COMPLEX OPTIONS STRATEGIES YOU MIGHT WANT TO TRY

 COMPLEX OPTIONS STRATEGIES YOU MIGHT WANT TO TRY

Apart from the most popular options strategies, there are also other strategies that are rather more complicated than them but provide more benefits and protections for investors.

The Long Straddle Strategy

The long straddle strategy is done when an investor buys a call and put option on the same underlying security. Both options will have the same strike price and expiration date. This strategy is more often used when he or she thinks that the price of the underlying asset will move largely out of its range, although he or she might still be uncertain regarding the direction it will take.

The long straddle strategy lets the investor have the opportunity to achieve unlimited gains, at least in theory. Meanwhile, the losses are limited only to the price of both option contracts combined.

The Long Strangle Strategy

When the investor uses the long strangle strategy, he or she uses an out-of-the-money call option and an out-of-the-money put option at the same time, on the same underlying asset, and with the same expiration date.

Usually, investors use the long strangle strategy when he or she thinks that the asset’s price will experience a very large movement, although the direction of the movement is still not clear. The losses will be capped to the prices (or the premium paid) for both of the options. Strangles are usually less expensive than straddles because the options are bought out of the money.

The Long Call Butterfly Spread

This strategy does not only use a combination of two different options contracts. Rather, the long call butterfly spread requires the use of both a bull spread strategy and a bear spread strategy, with three different strike prices. All of the options will have the same expiration date as well as underlying asset.

For instance, you can construct a long butterfly spread by buying an in-the-money call option at a lower strike price, while simultaneously selling two at-the-money call options, and buying an out-of-the-money call option.

The long call butterfly spread is usually used by an investor who thinks that the stock will not have moved much by expiration.

Iron Condor

The iron condor is yet another complex strategy. Using the iron condor strategy, the investor will hold a bull put spread and a bear call spread at the same time. This is constructed by selling 1 out-of-the-money put and buying 1 out-of-the-money put with a lower strike price (bull put spread), and simultaneously selling 1 out-of-the-money call and buying 1 out-of-the-money call of a higher strike price (bear call spread). All of the options in this strategy will have the same underlying security and expiration date.

This strategy generates profit from a net premium on the structure, created to benefit from a stock that experiences low volatility. Traders use this strategy because of its perceived earnings probability and the small amount of premium.

Iron Butterfly

Using the iron butterfly strategy, the investor will sell an at-the-money put and buy an out-of-the-money put, while also selling an at-the-money call and buying an out-of-the-money call. All options have the same expiration date and the same underlying security.

The iron butterfly uses both calls and puts and basically combines selling an at-the-money straddle and buying protective “wings.” The profits and the losses are capped within specific ranges, largely based on the strike price of the options.

Geraldine Robinson

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