Option strategies are great investment tools. However, identifying which strategy to use and when to implement it is essential to maximizing potential and identifying risk. Thankfully, there are a number of different possibilities traders can explore to increase their chance of success. In this second part of the option strategies series, we’re going to cover several new strategies that traders can execute.
Investors will want to employ this strategy if they believe the market will make a large movement in either direction. To execute, a call and a put are purchased at the same strike price with the same underlying asset and expiration date. Risk, in this strategy, is limited, to exactly how much was paid for the premium. The upfront cost can be high, but it can give an investor potential in either market direction.
|Long 1 CLX 45 Call @ 1.80|
|Long 1 CLX 45 Put @ 1.80|
Max Profit Potential: Unlimited beyond the premium paid for the strategy.
1.80 + 1.80 = 3.60
Upside: 45.00 + 3.60 = Above 48.60 minus commission and fees.
Downside: 45.00 – 3.60 = Below 41.40 minus commission and fees.
Risk: Total premium paid for the options (1.80 + 1.80 * $1,000) $3,600 plus commission and fees.
The iron condor is used by investors when they believe the underlying will experience low volatility. Maximum profit potential and risk are limited, but the potential losses can still be greater than the potential rewards. Executing the iron condor strategy is similar to implementing both a put spread and a call spread at the same time. Premium is collected by selling call and put spreads, which establish a target range in which you want the market to stay within.
|Long CLZ 55 Call @ 0.20||Short 1 CLZ 50 Call @ 1.00|
|Long 1 CLZ 35 Put @ 0.20||Short 1 CLZ 40 Put @ 1.00|
Max Profit Potential: Premium collected on the whole strategy.
Calls: 1.00 – 0.20 = 0.80
Puts: 1.00 – 0.20 = 0.80
0.80 + 0.80 = 1.60
1.60 * $1,000 = $1,600
Risk: The distance between the short call spread or the short put spread, minus the premium collected for the strategy.
55 – 50 = 5 – 1.60 = 3.40 or $3,400 plus commission and fees.
40 – 35 = 5 – 1.60 = 3.40 or $3,400 plus commission and fees.
A butterfly spread earns its name by combining a bull spread with a bear spread. The upfront cost is low in comparison to other options strategies because of the two sales (which create the body of the butterfly), which make up for a majority of the cost for purchasing two calls (the butterfly’s wings). This options trading strategy carries limited risk and reward, and it’s best used when the investor expects some market movement, without continuing a major trend. However, you do want the markets to trend in a specified direction to slowly climb or fall to the middle of the butterfly. As in this example of a bullish strategy.
|Long 1 CLZ 55 Call @ 0.20|
|Short 2 CLZ 50 Calls @ 1.00|
|Long 1 CLZ 45 Call @ 2.50|
Max Profit Potential: The distance between the long call and the short calls, minus the premium paid for the spread.
50.00 – 45.00 = 5.00
5.00 – 0.70 = 4.30
4.30 x $1,000 = $4,300 max profit potential minus commission and fees.
Risk: Total premium paid for the spread: $700 plus commission and fees.
Not every options strategy works best on its own. More often than not, it is more beneficial to use strategies together to reduce costs, limit risk and maximize returns. One of the largest mistakes that new options traders make is not implementing a strategy behind their trades. Conducting thorough research, utilizing trading tools and targeting strategies towards the individual’s market outlook will provide a good foundation for success. However, working with a professional who has years of experience can be beneficial to finding the right strategy that fits your financial situation.