Advanced options trading strategies can be complex and require a thorough understanding of options trading as a foundation to build on. However, they can be potentially rewarding, when used correctly. Traders of a certain skill and experience level will also find it challenging and exciting to use these strategies when options trading online once they get the hang of it.

In this article, we look at 4 advanced options trading strategies – the straddle, the strangle, the butterfly, and the iron condor.

The straddle

The straddle involves buying both a call option and a put option on the same underlying asset. Both options will have the same strike price and expiry date. The idea behind the straddle is to potentially profit from significant price movement in either direction, so it is a viable strategy when a trader does not know how the market will move – only that it will move.

An example of the straddle

Say you are a trader, and you believe the price of silver will experience a significant price movement shortly, but you are not sure in which direction it will go. You can purchase a straddle – a call option and a put option – with the same strike price. If silver is currently trading at $23 per ounce, you may buy a call option and a put option at the strike price of $23 with an expiry date of one month.

If the price of silver per ounce goes up, the call option will increase in value, while the put option will decrease in value. If the price of silver per ounce goes down, the reverse will happen. Either way, the increase of value in one option will offset the decrease of value in the other, and this will result in a profit for the straddle.

A word of caution

It is essential to remember that the profit potential of a straddle is unlimited, as there is no limit to how high or low the price of silver can go. However, this means that the risk is also technically unlimited, as the options may expire worthless if the price of silver does not move at all.

The strangle

The strangle involves buying a call option and a put option with different strike prices. Both options will have different strike prices but the same expiry date. The idea behind the strangle is to potentially profit from significant price movement in either direction, with a lower upfront cost than the straddle.

An example of the strangle

Say you are a trader, and you believe the price of a stock will experience a significant price movement shortly, but you are not sure in which direction it will go. You can purchase a strangle – a call option at a higher strike price and a put option at a lower strike price – with the same expiry date. If the price of the stock is currently trading at $110, you may buy a call option with a strike price of $115 and a put option with a strike price of $105, both expiring in one month.

Should the price of the stock go up, the call option will increase in value, while the put option will decrease in value. Should the price of the stock go down, the reverse will happen. Either way, the increase of value in one option will offset the decrease of value in the other, resulting in a profit for the strangle, just like it is with the straddle strategy.

Difference between the strangle and the straddle

The difference between the strangle and the straddle is that there is a lower upfront cost for the strangle. This is because the strike prices of the options are further apart for the strangle. This means the stock price will have to move more significantly to make a profit. However, the profit will also be smaller than that of a straddle.

A word of caution

The risk of a strangle is limited, unlike the risk of a straddle, while the potential for profit is technically unlimited, as there is no limit to how high or low the stock price can go. However, you may still incur losses for the premiums paid for the options if the price of the stock does not end up moving much.

The butterfly

The butterfly involves buying or selling multiple options with different strike prices. The reason it is called the butterfly is the pattern the strike prices make on a price chart. The idea behind the butterfly is the profit from a market that is expected to remain relatively stable, with no significant price movements in either direction.

An example of the butterfly

Say you are a trader, and you believe a stock will remain relatively stable in the short term. You can buy a butterfly by purchasing one call option with a lower strike price, one call option with a higher strike price, and selling two options with a strike price in between the lower and higher strikes. All the options should have the same expiry date.

For example, a stock is trading at $100. You may buy a call option with the strike price of $90, sell two call options with the strike price of $110, and buy a second call option with a strike price of $110. If the stock price remains relatively stable and stays close to the stock price of $100, you can allow the two options you sold to expire worthless, while deriving potential profit from the call options.

A word of caution

The profit potential of the butterfly is limited, as it depends on the stability of the stock price and there will be no large movements in either direction. The cost of the premiums to purchase the options contracts may also eat into your potential profits.

The iron condor

The iron condor involves selling both a call and put option with a higher and lower strike price respectively, while simultaneously buying a call and a put option at a further distance from the current stock price. The goal is to profit from a market that is expected to move but not significantly – and prices to remain within a certain range.

An example of the iron condor

Say, you are a trader, and you believe a stock will fluctuate in price, but only slightly. You could sell an iron condor by selling a call option with a higher strike price and a put option with a lower strike price. Then you will buy a call option with an even higher strike price and buy a put option with an even lower strike price. All the options contracts will have the same expiry date.

If the stock is currently sitting at $100, you want to sell a call option with a strike price of $110 and sell a put option with a strike price of $90. For the other two options, you want to buy a call option with a strike price of $115 and sell a put option with a strike price of $85. All these contracts will expire in one month.

Should the stock price remain within the range of $90 and $110, all four options will expire worthless, and you will keep the premiums you collected from selling these options. This can result in a profit for you as an option seller.

A word of caution

If the price of the stock moves significantly out of the range, you will incur a loss. As this strategy is bound by a range, you will also have limited profit potential. However, at the same time, you have limited risk with the iron condor – the most you can lose is the difference between the strike prices of the options, minus the premiums you collected for selling the contracts.

Summary

These four advanced options trading strategies can be used to potentially help you make a profit regardless of how the markets may move. However, you should be aware that options trading is complex on its own, and applying these strategies will take research and skill. There is always the possibility of incurring a loss, so you should never trade more than you can afford to lose. You should also have a sound grasp of technical analysis to make more informed forecasts of market movements.