Have you ever wondered if any of the advanced strategies professional options traders use could work within your game plan?
Once you understand the basics of trading calls and puts, there’s a whole universe of intermediate and advanced strategies waiting for you.
From iron condors to jade lizards … they may sound like metal bands, when in fact, they’re the strange names traders have given actionable options strategies.
Today, we’ll explore a handful of these exotic options strategies. Then, I’ll explain exactly how they work and when you might use them.
DISCLAIMER: Personally, I prefer to stick with simple calls and puts. I rarely trade these left-field strategies and I never alert them to Evolvers.
But that doesn’t mean one of these strategies won’t be perfect for your individual game plan. Remember, just like every trader is different … every strategy must be tailor-made to your personality, risk tolerance, and account size.
Each strategy has its own unique pros and cons. And understanding how to combine different contracts could help you maximize your trading within a variety of setups.
Whether you’re a seasoned options trader or just getting started, it’s worth considering some of these strategies to expand your horizons and potentially improve your performance.
With that in mind, keep reading and I’ll show you four exotic options trading strategies I want every Evolver to be aware of…
To open a credit spread, you buy and sell contracts of the same type on the same stock. The strike you sell should be closer to the money than the strike you buy.
Why would traders do this? Because a credit spread puts money in your account as soon as you open it.
Then you’re hoping the bid/ask spread between your two strikes narrows. And if so, you keep the credited premium — plus any additional profit.
Trading credit spreads is a lower risk/lower reward strategy. It’s not gonna make you rich unless you have a lot of capital to invest, but it can be a great supplement to a more aggressive aspect of your strategy.
Hold this thought. I think you’ll understand credit spreads better once we go over debit spreads…
Debit spreads are the opposite of credit spreads.
You still buy and sell contracts of the same type on the same stock…
But this time, the strike you buy should be closer to the money than the strike you sell.
Another key difference: where you’re paid to open a credit spread, it costs you money to open a debit spread. But there’s more potential upside in trading debit spreads — higher risk/higher reward.
Debit spreads are more of an option buyer’s strategy, while credit spreads tend to appeal to option sellers.
Bull call spreads (and bear put spreads) are the most popular forms of debit spreads.
These spread plays work best if you think a stock is going up with a very clear price target in mind.
In these sorts of setups, all you need to do is buy a strike in your target range and sell the strike nearest to your high-end price target.
Debit spreads are cheaper trades to enter than if you just buy naked calls or puts — an interesting possibility for traders with small accounts.
Straddles and Strangles
Straddling is a directionally neutral options trading strategy that can be incredibly useful in a specific type of setup.
Tell me if this has ever happened to you…
You feel that a big move is ready to happen in a stock, but you have no idea which direction it will go.
Did you know you can potentially make money by predicting a big % move … WITHOUT being forced to pick a direction?!
By buying a put and a call at the same strike price (and the same expiration date), you’ll be opening a straddle.
This strategy will profit off of a big move in either direction. Pretty cool, right?
The catch? Your straddle will cost almost twice as much to purchase as individual calls or puts, but you’re paying for a higher probability of success.
Plus, the position will lose value if the share price doesn’t move considerably prior to your expiration date.
But there are certain times when straddling can be opportune. For a real-world use case, think about earnings season…
Straddles can be especially useful during earnings season because we never know what weird specifics could ruin (or save) an earnings report…
Instead of blindly betting one way or the other, making a 50/50 bet … remember that you always have the choice of playing both sides via a straddle.
Additionally, there’s a variant of straddles known as strangles, where you buy a put and a call at different strikes on the same expiration date. Strangles can be useful if you have a specific range you think the stock could trade down (or up) to, beyond the current share price.
Covered Calls and Puts
ATTENTION: If you own any long-term stock positions, pay attention to this one. Selling covered contracts can be a low-risk, consistently profitable strategy for anyone who owns optionable stocks.
DISCLAIMER: For this example, I’ll refer to covered calls. But remember that you can apply this same strategy to put contracts in the same way.
Most traders don’t sell naked options because they carry outsized risk.
If you sell a naked call on the wrong stock on the wrong week, the losses could be ENORMOUS.
But if you own more than 100 shares of a stock long term, there’s a different strategy you should consider — selling covered calls.
A contract is “covered” if the seller of the contract owns at least 100 shares of the underlying stock.
This means that if the contract gets assigned, you won’t get margin called — you’ll just have to fork over your shares instead.
You don’t want this outcome either. But trust me, getting your shares assigned is much better than getting margin called.
Bottom line: Covered calls allow you to sell options without risking your entire account.
As you can see, option strategies are determined by how you combine different contracts. If you can mix up the perfectly timed cocktail of calls and puts, you can help optimize your strategy.
WARNING: Don’t jump in and trade an exotic spread without doing your homework. If one of these strategies appeals to you … paper trade it before you risk any real money!
That said, if you aren’t, at least, aware of left-field options strategies like these, you might as well be trading with blinders on.
Expand your horizons and you may be surprised by what the complex world of options has to offer.