How to Trade Options:
Non-Directional Strategies
MICHAEL BURKE
Important Information and Disclosures
This course is provided by TradeStation, a U.S.-based multi-asset brokerage company that seeks to
serve institutional and active traders. Please be advised that active trading is generally not appropriate
for someone of limited resources, limited investment or trading experience, or low risk tolerance, or who
is not willing to risk at least $50,000 of capital.
Neither TradeStation nor its affiliates provide or suggest any specific analysis, options strategy, or other
trading strategies. TradeStation offers brokerage services along with unique tools to help you analyze
and test your own trading ideas and strategies. While we believe this is very valuable information, we
caution you that simulated past performance of a trading strategy is no guarantee of its future
performance or success. We also do not recommend or solicit the purchase or sale of any particular
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as an example – not as a recommendation.
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should be understood in the foregoing context.
Options Risk Disclosure
Options trading carries a high degree of risk. Purchasers and sellers of options should familiarize
themselves with options trading theory and pricing, and all associated risk factors. Please read
Characteristics and Risks of Standardized Options, available from the Options Clearing Corporation
website (http://www.optionsclearing.com/publications/risks/riskstoc.pdf) or by writing TradeStation, 8050
SW 10 Street, Suite 2000, Plantation, FL 33324.
Trading options can be much more complex and challenging than trading stocks, and is not suitable for
all traders. Traders should always consult a tax advisor about any potential tax consequences of their
trading.
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TRADESTATION ASSUMES NO RESPONSIBILITY FOR ERRORS OR OMISSIONS, OR FOR ANY
DAMAGES RESULTING FROM THE USE OF THE INFORMATION CONTAINED HEREIN.
Contents
Important Information and Disclosures ..................................................................................................... 2
Options Risk Disclosure ........................................................................................................................... 2
Options Strategies ................................................................................................................................... 4
Market Outlook ..................................................................................................................................... 4
Reading a Position Graph ........................................................................................................................ 5
General Options Multi-leg Strategy Theory .............................................................................................. 6
Maximum Loss ..................................................................................................................................... 6
Maximum Gain ..................................................................................................................................... 6
Long (Buy) Straddle ................................................................................................................................. 7
Long (Buy) Strangle ................................................................................................................................. 8
Long (Buy) Butterfly ................................................................................................................................. 9
Long (Buy) Condor................................................................................................................................. 10
Long Calendar Spread ........................................................................................................................... 11
Additional Educational Resources.......................................................................................................... 12
Options Strategies
Options trading offers the ability to take advantage of non-directional market opportunities in both quiet
low volatility conditions and potentially active high volatility situations. With dozens of possible option
strategies to employ, choosing the right strategy for the right situation comes down to knowledge and
experience. Options trading requires effort and a greater understanding of the mechanics and pricing of
options strategies in order to make informed options trading decisions.
In this course we will look at both quiet and active market strategies.
Option Strategies
Market Outlook
Long Straddle
Market neutral, volatility increasing (Limited Risk)
Long Strangle
Market neutral, volatility increasing (Limited Risk)
Butterfly
Quiet market (Limited Risk)
Long Iron Condor
Quiet market (Limited Risk)
Calendar Spread
Quiet market (Limited Risk)
Note: There are additional multi-leg option strategies that you can learn about and employ in your options trading.
Each leg of a multi-leg spread incurs a commission and bid/ask cost that can be significant to your profit or loss.
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Reading a Position Graph
We will look at some of the most popular strategies traders are using today. Each position graph
provided shows the option position profit/loss profile at expiration. You can also derive the maximum
gain, maximum loss, and breakeven points from these graphs.
Each plot on the graph represents a date in time; often, the expiration date is a default plot.
Long Call Position Graph at Expiration
•
Each option position graph shows the position profit and loss (P&L) on the left y-axis. The
underlying asset price is along the bottom on the x-axis.
•
Strike prices of the position are generally at the angle points of the P&L line, which are also
generally the points of maximum gain or maximum loss of the position.
•
The dotted line at 0 is the breakeven line. When the P&L line crosses the breakeven line, you
can read the position breakeven price of the underlying asset on the x-axis.
