Intermediate Spreads
Objective:
To become familiar with some intermediate/advanced level spreads. Knowing the construction process and risk profiles of these spreads can elevate your personal trading as well as your ability to read flow.
Why do we use spreads?
-DECREASE RISK
-DECREASE CAPITAL BURDEN
-PROFIT IN DIFFERENT VOLATILITY ENVIRONMENTS
LONG BUTTERFLY
We construct the long butterfly by buying one ITM call, selling two ATM, and buying one OTM call. The long butterfly consists of a vertical call debit spread and a vertical call credit spread.
-Market Bias: Neutral
-Volatility Environment: Low Volatility
-Risk and Reward: Total risk is the premium paid, the maximum reward is only the ITM call exercised
-Breakevens: Breakeven at lowest strike plus the premium paid and highest strike minus premium paid
-Advantages and disadvantages: Limits risk, possibility to need a lot of positions to get full exposure
LONG COLLAR
We construct the collar by first buying shares, and then selling at OTM call and buying an ATM put to protect our position. The collar is one of the most common spreads you’ll see institutions put on.
-Market Bias: Bullish
-Volatility Environment: Neutral
-Risk and Reward: Maximum risk is when the price is below the put strike, the maximum reward is when the price is above your call strike
-Breakevens: Price of shares minus the call premium plus the put premium
-Advantages and disadvantages: The collar allows you to protect your downside risks, but also limits full upside reward
LONG STRADDLE
We construct the long straddle by purchasing an ATM put and an ATM call. This can be helpful when you are unsure of direction but expect high volatility.
-Market Bias: Neutral
-Volatility Environment: High Volatility
-Risk and Reward: Maximum risk is the net premium paid, there is an unlimited reward
-Breakevens: Strike of put minus premium, the strike of call plus premium
-Advantages and disadvantages: The long straddle allows you to profit in volatile environments, but requires large moves of underlying
LONG STRANGLE
We construct the long strangle by purchasing an OTM put and an OTM call. This is similar to the straddle except we take wider strikes
-Market Bias: Neutral
-Volatility Environment: High Volatility
-Risk and Reward: Maximum risk is the net premium paid, there is an unlimited reward
-Breakevens: Strike of put minus premium, the strike of call plus premium
-Advantages and disadvantages: The long strangle allows you to profit in volatile environments in a less capital intensive way, but requires even larger moves of underlying then a straddle
IRON CONDOR
We construct the iron condor by buying one deep ITM call, buying one deep OTM call, selling one ITM call, and buying one ITM call. The iron condor reacts in a similar manner to the butterfly
-Market Bias: Neutral
-Volatility Environment: Low Volatility
-Risk and Reward: Maximum risk is the premium paid, maximum profit is when the price is between middle strikes
-Breakevens: Breakeven at lowest strike plus the premium paid and highest strike minus premium paid
-Advantages and disadvantages: Allows us to profit in range-bound markets with low volatility but requires careful strike selection
WE DON’T HAVE TO ONLY MAKE MONEY WITH SPREADS BY PAYING A TOTAL DEBIT, WE CAN EXECUTE THETA/VEGA STRATEGIES AS WELL
SHORT BUTTERFLY
We construct the short butterfly by selling one ITM call, buying two ATM calls, and selling one OTM call. The long butterfly consists of two vertical call credit spreads.
-Market Bias: Neutral
-Volatility Environment: High Volatility
-Risk and Reward: Total risk is the highest strike minus lowest strike minus premium, the maximum reward is price trading above or below your maximum strikes
-Breakevens: Breakeven at lowest strike plus the premium paid and highest strike minus premium paid
-Advantages and disadvantages: Can help profit in high volatility scenarios but requires lots of movement
SHORT STRANGLE
We construct the short straddle by selling an OTM put and an OTM call. This is similar to the straddle except we take wider strikes
-Market Bias: Neutral
-Volatility Environment: High Volatility entry Low Volatility exit
-Risk and Reward: Can have unlimited risk if you lack collateral and the price moves beyond strikes, reward is the maximum credit received
-Breakevens: Strike of put minus premium, the strike of call plus premium
-Advantages and disadvantages: The short strangle offers a high probability of profit if a flat market, but carries a lot of risk
SHORT STRADDLE
We construct the short straddle by selling an ATM put and an ATM call. This can be helpful when you are unsure of direction but expect high volatility.
