If you think that basic options strategies may sometimes limit you, advanced options strategies offer a way to give you a more dynamic approach. Let’s look into complex options strategies, such as bull call spreads and short straddles, with a few considerations about some of the advanced option trading strategies that can come in handy on different occasions.
Key takeaways
- Some advanced options strategies are the bull call spread, ratio spreads, short straddles and strangles, and calendar spreads.
- A bull call spread is an advanced options strategy that lets you benefit from a moderate increase in the price of the underlying asset.
- If you use ratio spreads you can benefit from little movements if you are willing to accept an uncapped loss risk.
- Short straddles and short strangles are strategies to profit from low volatility or time decay.
- Calendar spreads are effective in capitalizing on time decay and volatility changes, using options with different expiration dates to optimize returns.
Comparing Different Advanced Option Trading Strategies
Before we look into each advanced options strategy in detail, let’s compare six key strategies: bull call spread, put ratio spread & call ratio spread, short straddle, short strangle, and calendar spread.
The table below will guide you through building each advanced options strategy, highlighting the potential gains and risks involved:
Whether you’re interested in complex options strategies like ratio spreads or prefer the flexibility of a calendar spread, this comparison offers insights into advanced options trading strategies. The rest of the article will explore each advanced options strategy further, helping you decide which fits your trading style best. For the sake of clarity, we will base all our strategy examples on the same underlying stock: Zoom (ZM).
The Bull Call Spread Strategy
Let’s begin with the bull call spread strategy. A bull call spread involves buying a call option at a lower strike price and selling another call at a higher strike price, both with the same expiration. This limits potential gains and losses, making it a popular choice among advanced options strategies.
The typical profit & loss (P&L) profile of a bull call spread is the one you see below:
Here is what you should understand from the chart above:
- Potential Gains: Capped at the difference between the strike prices minus the net premium paid.
- Risks: Limited to the net premium paid.
How does this advanced options strategy work in practice? Consider Zoom (ZM) trading at $69.97. If you’re slightly bullish, you might buy a $65 call and sell a $72 call expiring in one week, as found on our options screener.
To profit, ZM needs to stay above $69.80. Here, a $468 potential loss opposes a $220 capped gain.
Should you take this trade? Well, it depends: if you believe that the underlying stock will rise significantly within a week, this bull call spread may limit your gains. You may tell yourself that risking a $468 loss against a $220 gain is not worth it. At this point, the matter comes down to your own preference: is this trade so likely to be profitable that you can accept a low profit-to-loss ratio? If you do, then you can trade. If you don’t, you can adjust the filter on the screener to find a better trade.
The Ratio Spread Strategy
Next, let’s examine ratio spread strategies, which use different strike prices and ratios, such as buying one option and selling two or more. These advanced option trading strategies allow flexibility in uncertain markets.
For instance, the standard P&L profile of a put ratio spread looks like this:
Concerning this advanced options strategy, there are at least two important things that pop up from the chart above:
- Potential Gains: The profit changes based on the chosen strikes and ratios.
- Risks: The loss will be capped on one side (and can even be completely removed or turned into a small profit), but the other side has a potentially unlimited risk of losing money.
To give you a better idea, let’s stick to ZM, and let’s say you are slightly bearish. In this case, you could buy a $71 put and sell 2 $66 puts with a 2-week expiry:
Your max gain is $346 if ZM hits $66 at expiration. Loss is unlimited below $62.56, but capped to $154 above $69.46.
Should you take this trade? You may ask yourself: is this trade likely to be profitable? Is the potential $346 gain worth risking an unlimited loss below $62.56? It all depends on your market outlook and risk tolerance. Our screener lets you play around with the contract ratio for this advanced options strategy: do you want a 2:1 ratio? 3:2? 7:6? Keep tweaking the screener and see the P&L graph change in real time.
Note that this example only refers to the put ratio spread. You could also do a call ratio spread, which works in reverse.
The Short Straddle Strategy
The short straddle strategy involves selling at-the-money call and put options with the same expiration, betting on minimal market movement.
Let us show you the typical P&L profile of this advanced options strategy:
By now, you should have a clear idea of what we look for when we analyze a P&L chart. Specifically, here’s what we see for the short straddle:
- Potential Gains: Limited to the premiums received.
- Risks: Unlimited on both sides if the market moves significantly.
As an example, say it’s Thursday and you expect ZM to stay near $70 by tomorrow. In this case, you could sell a $70 put and call expiring on Friday, as shown below:
Here, your max gain is $192 if ZM ends at $70. Losses are unlimited beyond $71.92 or below $68.08.
Again, we ask: should you take this trade? Based on the P&L profile of our advanced options strategy, would you risk $192 for an unlimited potential loss just to bet that ZM will stay near $70 by tomorrow? At the end of the day, it all comes down to this simple question. If you’re comfortable taking such a risk, then go ahead. As always, adjust your screener settings until you find a more favorable trade.
The Short Strangle Strategy
The short strangle strategy, similar to the straddle, uses out-of-the-money options to widen the range of potential profit. If you take the same principle of the straddle but you change the strike prices to create a “range,” this is the P&L you’ll obtain:
Note the following aspects:
- Potential Gains: Capped to premiums received (but the profit area is typically larger than that of a short straddle).
- Risks: Also unlimited with significant price movements.
And again, let’s check out an example. Suppose you expect ZM to move in a rather large range over the next month. In this case, you could open a short strangle by selling a $63 put and a $77 call:
In this case, your max profit is $205 between $60.95 and $79.05. Losses are unlimited outside this range.
Should you trade this idea? If your intuition on ZM is correct (and that’s a big “if”), you’ll go for a short strangle if you want a higher profit probability compared to the short straddle (because the two breakeven prices are farther apart).
The Calendar Spread Strategy
Last but not least, the calendar spread strategy uses options with different expiration dates, capitalizing on time decay and volatility shifts. This is, perhaps, the harder strategy to picture in terms of P&L. For instance, this is what you’d obtain with a typical long call calendar spread:
As a very important note, consider that the P&L above for this advanced options strategy shows what would happen at the closest expiration date to the current one. As you know, options decay with time and become less valuable, but they also change in value when volatility changes. This means that the P&L of this advanced options strategy will evolve over time as we move closer to the expiration day, and finding the exact breakeven prices (where the profit is zero) will be tricky.
In any case, this is what you should note about the strategy’s P&L:
- Potential Gains: Limited at the strike price of the contracts in your strategy (you can easily spot a peak at that level) Key to maximizing returns.
- Risks: Capped on both sides of the trade.
As you can guess, we’ll end with an example for this strategy as well. Remember, ZM is trading at $69.97, and let’s say you don’t expect much movement in the stock. You could open a long call calendar spread as follows:
The trade might yield $90 in profit. Your maximum loss is under $150 on one side, slightly over $100 on the other.
If you’re wondering whether to take this trade, just keep in mind that the long calendar spread can easily be turned into an income generation position (assuming your intuition on ZM is correct). Specifically, you could let the short-term leg of the strategy expire (i.e., the call you are selling) and sell another call option to earn additional income. You can play around with the expiration dates and strikes based on your specific expectations on ZM.