•
The profit or loss above does not factor in commissions, interest, bid-ask spread, or tax
considerations.
With TradeStation’s OptionStation Pro, you can create position graphs for any options position or
strategy, even custom positions that include LEAPS or the underlying asset.
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General Options Multi-leg Strategy Theory
Now that we have looked at the four basic options strategies, we can use these strategies as building
blocks to create more complex multi-leg options strategies. Multi-leg strategies are options positions that
can create trading opportunities for virtually any market mode or situation.
The behavior and characteristics of multi-leg options positions have several things in common across
most strategies. By understanding these characteristics, you can quickly determine important profit/loss
and risk information that can help you better analyze your positions.
The most common types of multi-leg options strategies are options spread positions: an options position
that has two or more different options contracts (legs) traded in combination, usually comprised of buying
and writing both puts and/or calls of the same of different strike prices and/or expiration dates. Spreads
allow the trader to take advantage of a wide array of market conditions and often help to increase the
leverage of capital of the trade. When writing options in combination with buying options, the options you
are buying can often offset the margin requirements for the options you are writing, reducing or
sometimes eliminating a margin requirement.
You can generally determine the underlying asset’s maximum gain and maximum loss price points for
any spread position by looking at the strike prices of the options that make up your strategy. The
maximum gain price point of the underlying asset is generally at the strike price of the options you are
selling, and the maximum loss price point is generally at the strike price of the options you are buying.
Maximum Loss
Any time you create and open an options spread position with a debit (a debit is incurred whenever the
options you are buying are more expensive than the options you are selling), the debit is usually the
maximum amount you can lose on the position. However, there is the risk of early exercise for options
you are writing, and this can cause a generally safe strategy to lose considerably more money than
expected.
Maximum Gain
When you create and open a spread position with a credit (a credit is incurred whenever the options you
are buying are less expensive than the options you are selling), the credit is usually the maximum gain of
the position. There will be a margin requirement equal to the maximum loss of the position.
Note: The profit or loss for the following examples below do not factor in commissions, interest, bid/ask
spread, or tax considerations. Multi-leg spreads incur multiple commissions and must also overcome
multiple bid/ask spreads, which can affect the profit and loss of an options position.
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Long (Buy) Straddle
A long straddle is a neutral position taken when a large move is expected either up or down but the
direction is uncertain. A long straddle is made up of two options positions; a buy put and a buy call at the
same strike price in the same expiration month, typically using strike at or near the current asset price.
Normally, you need to give this type of position plenty of time to produce profits as the asset needs to
make a significant move in one direction. Since we are buying options, the position can also benefit from
an increase in volatility. There is no margin requirement other than the cost of the options, and the
maximum loss is the premium paid to purchase the straddle. The position benefits from a large
directional price move, and is not profitable if the underlying asset price movement becomes stagnant
and does not move enough in either direction to cover the cost of the position.
Long Straddle Options Strategy:
Long 1 XYZ SEPT 48 call @ 2.45, $245 premium paid (debit account).
Long 1 XYZ SEPT 48 put @ 2.21, $221 premium paid (debit account).
Results:
•
•
•
•
Maximum gain is unlimited in either direction.
Maximum loss is the debit: ($2.45+$2.21) X 100 = $466.
Maximum loss is realized at expiration at the strike price of the options bought (48).
Breakeven prices occur at the strike price + and - the premium paid:
(48 - 4.66 = 43.34) and (48 + 4.66 = 52.66).
Risk Factor Effect:
• Price sensitivity (Delta) position generally increases in value by the Delta value as the
underlying asset price rises or falls.
• Time decay (Theta) position profit decreases in value by the Theta value with the passage
of time.
• Volatility sensitivity (Vega) position profit increases in value by the Vega value with rising
volatility.
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Long (Buy) Strangle
A long strangle is a neutral position taken when a large move is expected either up or down but the
direction is uncertain. A long strangle is made up of two options positions; a buy put and a buy call at
different strike prices in the same expiration month, typically using strikes just out-of-the money.