-Market Bias: Neutral
-Volatility Environment: High Volatility entry Low Volatility exit
-Risk and Reward: Can have unlimited risk if you lack collateral and the price moves beyond strikes, reward is the maximum credit received
-Breakevens: Strike of put minus premium, the strike of call plus premium
-Advantages and disadvantages: The short straddle offers a high probability of profit if a flat market, but carries a lot of risk
SHORT CONDOR
We construct the short condor by buying one ITM call, buying one OTM call, selling one deep ITM call, selling one deep ITM call. The short condor reacts in a similar manner to the short butterfly
-Market Bias: Neutral
-Volatility Environment: High Volatility
-Risk and Reward: Maximum risk is when the price of the underlying is between strikes of two long calls, maximum profit is when the price is outside of all strikes
-Breakevens: Breakeven at lowest strike plus the premium paid and highest strike minus premium paid
-Advantages and disadvantages: Can help profit in high volatility scenarios but requires careful strike selection
EXAMPLES
============= NEUTRAL ==============
APPL SHORT STRADDLE (neutral) net credit
https://optionstrat.com/mcdHFGkQg5Hq
AAPL IRON BUTTERFLY (neutral) net credit
https://optionstrat.com/4tW2QrY4BlCZ
AAPL SHORT STRANGLE (neutral) net credit
https://optionstrat.com/NakRtYHvwTnx
AAPL IRON CONDOR (neutral) net credit
https://optionstrat.com/AefxHBKC0aHG
LONG PUT BUTTERFLY (neutral) net debit
https://optionstrat.com/IybIznjc6wke
LONG CALL BUTTERFLY (neutral) net debit
https://optionstrat.com/8OLg72mUSg86
=============== BEARISH ==============
AAPL BEAR CALL SPREAD (bearish) net credit
https://optionstrat.com/L2r6MxGT7380
AAPL BEAR PUT SPREAD (bearish) net debit
https://optionstrat.com/wRwBxoPvcljR
AAPL CALENDAR PUT SPREAD (bearish) net debit
https://optionstrat.com/Spsh762kCkiw
============== BULLISH ================
AAPL COVERED CALL (bullish) net credit
https://optionstrat.com/qWxawdQBnQOn
AAPL BULL CALL SPREAD (bullish) net debit
https://optionstrat.com/znAHQ9g2MZ0Q
AAPL PUT BROKEN WING (bullish) net credit
https://optionstrat.com/PNyrB9e7Vkzk
AAPL BULL PUT SPREAD (bullish) net credit
https://optionstrat.com/YuxdnFR25OmA
AAPL CALENDAR CALL SPREAD (bullish) net debit
https://optionstrat.com/v0ErYzlt4c17
AAPL COLLAR (bullish but risk adverse) net debit
https://optionstrat.com/m3YLHZYfpc0p
PROTECTIVE PUT (bullish but risk adverse) net debit
https://optionstrat.com/LQts7HmQNXPz
============== DIRECTIONAL ==============
AAPL STRADDLE (directional) net debit
https://optionstrat.com/jdlmYSUqks4c
AAPL STRANGLE (directional) net debit
https://optionstrat.com/1nOnPMGesFPu
AAPL INVERSE IRON BUTTERFLY (directional) net credit
https://optionstrat.com/8lItf9PZk4zF
AAPL INVERSE IRON CONDOR (directional) net credit
https://optionstrat.com/yOZhFq4S1ESr
AAPL SHORT CALL BUTTERFLY (directional) net credit
https://optionstrat.com/8WwvHG601Sst
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