Option Trading

Advanced Options Strategies

Professional traders use combinations for specific market conditions.

Butterfly Spread

Outlook: Neutral, low volatility.

How it works: Combination of bull and bear spreads with three strikes.

Risk/Reward: Limited both ways.

Calendar Spread

Outlook: Neutral with time decay advantage.

How it works: Sell near-term option, buy longer-term option (same strike).

Benefit: Profit from faster time decay of short option.

Ratio Spread

Outlook: Directional but with twist.

How it works: Buy one option and sell more options of the same type.

Risk: Potentially unlimited.

Reward: Limited to premium collected.

Collar Strategy

Outlook: Hedge with limited upside.

How it works: Own stock, buy protective put, sell covered call.

Use: Lock in gains, reduce downside.

Risk Management in Options Trading

Options carry significant risks if misused. Successful traders emphasize:

Position Sizing: Never risk too much on one trade.

Diversification: Spread across multiple strategies/assets.

Stop-Loss & Adjustments: Exit losing trades early.

Implied Volatility (IV) Awareness: High IV increases premiums; selling strategies may be better.