Normally, you need to give this type of position plenty of time to produce profits, as the asset needs to
make a significant move in one direction. Since we are buying options, the position can also benefit from
an increase in volatility. There is no margin requirement other than the cost of the options, and the
maximum loss is the premium paid to purchase the strangle. The position benefits from a large
directional price move, and is not profitable if the underlying asset price movement becomes stagnant
and does not move enough in either direction to cover the cost of the position. Strangles cost less to put
on than straddles, but the area of maximum loss is increased for a strangle.
Long Strangle Options Strategy:
Long 1 XYZ SEPT 47 call @ 1.95, $195 premium paid (debit account).
Long 1 XYZ SEPT 49 put @ 1.79, $179 premium paid (debit account).
Results:
•
•
•
•
Maximum gain is unlimited in either direction.
Maximum loss is the debit: ($1.95+$1.79) X 100 = $374.
Maximum loss is realized at expiration between the strike prices bought (47-49).
Breakeven prices occur at the strike prices + and - the premium paid:
(47 - 3.74 = 43.26) and (49 + 3.74 = 52.74).
Risk Factor Effect:
•
Price sensitivity (Delta) position generally increases in value by the Delta value as the
underlying asset price rises or falls.
•
Time decay (Theta) position profit decreases in value by the Theta value with the passage
of time.
•
Volatility sensitivity (Vega) position profit increases in value by the Vega value with rising
volatility.
Multi-leg spreads incur a commission and bid/ask cost that can be significant to your profit or loss.
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Long (Buy) Butterfly
A long butterfly spread is a neutral position taken when the market is expected to have little directional
movement, sometimes called a quiet market outlook. A long butterfly is made up of three options
positions using either all calls or all puts: sell 2 options at-the-money, buy 1 option in-the-money, and buy
1 option out-of-the-money, all in the same expiration month. Although this is called a long Butterfly, the
trading position is actually net short and benefits from time decay and decreasing volatility. The riskreward for a butterfly typically often looks very advantageous, but there is only a small window of
underlying price range for profitability. In addition, the odds of hitting the exact price for the maximum
gain are very low. The margin requirement for this position is the maximum loss of the positon, usually a
relatively small amount.
Long Butterfly Options Strategy:
Long 1 XYZ SEPT 46 call @ 3.70, $370 premium paid (debit account).
Short 2 XYZ SEPT 48 call @ 2.40, $480 premium received (credit account).
Long 1 XYZ SEPT 50 call @ 1.53, $153 premium paid (debit account).
Results:
• Maximum loss is the net debit: Net Debit = (2.40 x 2) - (3.70 + 1.53) = .43.
• Maximum gain is based on the strike price proximities minus the net debit:
(48 - 46) - net debit = 2.00 - .43 =1.57 or $157.00.
• Breakeven Prices occur at the center strike price + and - the maximum gain
(48 - 1.57 = 46.43) and (48 + 1.57 = 49.57).
Risk Factor Effect:
•
Price sensitivity (Delta) position generally decreases in value by the Delta value as the
underlying asset price rises or falls.
•
Time decay (Theta) position profit increases in value by the Theta value with the passage of
time.
•
Volatility sensitivity (Vega) position profit decreases in value by the Vega value with rising
volatility.
Multi-leg spreads incur a commission and bid/ask cost that can be significant to your profit or loss.
9
Long (Buy) Condor
A long condor spread is a neutral position taken when the market is expected to have little directional
movement. A long condor is made up of four options positions using either all calls or all puts: sell 1
option slightly in-the-money, sell 1 option slightly out-of-the-money, buy 1 option slightly more in-themoney, and buy 1 option slightly more out-of-the-money, all in the same expiration month. Although this
is called a long condor, the trading position is actually net short and benefits from time decay and
decreasing volatility. The margin requirement for this strategy is the maximum loss of the position. Since
this strategy benefits from time decay, it may be advantageous to only trade this strategy with 30-45 days
left to expiration.
Long Condor Options Strategy:
Long 1 XYZ SEPT 44 call @ .87, $87 premium paid (debit account).
Short 1 XYZ SEPT 47 call @ 1.73, $173 premium received (credit account).
