The main multi-legs can be categorized into 4 indicative classes:
Directional Longs: Strategies that benefit from the rise in the price of the underlying asset, with differences in profitability and risk characteristics. Without using multi-leg functionality, one could profit from the rise of the underlying asset by buying the underlying asset itself, a Call thereon, or shorting a Put. Multi-legs expand these opportunities:
Multi-Leg
| Components
| Comments
|
Put Credit Spread
| - Selling Put (A)
- Buying Put (B)
- S(A) > S(B)
| - Maximum profit is limited (achieved when the UA price* > S(A))
- Maximum risk is limited (achieved when the UA price < S(B))
- Income profile is similar to Call Debit Spread, Collar
|
Call Debit Spread
| - Selling Call (A)
- Buying Call (B)
- S(A) < S(B)
| - Maximum profit is limited (achieved when the UA price > S(B))
- Maximum risk is limited (achieved when the UA price < S(A))
- Income profile is similar to Call Debit Spread, Collar
|
Covered Call
| | - Maximum profit is limited (at the UA price above the Call strike) when the price rises
- Risk is unlimited (*) when the price declines
- Income profile is similar to short Put
|
Put Protective
| | - Maximum profit is unlimited when the price rises
- Maximum risk is limited (at the UA price equal to the Put strike)
- Income profile is similar to long Call
|
Collar
| - Buying UA
- Selling Call (A)
- Buying Put (B)
| - Maximum profit is limited achieved when the UA price > S(A))
- Maximum risk is limited (achieved when the UA price < S(B))
- Income profile is similar to Call Debit Spread, Put Credit Spread
|
* Notes to the table:
- UA - Underlying Asset
- S(X) - Option X's strike price
- All options shall have the same expiration
- If the UA's price falls, unlimited risk and return means the risk/return could potentially equal the underlying asset price
Directional Shorts: Unlike long multi-legs, the application of these strategies is aimed at profiting from the decline of the underlying asset. Without using multi-legs, a similar effect (but limited) can be achieved by shorting the underlying asset, buying a Put, or shorting a Call.
Multi-Leg
| Components
| Comments
|
Put Debit Spread
| - Buying Put (A)
- Selling Put (B)
- S(A) > S(B)
| - Maximum profit is limited (achieved when the UA price < S(B))
- Maximum risk is limited (achieved when the UA price > S(A))
- Income profile is similar to Call Credit Spread
|
Call Credit Spread
| - Selling Call (A)
- Buying Call (B)
- S(A) < S(B)
| - Maximum profit is limited (achieved when the UA price < S(A))
- Maximum risk is limited (achieved when the UA price > S(B))
- Income profile is similar to Put Debit Spread
|
Covered Put
| | - Maximum profit is limited (at the UA price below the Put strike) during price decline
- Maximum risk is unlimited (*) when the price rises
- Income profile is similar to short Call
|
Call Protective
| | - Maximum profit is unlimited when the price falls
- Maximum risk is limited (at the UA price equal to the Call strike)
- Income profile is similar to long Put
|
“Buying Volatility”: It means that the trader is betting that the price of the underlying asset will break a certain range and intends to profit therefrom. Without using multi-legs, it is impossible to achieve such profit profile by buying or selling the underlying asset or any option. The main strategies are:
Multi-Leg
| Components
| Comments
|
Long Straddle
| - Buying Call (A)
- Buying Put (B)
- S(A) = S(B)
| - Maximum profit is unlimited with the rise and fall of the UA
- Maximum risk is limited and achieved when the UA price = S(A)
|
Long Strangle
| - Buying Call (A)
- Buying Put (B)
- S(A) > S(B)
| - Maximum profit is unlimited with the rise and fall of the UA
- Maximum loss is limited and achieved in the price range between S(B) and S(A)
|
Long Iron Condor
| - Selling Put (A)
- Buying Put (B)
- Buying Call (C)
- Selling Call (D)
- S(A) < S(B) < S(C) < S(D)
| - Maximum profit is limited, when the UA price grows above S(D), and when the UA price falls below S(A)
- Maximum risk is limited and achieved in the price range between S(B) and S(C)
|
Long Iron Butterfly
| - Selling Put (A)
- Buying Put (B)
- Buying Call (C)
- Selling Call (D)
- S(A) < S(B) = S(C) < S(D)
| - Maximum profit is limited during growth when the UA price is above S(D), and during a fall when the UA price is below S(A)
- Maximum risk is limited and achieved when the UA price is equal to S(B)
|
“Selling Volatility”: The complete antithesis of “Buying Volatility” strategies. Using the "Selling Volatility" strategies, a trader profits from scenarios where the underlying asset's price remains within set ranges. These are simply inverted "Buying Volatility" strategies:
Multi-Leg
| Components
| Comments
|
Short Straddle
| - Selling Call (A)
- Selling Put (B)
- S(A) = S(B)
| - Maximum profit is limited and achieved when the UA price is equal to S(A)
- Maximum risk is unlimited whether the price rises or falls
|
Short Strangle
| - Selling Call (A)
- Selling Put (B)
- S(A) > S(B)
| - Maximum profit is limited and achieved in the UA price range between S(B) and S(A)
- Maximum risk is unlimited whether the price rises or falls
|
Short Iron Condor
| - Buying Put (A)
- Selling Put (B)
- Selling Call (C)
- Buying Call (D)
- S(A) < S(B) < S(C) < S(D)
| - Maximum profit is limited in the range between S(B) и S(C)
- Maximum risk is limited during growth when the UA price is above S(D), and during a fall when the UA price is below S(A)
|
Short Iron Butterfly
| - Buying Put (A)
- Selling Put (B)
- Selling Call (C)
- Buying Call (D)
- S(A) < S(B) = S(C) < S(D)
| - Maximum profit is limited if the UA price is equal to S(B)
- Maximum risk is limited during growth when the UA price is above S(D), and during a fall when the UA price is below S(A)
|
