What is the ‘best option strategy’?

Of course this could be viewed as a silly question as the ‘best option strategy’ is purely a matter of opinion as one trader will no doubt have a favorite option trading strategy over another.

However, one not so silly answer to that question could have to do with current market conditions as well as where the option trader believes the asset being traded will be moving over the next couple days to couple weeks of time.

For example, if a trader believed that Stock ABC was going to be range bound over the next four weeks of time and the volatility levels on ABC were a bit higher than average, the best option strategy might be an iron condor spread – or a butterfly spread.

Or, if the same trader believed that ABC would be turning bearish and moving slightly down and the vols were lower than average – the best option strategy might be a calendar spread to take advantage of the rising vols if in fact the underlying did move down.

If the same trader was convinced beyond a shadow of a doubt the the stock being used was about to blast off into the stratosphere – the option option strategy might be to sell a put credit spread – or a bull put spread.

Finally – if the trader was sure that the market was going to crash like it had  never crashed before and the world would come to a fiery end before morning – the best option strategy would probably be for him to try and withdraw all his money from his option brokerage account and then head on down to the local Home Town Buffet and pig out one last time.

photo credit: Port of San Diego

Best Option Strategy is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

An option vertical spread is the sale of one option and the purchase of another nearby option together as one ’spread’.

It is termed ‘vertical spread’ because if you were to look at an option chain that listed the all the available options – as well as the option sold and the option bought – these are usually listed vertically – one on top of the other. When you visualize the the sold option and the purchased option in that vertically listed option chain – visually they appear together as a ‘vertical spread’.

Both option debit spreads and credit spreads could be referred to as a vertical spread.

A debit spread is a spread that withdraws a debit from the traders account – while a credit spread is one that delivers a credit into the account.

Following are a couple provided examples of both a debit spread and a credit spread on the ETF DIA…

Debit Spread (vertical spread)
Buy 3 100 Calls
Sell 3 101 Calls

This is a bullish trade – a trader making this trade either is confident or is hoping that DIA will be heading higher.

Credit Spread (also a vertical spread)
Sell 3 105 Calls
Buy 3 106 Calls

This is a bearish trade (or neutral trade). A trader making this trade either believes or hopes that DIA will remain below the 105 price point up until expiration day.

photo credit: Patrick Hoesly

Vertical Spread is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

The first time someone tried to explain the concept of option selling to me I had a near brain meltdown.

Okay, maybe that’s a little over dramatic – but it was something that was a bit difficult to wrap my head around – and after coming to understand the concept and then trying to explain it to others – I see the same cloudy confusion in most of them as I had when it was first explained to me.

It probably has to do with the fact that when you are selling options – you are selling something that you don’t own. And because I couldn’t relate that to anything else I had hear about or experienced it didn’t make much sense.

When one is trading options it is true they are allowed to sell something that they don’t own – however – they do need to prove that they have the capability to purchase it. They need to prove they have the means – the assets available – the cash in the bank so to speak.

Basically your broker is doing you a favor to sell an option that you don’t already own – however your broker isn’t stupid either. They are going to want to make sure if needed – you DO have the assets to purchase. There is no free ride.

Ways to prove this could be cash in your account – stock in your account – or simply through buying a corresponding call or put nearby ‘covering’ your sold – naked – short position.

A reason traders like to sell options rather than buy them is due to the fact that options are continually using value due to theta decay. Rather than purchase a decaying option – it is preferred to sell it to someone else.

Ways that a trader can benefit from option selling while still limiting their risk is through the use of option spread strategies like the iron condor, the butterfly spread, the double diagonal, the calendar spread, and the credit spread / vertical spreads.

photo credit: TheTruthAbout…

Option Selling is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

The Iron Condor option spread trading strategy is a great way for investors to generate a decent monthly cash flow without having to site behind the computer all way watching every up and down tick of the market.

The iron condor is a theta positive option selling trade. What the iron condor trader is hoping to accomplish when placing of these spreads is to take advantage of the probabilities which say the stock which they are trading ’should’ stay within a certain range during the time left before the options expire.

This option spread strategies is constructed from two credit spreads – one made up of calls placed out of the money above where the stock is presently residing – and the other made up of puts placed out of the money below where the stock is currently trading at.

If all goes as planned – over time these two vertical spreads will lose value as expiration day approaches – until finally they reach a buy back level that is enough for the trader to realize his or her profit target – or in some cases iron condor traders might allow both – or one or the other credit spreads – to expire worthless on expiration day.

Though the scenario outlined above is ideal – and is what actually happens a majority of the time – there will be times when the underlying being used will make a abnormal move threatening one of the options sold short. And because this trade is considered to be a high risk to reward trade – the iron condor strategy trader needs to be watchful of the trade while it is on and manage it properly if such a move takes place.

photo credit: law_keven

Iron Condor is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

Two of the most talked about and popular option spread trading methods are the iron condor spread and the credit spread – also sometimes titled the vertical spread.

Actually, the iron condor is the credit spread – just times two. The iron condor spread strategy is composed of two credit spreads – one on each side of the spread.

To construct an iron condor a trader would place an out of the money call credit spread on the underlying asset – while at the same time placing an out of the money put credit spread on that same asset. This could be done in stages – leg in to the position – or at the same time as one four legged iron condor spread trade.