Short 1 XYZ SEPT 50 call @ 3.25, $325 premium received (credit account).
Long 1 XYZ SEPT 52.5 call @ 5.10, $510 premium paid (debit account).
Results:
• Maximum loss is the net debit: Net Debit = (1.73+3.25) - (.87+ 5.10) = 1.49.
• Maximum gain is based on the strike price proximities minus the net debit:
(47 - 44) - net debit = 3.00 - 1.49 =1.51 or $151.00.
• Breakeven prices occur at the strike prices of the options sold + and - the maximum gain
(47 - 1.51 = 45.49) and (50 + 1.51 = 51.51).
Risk Factor Effect:
•
Price sensitivity (Delta) position generally decreases in value by the Delta value as the
underlying asset price rises or falls.
•
Time decay (Theta) position profit increases in value by the Theta value with the passage
of time.
•
Volatility sensitivity (Vega) position profit decreases in value by the Vega value with rising
volatility.
Multi-leg spreads incur a commission and bid/ask cost that can be significant to your profit or loss.
10
Long Calendar Spread
A calendar spread is a neutral market position, sometimes referred to as a time spread. It is used when
the underlying asset price is stable and is not expected to make any major move over the life of the
position. A calendar spread is made up of writing a near-term call or put and buying a longer-term call or
put that covers the option sold. Both options must be of the same type and the same strike. The idea with
a calendar spread is that the value of the near-term options will decay faster than the far-term options,
allowing the trader to capture time decay. Maximum gain occurs at the strike price of the near-term
option at expiration, at which time you can elect to close the entire position or continue with the long
options trade. The margin requirement is the maximum loss of the trade, which is the debit you incur to
put on the position.
Long Calendar Spread:
Long 1 XYZ SEPT 49 call @ 1.95, $370 premium paid (debit account).
Short 1 XYZ AUG 49 call @ 1.69, $480 premium received (credit account).
Results:
• Maximum loss is the net debit: Net Debit = (1.95) - (1.69) = .26 or $26.00.
• Maximum gain is difficult to calculate, but is limited to the premium received, minus the net
debit, minus the cost to buy back the SEPT long call
Approx: (1.69 - 26) - .75 to buy back the call (rough guess) = .68 in profit or $68.00.
• Breakeven prices require a pricing model to estimate. OptionStation Pro position graphs
make this calculation. (see graph above)
Risk Factor Effect:
•
Price sensitivity (Delta) position generally decreases in value by the Delta value as the
underlying asset price rises or falls.
•
Time decay (Theta) position profit increases in value by the Theta value with the passage
of time.
•
Volatility sensitivity (Vega) position profit decreases or increases in value by the Vega
value with rising or falling volatility depending on the underlying asset’s price proximity to
the strike price of the option sold.
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Additional Educational Resources
How to Trade Options - Primer Series:
Session 1 - How Options Are Priced
http://www.tradestation.com/education/events/on-demand-webcasts/markets/options/how-to-tradeoptions-primer
Session 2 - Volatility and the Greeks
http://www.tradestation.com/education/events/on-demandwebcasts/markets/options/understanding-volatility-and-the-greeks
Session 3 - Option Strategy Building Blocks
http://www.tradestation.com/education/events/on-demand-webcasts/markets/options/strategybuilding-blocks
Getting Started With OptionStation Pro (Lesson 9)
http://www.tradestation.com/education/events/on-demand-webcasts/tradestation-basics/getting-started
OptionStation Pro Video Tutorials
http://www.tradestation.com/education/university/school-of-tradestation-basics/videotutorials/optionstation-pro
Advanced How to Trade Options Seminars
http://www.tradestation.com/education/events/on-demand-webcasts/markets/options
FREE VideoStation Trading App
(makes it easier to access/find/view videos)
https://tradestation.tradingappstore.com/products/VideoStation
Strategy Concepts Club - Premium Content
Monthly magazine with strategy trading ideas, strategy development concepts, and sample EasyLanguage code.
http://www.tradestation.com/en/promo/strategy-concepts-club - Free Sample Issue Here
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