Trading options isn’t just about buying a call when you’re bullish or a put when you’re bearish. Advanced traders use combinations of options to express specific views on direction, volatility, and time decay. Below are some of the most widely used practical strategies.
1. Vertical Spreads (Call and Put Spreads)
Instead of taking a naked directional bet, spreads allow traders to limit risk and reduce premium outlay.
- Bull Call Spread: Buy a call at a lower strike and sell another at a higher strike. Profits are capped, but so are losses.
- Bear Put Spread: Buy a put at a higher strike and sell another at a lower strike. It’s a controlled way to profit from downside moves.
2. Straddles and Strangles
Perfect for when you expect movement but don’t know the direction.
- Straddle: Buy a call and a put at the same strike and expiration. You gain if the stock makes a big move either way.
- Strangle: Similar to a straddle, but the call and put are out-of-the-money. Cheaper to enter, but requires a bigger move to profit.
3. Butterflies
This is a limited-risk, limited-reward strategy designed to profit if a stock stays near a target price.
- Example: A call butterfly involves buying one call at a lower strike, selling two calls at a middle strike, and buying one call at a higher strike. Maximum profit occurs if the stock expires right at the middle strike.
4. Iron Condors
This is essentially two spreads combined: a short out-of-the-money put spread and a short out-of-the-money call spread. Traders use it to generate income in low-volatility environments. The goal is for the underlying to stay within a range so all the options expire worthless and the premium is kept.
5. Ratio Spreads and Volatility Plays
Here, traders sell more options than they buy (for example, buying one call and selling two higher-strike calls). Ratio spreads can be used to take advantage of volatility skew and to reduce cost, but they carry significant risk if the underlying makes a strong move against you.
6. Combining with Hedging or Speculation
Experienced traders mix these strategies with portfolio management. Protective puts guard equity positions during downturns, while collars cap both upside and downside. Others use straddles or condors around major events (earnings, Fed announcements) to trade volatility rather than direction.
Bottom line
These strategies give traders precise tools to express nuanced views. But they demand discipline: understanding Greeks, keeping an eye on volatility, and actively managing positions. Used correctly, advanced spreads and combinations can turn the options market into more than just a leveraged bet—they become a structured way to trade risk.