Complex Multi-Leg Strategies
Master butterflies, condors, and ratio spreads for sophisticated trading
High Risk Strategy Warning
Complex multi-leg strategies involve sophisticated risk profiles and can result in significant losses. These strategies require advanced understanding of options mechanics and substantial trading experience.
Learning Objectives
Butterfly Spreads
Neutral strategies for profiting from low volatility
Long Call Butterfly
A three-leg strategy involving buying one ITM call, selling two ATM calls, and buying one OTM call.
Construction:
- Buy 1 call at lower strike (ITM)
- Sell 2 calls at middle strike (ATM)
- Buy 1 call at higher strike (OTM)
Put Butterfly
Similar profit profile using puts instead of calls, often used when puts are cheaper.
Risk Profile
Maximum Profit
When stock closes at middle strike at expiration
Maximum Loss
Net premium paid (limited risk)
Condor Strategies
Range-bound strategies for consistent income
Iron Condor
A four-leg strategy combining a bull put spread and a bear call spread.
Construction:
- Sell OTM put (lower strike)
- Buy further OTM put (protection)
- Sell OTM call (higher strike)
- Buy further OTM call (protection)
Management Rules
Ratio Spreads
Directional strategies with unlimited risk potential
Call Ratio Spread
Buy fewer calls at lower strike, sell more calls at higher strike. Bullish with limited upside.
Risk Warning:
Unlimited risk if stock moves significantly above higher strike
Put Ratio Spread
Buy fewer puts at higher strike, sell more puts at lower strike. Bearish with limited downside.
When to Use
Advanced Considerations
Commission Impact
Multi-leg strategies involve multiple commissions. Ensure profit potential exceeds transaction costs.
Liquidity Requirements
Only trade these strategies in highly liquid underlyings with tight bid-ask spreads.
Portfolio Allocation
Limit complex strategies to a small percentage of your portfolio (typically 5-10%).