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Interactive Options Course
Lesson 6 of 7
Technically any multi-leg option combination is considered a spread. However, there are well-defined option combination strategies that are used by investors when they believe the underlying price will behave in a certain way. This lesson will provide a brief overview of six popular strategies:
For more information on option strategies please review the option strategy courses in Traders’ Academy. Any profit or losses described may not consider other expenses such as commission or exchange fees.
A long straddle is a position where the investor is long both the call and put in the same strike in the same expiration. If the investor believes the underlying price will move a certain percentage within a certain time frame but is unsure if it will rise or fall, they may buy a long straddle. A long straddle has unlimited upside profit, and the downside profit is only limited by the stock price going to 0.
An investor may want to sell the straddle if they felt that the price of the underlying was going to stay within a certain range up to expiration to take in the premium. A short straddle has unlimited upside risk, and the downside risk is only limited by the stock going to zero.
A strangle is like a straddle, except that the calls and puts have different strikes. The buyer is long both the call and the put and the seller is short both the call and the put. The premium is lower for the spread, but the stock must move a greater difference for the buyer to realize a profit or the seller to realize a loss. Like a long straddle, a long strangle has unlimited profit potential on the upside and is limited only by the underlying going to zero.
An iron condor is a delta neutral strategy composed of a long and short put and a long and short call in which the buyer of the iron condor will profit when the underlying stays within a certain range and the seller will profit when the underlying moves out of that range. Unlike the straddle and strangle the long iron condor has limited upside and downside profit and the short iron condor has limited upside and downside risk.
A butterfly combines bull and bear spreads using three strikes and four options. Two contracts in an at-the-money strike and one contract in each “wing”; an out-of-the-money and an in-the-money strike. The wings are equidistant from the at-the-money strike. A long butterfly consists of buying the wings and selling the middle. A buyer of the butterfly profits if the stock moves and the seller profits if it stays within a certain range. A butterfly has limited risk and profit potential based on the strikes chosen.
A vertical spread consists of a long and short option in the same underlying, same expiration, same option right, and different strikes. The vertical spread allows the investor to minimize risk while potentially profiting from a directional move in the underlying. The four main types of vertical spreads; bull call, bear call, bull put, and bear put. A bull call spread is also a debit call spread where the investor buys the lower call strike and sells the higher strike benefitting from an upside move. A bull put spread or put credit spread payout chart looks like the bull call spread except that the investor is selling the higher put strike and buying the lower put strike taking in a credit.
A bear put spread also known as a put debit spread and a call bear spread, or call credit spread payout chart look alike. In a bear put spread the investor buys the higher put strike and sells the lower put strike whereas in the call bear spread the investor sells the lower call strike and buys the higher call strike.
For the two credit spreads the maximum profit is the premium taken in from the sale of the spread and the maximum loss is the distance between the strikes minus the premium.
For the two debit spreads the maximum loss is the premium paid for the spread and the maximum profit is the distance between the two strikes minus the premium paid.
A calendar spread consists of a long and short position in the same option right but in two different expirations. If the positions are in two different strikes than it is diagonal calendar spread and if they are in the same strike than it is a horizontal calendar spread. Generally, an investor sells the nearer expiration and buys the longer-term expiration looking to profit as the short-term option value decays quicker than the long-term and the underlying remains within a small trading range.
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by going to the following link ibkr.com/occ. Multiple leg strategies, including spreads, will incur multiple transaction costs.
How do I close a bull put spread on the RUT? Can you direct me to a video that goes through the steps? Thank You
Hello, thank you for reaching out. To close a bull put spread on the RUSSELL 2000 Index (RUT):
Log into Client Portal and go to the Portfolio page.
Click on the bull put spread position you want to close to open the Position Information window.
Click on the “Close” button in the top right corner.
In the order ticket, select “Buy” to close the short put and “Sell” to close the long put.
Review the order details and click “Transmit” to close the spread position.
The closing buy and sell orders will offset the original short and long puts, closing out the bull put spread position.
Please view all our options-related courses here: https://www.interactivebrokers.com/campus/traders-academy/options/
We hope this helps!
Can i Close position of an option together with the underlying as combo?
Thank you for asking. Yes, this is possible. To close an option position together with the underlying stock as a combo in TWS:
Group the option legs and stock into a complex position in your portfolio. To do this, go to Global Configuration > Display > Ticker Row and select “Group legs into complex positions”.
Right click on the complex position in your portfolio and select “Close Complex Position”.
This will allow you to close the option and stock together as a combo in one order.
The order quantity will be calculated based on the leg ratios to proportionally close out each leg. You can modify the quantity if you only want to partially close the position.
We hope this answers your question!
Hello, How to adjust a bull put spread to an iron condor on IBKR Desktop?
Hello, thank you for reaching out. You can adjust a bull put spread to an iron condor in IBKR Desktop by entering the same bear order as the bull put spread for the same number of contracts. If you have a time-sensitive trading issue, please contact Client Services: https://spr.ly/IBKR_ClientServicesCampus
When I have a combo on tws I can select SHOW LEGS and it will break apart the combo into the legs. Can I do the reverse? I have 4 legs open, can I group them into a combo? Thanks
Thank you for asking, Jeff. The Pair or Leg-by-Leg tab of the Combo Selection is the most flexible tool to create a combo. You can read more about this feature here: https://www.interactivebrokers.com/faq?id=35789131
If I have a bear put spread and exercise early, will the put I sold also be exercised along with the bought put? Or will only the put I bought be exercised leaving me liable for the put I sold?
Thank you for contacting us. When you sell (or write) options in your account, it’s important to understand that as an option seller, you have obligations rather than rights. Here are the key points to keep in mind:
Your short option positions and long option positions operate independently of each other. This means:
If you are assigned on your short option position, you must fulfill that obligation regardless of any long options you may hold
Exercising your long call options has no impact on your obligations for short positions
You remain liable for any puts you’ve sold whether or not you choose to exercise your long positions
For example, if you have both long and short options in a spread strategy, each position stands on its own. The counterparty who owns the option you sold can exercise at any time before expiration, triggering an assignment to you – even if you haven’t taken any action on your long options.
For more detailed information on how exercise and assignment work, I recommend reviewing the IBKR Campus course on this topic: https://www.interactivebrokers.com/campus/trading-lessons/exercise-and-assignment/
Please let me know if you have any other questions about your option positions.
how to group my portfolio option multiple legs into one single position on the Interactive brokers
If I have a bull put vertical spread, sold a put at 100 and bought a put at 90, but the stock falls to 80 and both options are in the money. If I hold till expiration will IB automatically exercise my long 90 put to satisfy the 100 put I will be assigned shares on?
Hi Robert, thank you for asking. In the case of U.S. securities options, the OCC will automatically exercise any option that is in-the-money by at least $0.01 unless you provide contrary exercise instructions. For non-U.S. options, please refer to the Options Exercise page of our website for information on how the different clearinghouses will handle the exercise:
https://www.interactivebrokers.com/en/trading/delivery-exercise-actions.php
We hope this helps!
I am using the combo butterfly option strategy. When I close the position, what’s the best way to to know what limited price to use? Is there a profit/loss calculator that will show you if you use this limit price, you’ll get this profit?
Hi Chrisophe, thank you for asking. The Performance Profile is available for stock and options for you to consider potential profit and loss values through and at expiration. The chart displays a solid line for at expiration values and a dotted line depicting p/l using the as-of date determined using the date selector. For more information, please view this FAQ: https://www.interactivebrokers.com/faq?id=35787239
Also, this Traders’ Academy course may be a great resource for you. We hope this helps!
is there any video to help me set up a bull put spread on the new desktop