All the strategies up to this point have required a combination of two different positions or contracts.
With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets.
Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. In this strategy, the investor will simultaneously purchase put options as a specific strike price and sell the same number of puts at a lower strike price. This strategy is often used by investors after a long position in a stock has experienced substantial gains. An investor will often use this strategy when he or she believes the price of the underlying asset will move sigificantly, but is unsure of which direction the move will take.
The put strike price will typically be below the strike price of the call option, and both options will be out of the money.
In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices.
In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies.
Your volume of assets owned should be equivalent to the number of assets underlying the call option.
This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts.
An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price.
The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly.
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