and selling options in an unequal ratio, used when expecting moderate price movement and aiming to reduce the cost of the trade.

Adjust risk and reward by buying/selling a different number of options, potentially reducing the cost of the trade.

Variable risk/reward profile depending on the ratio of options bought/sold.

Varies depending on the specific ratio of options bought/sold.

Butterfly Spread:

Buying and selling options at three different strike prices to profit from volatility decreasing or minimal price movement.

Profit from a specific price range where maximum profit is achieved, with limited risk.

Limited risk (premium paid) with limited profit potential.

Upper and lower breakeven at the highest and lowest strike prices, respectively, plus/minus the net premium paid.

Backspread:

Buying more options than selling (or vice versa), used when expecting significant price movement in one direction.

Profit from a directional move in the underlying asset, with the potential for unlimited profit.

Variable risk/reward profile depending on the ratio of options bought/sold.

Varies depending on the specific ratio of options bought/sold.

Diagonal Spread:

Combining options with different strike prices and expiration dates, used when expecting a gradual price movement in the underlying asset.

Benefit from time decay and potential price movement, with limited risk.

Limited risk (premium paid) with limited profit potential.

Upper and lower breakeven at the strike prices of the options, plus/minus the net premium paid.

Box Spread:

Involves combining a bull call spread with a bear put spread to create a riskless profit opportunity (usually used for arbitrage).

Lock in a riskless profit by exploiting pricing discrepancies between options.

Riskless profit opportunity.

No risk; profit is locked in at initiation.

Collar:

Combining long stock ownership with a protective put and a covered call to limit downside risk while capping potential gains.

Protect gains on a long stock position while generating income and limiting downside risk.

Limited risk (premium paid for the protective put) with limited profit potential.

Varies depending on the specific strike prices of the options and the premium received/paid.

Double Diagonal Spread:

Combining two diagonal spreads to capitalize on both volatility and time decay.

Benefit from time decay and potential changes in volatility, with limited risk.

Limited risk (premium paid) with limited profit potential.

Upper and lower breakeven at the strike prices of the options, plus/minus the net premium paid.

What Are the Guidelines While Using Options Trading Strategies?

In binary options trading, a deviation occurs when traders speculate on whether a specific underlying asset will surpass a predetermined price within a set timeframe. These strategies can operate independently or be combined to achieve favourable outcomes. Timing the exit from trades is of paramount importance. It's advisable to seek stock options tips from reliable sources. Additionally, employing tools like an options calculator can aid in the trading strategies process.

Frequently Asked Questions

What Is a Long Call Option?

The long Call Option is used when an investor feels bullish regarding the market and expects the price value of a particular stock or index to rise.

What Is a Short Call Option?

A Short Call Option is in contrast to a Long Call Option. A Short Call Option is used when an investor is bearish and has a sense that the stock or index price will decline.

What Is a Long-Put Option?

A Long-Put Option is preferred when an investor is bearish but anticipates the stock or index to rise.

What Is a Short Put Option?

A Short Put Option is preferred when the investor is bullish but anticipates the stock or index to fall.

What Is a Short Straddle?

A Short Straddle strategy can be used when the investor senses the stock is not very volatile and tries to make the option premium on two contracts.