early assignment robinhood

Advanced options strategies (Level 3)

Options are some of the most flexible of investment strategies. Whether you're hedging or seeking to grow your investments, options may help you reach the goals you set for your portfolio.

Use this as an educational tool to learn about the options strategies available with Level 3 on Robinhood. Before you begin trading options, it's important to identify an investment strategy that makes sense for you.

Depending on your position, it’s possible for you to lose the principal you invest, or potentially more. So, it's important to learn about the different strategies before diving in.

Level 3 options trading is available in margin accounts , but not in cash accounts or Robinhood Retirement.

Long straddle

What’s a long straddle.

A long straddle is a two-legged, volatility strategy that involves simultaneously buying a call and put with the same strike prices. Both options have the same expiration date and are on the same underlying stock or ETF. Typically, both options are at-the-money.

A long straddle is a premium buying strategy. Since you’re buying 2 options you’ll pay a net debit to open the position. Like most long premium strategies, the goal of buying a straddle is to sell it later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction).

Although a straddle is designed to profit if the underlying stock moves up or down, buying one can be costly and it has a lower theoretical probability of success than buying a single call or put. Despite this, it’s common for a straddle to have some value left at expiration. Since both options share the same strike price, it’s rare for the underlying stock to expire exactly at the strike price. If it did, it’s possible you’ll lose the entire premium paid for both options.

When to use it

A long straddle is a volatility strategy . You might consider using it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. Also, a long straddle benefits from an increase in implied volatility. Since buying a straddle can be expensive, traders often buy them with shorter-dated options in anticipation of an upcoming event, like an earnings announcement. This is one way to speculate on the outcome of an event when you don’t know which direction the underlying stock will go, but you think it could make a large move up or down.

Building the strategy

To buy a straddle, pick an underlying stock or ETF, select an expiration date, and choose a call and a put. Almost always, both strikes are at-the-money . For example, imagine the underlying stock is trading at $99.78 and the closest strike prices are $99 and $100. The at-the-money strike price would then be $100. An example straddle would be to buy a $100 put and a $100 call with the same expiration date.

Straddles are traded simultaneously using a multi-leg order . A multi-leg order is a combination of individual orders, known as legs . The combined order is sent and both legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one leg first and the other later using individual orders. This is a more complicated approach and carries certain risks.

After you’ve built the straddle, choose a quantity, select your order type, and specify your price. The net price of the straddle is a combination of the 2 individual options. As such, it will have its own bid/ask spread . When buying a straddle, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of multi-leg pricing, many traders will work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you’ll need a seller to drop their asking price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A long straddle is typically used to speculate on the future volatility of the underlying stock and has no directional bias. Instead, you want the underlying stock or ETF to make a large move up or down. If this happens, one option will likely increase in value, while the other typically decreases. This creates potential opportunities to sell the straddle for a profit before expiration. While this may seem like a foolproof strategy, it’s not that simple.

If the market anticipates either higher or lower volatility, the cost of options will also be higher or lower. Essentially, you’ll need the underlying stock to move far enough to offset both the cost and time decay of the straddle. Put another way, the underlying stock must be more volatile than what the market was expecting. And since a straddle is commonly constructed with at-the-money options, the magnitude of the move may need to be substantial.

Cost of the trade

When you buy a straddle you’re buying 2 options: a call and a put. As a result, you pay 2 premiums. For example, imagine an at-the-money call that’s trading for $5 and an at-the-money put for $5.25. You’d pay $10.25 to buy the straddle. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $1,025 for each straddle you purchase.

Factors to consider

Look for an underlying stock or ETF that is likely to break out of its range and make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the lower end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated straddles are cheaper and more commonly used to trade an upcoming event, like earnings. However, time decay will come out of the options almost immediately after the event occurs, potentially resulting in an implied volatility crush ( IV crush ). Meanwhile, medium- and longer-dated straddles are more expensive but have a longer timeframe for the underlying stock to potentially move while mitigating losses from time decay, which accelerate as the expiration approaches.

Straddles are typically created by using the at-the-money strike price . This means the put and call strike will be identical and closest to the current stock price.

The total premium paid (and how many straddles you purchase) determines your risk. The general guideline for many traders is to risk no more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Remember that long straddles are costly, and typically have less than a 50% probability of success. Manage your risk accordingly.

How is a straddle different from a strangle?

Although long straddles and long strangles are both volatility strategies, there are major differences between them:

A straddle consists of a call and put with the same strike price, whereas a strangle consists of a call and put with different strike prices.

A straddle typically uses at-the-money options, whereas a strangle typically uses out-of-the-money options.

The value of a straddle is more reactive to price changes of the underlying stock compared to a strangle. This means the same price change of the underlying will typically cause the straddle to gain or lose more value than a strangle.

A straddle is typically more expensive than a strangle but has a higher probability of success.

Because the 2 options of a straddle share the same strike price, more often than not, one option will have value at expiration while the other will expire worthless. Meanwhile, both options of a strangle can and often do expire worthless.

Straddles are less sensitive to time decay and will hold a larger percentage of their value throughout equal time periods, assuming all other factors remain constant.

P/L Chart at expiration

A long straddle has an unlimited theoretical max gain and a theoretical max loss that’s limited to the premium paid. At expiration it profits if the underlying stock is trading above the upper breakeven price or below the lower breakeven price at expiration.

Theoretical max gain

The theoretical max gain is unlimited, because it contains a long call. A long call has theoretically unlimited profit potential, while the theoretical max gain of the long put is also large, but limited, if the underlying stock price falls to $0.

