Multi-Leg Strategies

Buy and sell a combination of calls and puts

Long call spread: buy a call and simultaneously sell a call that is further out of the money.

DeVol Trading Tip: This is a bullish directional trade at a lower cost than a single long call position, but with gain that is capped. Buy a call at a strike that you believe the underlier will exceed, and sell a call at a higher strike (i.e. further out of the money) that you don't believe the underlier will exceed, essentially capping your gain. The premium collected on the short call reduces the cost of the long call strategy.

Short call spread: sell a call and simultaneously buy a call that is further out of the money.

DeVol Trading Tip: This is a bearish directional trade. Collect the premium on the call being sold, albeit reduced by the premium of the long call. The benefit is to cap your maximum potential loss (with the long call position).

Long put spread: buy a put and simultaneously sell a put that is further out of the money.

DeVol Trading Tip: This is a bearish directional trade at a lower cost than a single long put position, but with gain that is capped. Buy a put at a strike that you don't believe the underlier will exceed, and sell a put at an even lower strike (i.e. further out of the money) that you believe the underlier will exceed, essentially capping your gain. The premium collected on the short put reduces the cost of the long put strategy.

Short put spread: sell a put and simultaneously buy a put that is further out of the money.

DeVol Trading Tip: This is a bullish directional trade. Collect the premium on the put being sold, albeit reduced by the premium of the long put. The benefit is to cap your maximum potential loss (with the long put position).

Long Straddle: buy both a call and a put option with the same strike and expiration date.

DeVol Trading Tip: This is used when traders anticipate a large price movement, but are unsure about the direction (bullish or bearish).

Long Strangle: buy both a call and a put option with a different strike and the same expiration date.

DeVol Trading Tip: Like a straddle, a long strangle is a good strategy if you expect a large price movement of the underlying, but are unsure of the direction. The difference is that with a strangle the underlying needs to move more sharply in order to be profitable, because the call and put are both out-of-the-money. This means there is a lower probability of the trade being profitable. But, this also makes the cost of the strategy cheaper.