These option spread strategies generate income as the bought and sold options in both credit spreads lose value. As time progresses towards expiration day – the difference in value between the sold and bought option in each credit spread becomes smaller and smaller – until eventually the trader who placed the spread can buy the position back for significantly less than what it was originally sold for.

An illustration of these two credit spreads is -

Put Credit Spread…
Buy 1 iwm 50 put
Sell 1 iwm 55 put

Call Credit Spread…
Sell 1 iwm 70 Call
Buy 1 iwm 75 Call

Or – the entire iron condor together as one trade (exactly the same as above) -

Iron Condor Spread
Buy 1 iwm 50 put
Sell 1 iwm 55 put
Sell 1 iwm 70 Call
Buy 1 iwm 75 Call

photo credit: Tony the Misfit

Option Spread Trading is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

While many iron condor traders perhaps don’t realize this – when they employ a popular and basic iron condor adjustment strategy of ‘rolling’ they are in fact placing a ‘condor spread’ – which is a spread all unto itself (and different from an ‘iron condor spread’)

A condor spread is a four legged option spread trading strategy which looks much like an iron condor on a trading platform graph – however it is definitely different – as illustrated below.

An iron condor is an option selling trade created out of two credit spreads.

A condor spread on the other hand is a spread created from a debit spread – and a credit spread – and unlike an iron condor which contains both calls and put options – the condor spread is created from either ONLY calls or ONLY puts.

An example of a condor spread…

Purchase 5 103 SPY Put options
Sell out 5 105 SPY Put options
Sell out 5 108 SPY Put options
Purchase 5  110 SPY Put options

When an iron condor trader rolls out a threatened credit spread on an iron condor – they might do this in two separate trades – however – they could do the exact same adjustment simply through placing a condor on that threatened side.

photo credit: bunnygoth

Condor Spread is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

A Condor is a combination of a debit spread and a credit spread – which are all either calls or puts – all at different strikes.

The Iron Condor is the sale of two credit spreads – a bull put spread and a bear call spread – combined together as one option spread trade – with space in between the two separate spreads.

For example, an iron condor on SPX might be constructed as follows:

SELL 1 1180 Call
BUY 1 1190 Call
(this is a 1180/1190 SPX Bear Call Spread)

SELL 1 960 PUT
BUY 1 950 PUT
(this is a 960/950 SPX Bull Put Spread)

In the above SPX Iron Condor example, there is a ‘price range’ or ’space’ between the two separate credit spreads. This range equals 220 SPX points. In most cases, a trader who makes this trade does so with the hope of belief that the SPX will stay within this 220 point range until expiration – without reaching either the 960 put or the 1180 call.

On the other hand, a Butterfly Spread (in this example we are referring to an Iron Butterfly Spread) is also the sale of a bull put spread and the sale of a bear call spread – however the short options of both of these individual spreads are sold at the same strike.

Condor Spread is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

When I first started trading option spreads, the butterfly spread always seemed to be a mysterious, complicated, and difficult to understand option trading strategy. And – rather than take the time to sit down and really try to understand what this option strategy did, how it was constructed, and how it worked, I just went off and spent my time trading what seemed to be easier to understand strategies like option credit spreads, debit spreads, and iron condors.

However, after a bit of time trading these other strategies – I found myself coming back to revisit the butterfly spread – and the second time around – I found a simpler way to understand exactly what the option butterfly spread is, how it’s constructed, and how it works:

A call butterfly is simply a call debit spread and a call credit spread ‘glued’ together at the short strikes. Traditionally – the short strikes are sold ATM (at the money) either at or near the strike with the most time premium.

A put butterfly is exactly the same – only constructed with puts. It’s a put debit spread and a put credit spread ‘glued’ together at the short strikes – which most often are placed ATM.

An Iron Butterfly is basically an Iron Condor – a spread made up of a bull put spread and a bear call spread – with the short strikes ‘glued’ together ATM

Another way to think of the Iron Butterfly is as a straddle spread: it’s the sale of a Straddle – usually ATM – with wings bought for protection.

Straddle Spread is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.

These strategies include -

A long butterfly, call or put butterfly – where all the options which construct the position are all either calls or puts.

The Iron Butterfly – where the options are a combination of both calls and puts.

The Broken Wing Butterfly – which traditionally is constructed from either all calls or put options – but could also be constructed as an Iron Butterfly trade using a combination of calls or puts. What makes the Broken Wing Butterfly unique is that while the distance between the bought and sold legs for the long and iron butterfly are usually equal – in the case of the broken wing butterfly they are not equal.

Traditionally, the butterfly spread is considered more of a market neutral trade, where the position is place ATM (at the money) with the thought being that the underlying being used will stay within a trading range long enough for the butterfly position to produce profits.

In addition, butterfly trades can be used for speculative purposes as well. An example would be an OTM (out of the money) butterfly placed at or near a stock price – or option strike price – which the trader believes the underlying will move to or be located at – either at or near expiration. 

Butterfly Strategies is a post from the Iron Condor Blog where you can get Iron Condor Spread Trading News, Information, and Strategies.