6.8 Option trading Strategies- Spreads and Combinations

Option trading strategies often involve the use of spreads and combinations to create specific risk-reward profiles and take advantage of different market conditions. Here are some common option trading strategies using spreads and combinations:

1. Vertical Spreads:
   • Bull Call Spread: Buying a call option at a lower strike price and simultaneously selling a call option at a higher strike price. This strategy profits from a moderate upward move in the underlying asset’s price.
   • Bear Put Spread: Buying a put option at a higher strike price and simultaneously selling a put option at a lower strike price. This strategy profits from a moderate downward move in the underlying asset’s price.
2. Horizontal Spreads:
   • Calendar Spread: Selling a near-term option and simultaneously buying a longer-term option with the same strike price. This strategy aims to profit from time decay while maintaining a neutral outlook on the underlying asset’s price.
3. Diagonal Spreads:
   • Diagonal Call Spread: Buying a call option at a lower strike price and expiration date and simultaneously selling a call option at a higher strike price and later expiration date. This strategy allows for potential profits from both time decay and a moderate upward move in the underlying asset’s price.
   • Diagonal Put Spread: Buying a put option at a higher strike price and expiration date and simultaneously selling a put option at a lower strike price and later expiration date. This strategy allows for potential profits from both time decay and a moderate downward move in the underlying asset’s price.
4. Butterfly Spreads:
   • Long Butterfly Spread: Combining a long call option with a higher strike price, a short call option at the middle strike price, and another long call option at a lower strike price. This strategy profits from a range-bound market with limited risk.
   • Short Butterfly Spread: The reverse of a long butterfly spread. Combining a short call option with a higher strike price, a long call option at the middle strike price, and another short call option at a lower strike price. This strategy profits from a range-bound market with limited risk.
5. Straddle and Strangle:
   • Long Straddle: Simultaneously buying a call option and a put option with the same strike price and expiration date. This strategy aims to profit from a significant move in the underlying asset’s price, regardless of the direction.
   • Long Strangle: Similar to a long straddle, but the call and put options have different strike prices. This strategy profits from a significant move in the underlying asset’s price, with a wider profit range compared to a straddle.