Besides the purchase or sale of a single Option, can be achieved by means of the Combination different options multiple strategies which can be used to speculate on a wide variety of market scenarios. For example, you can bet that a market will not fall below a defined price until a certain point in time, or that the market will be in a certain price range. The risk of each option strategy can also be adjusted to the individual risk tolerance.
On this page you will find a short Summary of the most important option strategies, as well as information about the Distinguishing features and characteristics of the individual strategies. In addition, an article with further information is available for each option strategy.
Distinguishing features of the individual option strategies
Different option strategies differ mainly in their risk profile (defined or undefined risk), as well as the way they react to changes in the Greeks (Delta, Gamma, Theta, Vega).
Risk limitation or undefined risk?
Knowing and controlling risk, or what loss a trade can suffer in the worst case, plays an important role, especially for options traders. Some strategies have a undefined maximum loss and should only be traded if the necessary knowledge and experience are available. In contrast, strategies based on the purchase of options or which do not include unhedged short options (naked legs) offer a risk profile with a clear defined maximum loss.
One distinguishes strategies in particular according to the criteria mentioned. Purchased options suffer a Time value losswhile sold options profit from this.
Option strategies with undefined maximum loss include:
- Short Calls
- Short Puts
- Short Strangles
- Short Straddles
- Ratio Spreads
Option strategies with defined maximum loss include:
- Long calls
- Long Puts
- Long Straddles
- Long Strangles
- Iron Condors
- All vertical spreads
- Calendar Spreads
- Butterflies
The Greeks
A basic understanding of the different Option key figures, the so-called Greeks, is especially helpful for options traders when using options strategies with multiple legs.
So you should know how the deployed strategy responds to change
- of the price of the underlying (Delta)
- the time (Theta)
- the implied volatility (Vega)
responds.
One distinguishes strategies in particular according to the criteria mentioned. Purchased options suffer a Time value losswhile sold options profit from this.
Sold options or option writer strategies mostly benefit from a declining implied volatilitywhile purchased options benefit from an increase in IV.
If a strategy consists of multiple legs (multiple options), the Greeks are added together to calculate how the strategy responds to changes in each option metric.
The four basic strategies
Through the purchase or sale of a Call- or one Put option the four basic strategies are created. All other option strategies are composed of the basic strategies, whereby the individual options differ in their strikes and/or the remaining term.
Long Call
The Purchase of a call is referred to as a long call. At the opening of the trade, the option premium is paid (debit) and the option suffers a time value loss until the expiration date, i.e. the time value falls to zero until the expiration date. The long call benefits from an increase in the underlying, as well as from an increase in implied volatility.
Short Call
The Sale of a call is called a short call. When the trade is opened, a receipt (credit) is created. The loss of time value has a positive effect on the sold option, i.e. the time value falls to zero by the expiration date. The short call profits from falling prices of the underlying, as well as from a declining implied volatility.
Long Put
The Purchase of a put is referred to as a long put. At the opening of the trade, the option premium is paid (debit) and the option suffers a time value loss until the expiration date, i.e. the time value falls to zero until the expiration date. The long put profits from falling prices of the underlying, as well as from an increase in implied volatility.
Short Put
The Sale of a put is called a short put. When the trade is opened, a receipt (credit) is created. The loss of time value has a positive effect on the sold option, i.e. the time value falls to zero by the expiration date. The short put benefits from rising prices of the underlying, as well as from a declining implied volatility.
Straddles and Strangles
Straddles and Strangles are among the most popular combination strategies. The straddle consists of two At The Money options that are bought or sold at the money. A strangle consists of two Out Of The Money options and can also be bought or sold as a long strangle or a short strangle.
With the purchase of a straddle or strangle can be strong movement of the underlying (regardless of the direction) and/or a volatility increase. With a short strangle or short straddle, on the other hand, you have the possibility of a Sideways market and/or a decline in implied volatility.
Vertical spreads
Vertical spreads consist of two calls or two puts with the same maturity, but different base prices. Vertical spreads can be divided into credit spreads and debit spreads.
Credit spreads
A credit spread is a short call or a short put where an additional option is purchased to hedge the short option. Thus, the unlimited risk of options sold limited are used to make the call. A short call thus becomes a call credit spread, also known as a bear call spread. A short put becomes a put credit spread, also known as a bull put spread.
Debit Spreads
A debit spread consists of a long call or a long put, whereby to the Cost reduction a few points above the call or below the put, another option is sold. The lower costs mean on the one hand a smaller possible maximum loss, but on the other hand also limit the unlimited profit potential of a long call or a long put.
The bullish variant is traded with call options and is called Call Debit Spread, or Bull Call Spread. The bearish variant is traded with put options and is called Put Debit Spread, or Bear Put Spread.
Other popular option strategies
Vertical spreads, straddles and strangles each consist of two options and are therefore relatively easy to understand and trade, which is why the aforementioned strategies are among the most commonly used options strategies.
But besides that there are many other strategieswhich sometimes consist of four or even more legs and are therefore somewhat more complex. These include, for example.
- Calendar Spreads
- Butterflies
- Iron Condors
- Ratio Spreads
On our website you will find an article with further information on each option strategy.