1. Prerequisites & Greeks Refresher
Before trading multi-leg strategies, you must understand the Greeks — the variables that drive option pricing:
| Greek | Measures | Why It Matters |
|---|
| Delta (Δ) | Price sensitivity to underlying | Determines directional exposure |
| Gamma (Γ) | Rate of Delta change | Risk of sudden Delta shifts near expiration |
| Theta (Θ) | Time decay per day | Core profit driver for sellers |
| Vega (v) | Sensitivity to IV changes | Critical around earnings and events |
| Rho (ρ) | Sensitivity to interest rates | Usually negligible for short-term trades |
Key Principle: Multi-leg strategies work by balancing Greeks. You can create positions that are directionally neutral (low Delta) while profiting from time decay (high Theta) or volatility changes (Vega plays).
2. Vertical Spreads
Bull Call Spread (Debit)
Buy a lower strike call + sell a higher strike call, same expiration. You pay a net debit.
- Max Profit: (Width of strikes − debit paid) × 100
- Max Loss: Debit paid
- Break-even: Long strike + debit paid
- Best when: Moderately bullish, IV is high (reduces cost)
Bear Put Spread (Debit)
Buy a higher strike put + sell a lower strike put. Same logic, opposite direction.
Bull Put Spread (Credit)
Sell a higher strike put + buy a lower strike put. You receive a credit upfront.
- Max Profit: Credit received
- Max Loss: (Width of strikes − credit) × 100
- Best when: Neutral to moderately bullish, selling premium
Bear Call Spread (Credit)
Sell a lower strike call + buy a higher strike call. Bearish credit strategy.
| Strategy | Outlook | Type | Max Risk |
|---|
| Bull Call Spread | Bullish | Debit | Debit paid |
| Bear Put Spread | Bearish | Debit | Debit paid |
| Bull Put Spread | Neutral-Bullish | Credit | Width − credit |
| Bear Call Spread | Neutral-Bearish | Credit | Width − credit |
3. Iron Condors
An Iron Condor combines a bull put spread and a bear call spread on the same underlying and expiration. It profits when the stock stays within a range.
- Structure: Buy OTM put → Sell closer put → Sell closer call → Buy OTM call
- Max Profit: Total credit received
- Max Loss: Width of wider spread − total credit
- Break-evens: Short put − credit / Short call + credit
Iron Condor Example: Stock at $100. Sell 95/90 put spread + sell 105/110 call spread for $2.00 credit. Max profit: $200 if stock stays between $95-$105 at expiration. Max loss: $300 (width $5 − credit $2 = $3 × 100).
When to use: Low IV rank environments, range-bound markets, 30-45 DTE for optimal theta decay.
4. Butterfly Spreads
A long butterfly profits from the stock landing at a specific price at expiration. Very cheap to enter with limited risk.
Long Call Butterfly
- Buy 1 lower strike call
- Sell 2 middle strike calls
- Buy 1 higher strike call
- All same width, same expiration
Max Profit: (Width − debit) × 100, occurs when stock is exactly at middle strike at expiration.
Max Loss: Debit paid (very small relative to potential profit).
Broken Wing Butterfly
A variation where the wings are unequal widths, creating a directional bias with zero or negative cost. Example: Buy 95 call, sell 2x 100 calls, buy 110 call (wider upper wing).
5. Straddles & Strangles
Long Straddle
Buy an ATM call + ATM put, same strike and expiration. Profits from a big move in either direction.
- Max Profit: Unlimited (upside) / Large (downside)
- Max Loss: Total premium paid
- Best when: Before earnings, major events; IV is expected to increase
Long Strangle
Buy an OTM call + OTM put. Cheaper than a straddle but requires a larger move to profit.
Short Straddle / Strangle
Selling instead of buying. Profits from time decay when the stock stays near the strike. Higher risk — requires active management.
Warning: Short straddles have theoretically unlimited risk. Always have a stop-loss plan and adequate capital. Only trade these with experience and proper position sizing.
6. Calendar Spreads
A calendar spread (or time spread) involves selling a near-term option and buying a longer-term option at the same strike.
- Profits from the front-month option decaying faster than the back-month
- Benefits from increasing implied volatility in the back month
- Best when IV is low and expected to rise, or when stock is range-bound short-term
Diagonal Spreads
A variation where the two options have different strikes AND different expirations. Combines elements of vertical and calendar spreads for more flexibility.
7. Trade Management & Adjustments
When to Close
- Profit target: Close at 50% of max profit for credit strategies
- Time-based: Close at 21 DTE to avoid gamma risk acceleration
- Loss limit: Close if the loss reaches 2x the credit received
Rolling
Closing the current position and opening a new one at a further expiration (and sometimes different strikes). Useful for extending winners or managing losers:
- Roll out: Same strikes, further expiration — collect more premium
- Roll out and up/down: Adjust strikes to account for stock movement
Adjusting Iron Condors
- If the stock approaches your short strike, consider rolling the tested side further out
- If the stock threatens to breach, close the tested side for a loss and let the opposite side expire worthless
- Consider converting to an iron butterfly by narrowing the untested side for extra credit
Golden Rule: Don't defend a position indefinitely. Know your max acceptable loss before entering the trade and honor it. The best adjustment is often closing and moving on.