- If you’re only buying puts and calls, you’re missing a lot of amazing trading opportunities in the options market…
- By picking and choosing the right exotic options strategy at the right time, you could potentially increase your profits exponentially…
- Options give traders a way to profit off almost ANY potential setup — keep reading to learn how…
I’m sure everyone reading this knows how to buy calls and puts. But when the setup calls for it, do you ever trade exotic options strategies?
From iron butterflies to jade lizards, there’s an entire universe of options trading strategies at your disposal. The names can be strange, but the ideas exist for a reason.
Let’s start with the basics and go over a few intermediate strategies beyond simple calls and puts. Who knows? One of these spreads might apply to a setup you’re tracking as we speak…
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.
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 — making them ideal choices for traders with smaller accounts.
Straddles are two directionally neutral options trading strategies you shouldn’t ignore.
Sometimes you can just feel that a big move is ready to happen in a chart, but you have no idea which direction it will go.
Did you know you can make money by predicting a big percent move without picking 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?
For a real-world example, 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, remember that you always have the choice of playing both sides.
Note: Avoid straddles on contracts with extremely high implied volatility (IV) heading into an earnings report. The post-earnings IV crush often destroys both sides of the trade.
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.
Note: 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 call is “covered” if the seller of the contract owns 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.
The 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 being said, if you aren’t occasionally considering left-field options strategies like these, you might as well be trading with blinders on. Expand your horizons and you may be surprised what the complex world of options has to offer.