Theoretical max loss

The theoretical max loss is limited to the total premium paid for the straddle. If the underlying stock is trading exactly at the strike price of your straddle at expiration, both options will be out-of-the-money and expire worthless. Although this is possible, it’s unlikely. It’s common for a straddle to expire with some value.

Breakeven point at expiration

At expiration, a straddle has 2 breakeven points—one above the strike price of the straddle, and one below. To calculate the upside breakeven, add the total premium paid to the strike price of the long call. To calculate the downside breakeven, subtract the total premium paid from the put’s strike price.

Is it possible to lose more than the theoretical max loss?

Yes. If either your call or put is exercised, you’ll purchase or sell 100 shares of the underlying stock. In this scenario, you’ll either own stock or possibly be short stock. With either of these positions, it’s possible to experience losses greater than the premium paid for the straddle.

Imagine XYZ stock is trading for $100.25. The following lists the options expiring in 60 days. The options shaded in green are in-the-money, the ones shaded in white are out-of-the-money. The at-the-money strike is the $100 strike.

You think the stock price will move in either direction over the next 2 months and decide to buy the XYZ $100 straddle.

Buy 1 XYZ $100 Put for ($5.85)

Buy 1 XYZ $100 Call for ($7.70)

= Total net debit is ($13.55)

The theoretical max gain to the upside is unlimited, because there’s no limit to how high the XYZ’s stock price can rise. Meanwhile, the theoretical max gain to the downside is $8,645. This is calculated by subtracting the total premium paid ($13.55) from the strike price of the put ($100).

The theoretical max loss occurs if XYZ closes exactly at $100 at expiration. In this scenario, both options would be out-of-the-money and expire worthless. Your loss would be limited to the total premium paid for the straddle, which was $13.55 per share, or $1,355 total. Although this is possible, the probability of XYZ closing exactly at $100 on expiration is typically low.

The breakeven points at expiration are $86.45 or $113.55. Remember, there are 2 breakeven prices at expiration for a straddle. The lower breakeven is calculated by subtracting the total premium paid ($13.55) from the put strike price ($100). The higher breakeven is calculated by adding the total premium paid ($13.55) to the call strike price ($100).

This is a theoretical example. Actual gains and losses will depend on a number of factors, such as the actual prices and number of contracts involved.

Managing the trade

A long straddle benefits if the underlying stock price rises or falls sharply and quickly. In addition, if implied volatility rises, both options will likely increase in value if all other factors remain constant. Around 30-45 days to expiration, time decay begins to accelerate and the closer your straddle is to expiration, the more extrinsic value each option will lose each day. Ultimately, the value of the call or put will only be worth its intrinsic value (the in-the-money amount) at expiration.

At some point, you’ll need to decide whether or not to sell your straddle or hold it into expiration. If the combined position is profitable, consider taking action before expiration. The longer you wait, the more extrinsic value will come out of both options. Of course, this may be offset by any movement in the underlying stock price.

Meanwhile, a decreasing implied volatility and a stable, sideways moving stock price will hurt the value of your straddle. This isn't ideal. If the position is worth less than your original purchase price, you can attempt to cut your losses and close it before expiration. While it isn’t common, if both options are out-of-the-money at expiration, the position will expire worthless, and you’ll take a max loss on the trade.

Option Greeks

A long straddle contains both a long call and put. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the straddle is delta and rho neutral . It has a negative theta , a positive gamma , and a positive vega . Over time, these can change as the underlying stock moves up or down.

If the stock rises, the put’s deltas will decrease and the call’s deltas will increase. Conversely, if the stock drops, the long put’s deltas will increase and the long call’s deltas will decrease. If implied volatility increases, vega will likely increase the value of both options. As time goes by, theta will reduce the value of both options.

Bottom line, this strategy is about movement—you want the underlying stock to make a large move in either direction before time decay kicks in. Meanwhile, a spike in implied volatility will likely benefit both options.

Keep in mind : Option Greeks are calculated using options pricing models and are theoretical estimates. All Greek values assume all other factors remain equal.

Closing the position

Although you have the right to exercise either of your options, typically, this isn't how many traders close a long straddle. Instead, you might consider selling your straddle before expiration to avoid the exercise process and any additional risk that it may introduce. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. You can do the following to close a long straddle:

Sell to close your position

Leg out of your position, exercise early, hold through expiration.

To close your position, take the opposite actions that you took to open it. For a long straddle, this involves simultaneously selling-to-close both the long call and long put. Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your straddle for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a straddle. You can do this by selling one option, and then selling the other option later, using separate orders. This approach includes both benefits and risks. You can do this to help mitigate liquidity concerns or change the structure of your strategy.

When you own a straddle, you have the right to buy or sell 100 shares of the underlying asset at the strike price by expiration (assuming you have the required buying power to exercise the call or necessary shares to exercise the put). Typically, you’d only consider doing this if one of your options is in-the-money at expiration .

However, if you exercise before expiration, you’ll forfeit any extrinsic value ( time value ) remaining in the option. For this reason, it rarely makes sense to exercise a call or put option prior to expiration. However, there are some scenarios where exercising early could make sense, including:

To capture an upcoming dividend payment . Remember, shareholders receive dividends, options holders do not. If your call option is in-the-money, and the remaining extrinsic value is less than the upcoming dividend, it could make sense to exercise the call of your straddle prior to the ex-dividend date.

To ensure you’re capturing the intrinsic value of the option . If you cannot sell to close your call or put option for at least its intrinsic value (the in-the-money amount), you can exercise the option and offset it with the necessary sale or purchase of shares to close the resulting long or short underlying stock position.

To reduce your margin interest . Interest rates are an important factor in determining whether or not to early exercise a put option. While there is no hard or fast rule, you may choose to exercise a deep in-the-money put to reduce your margin interest (assuming you bought the stock or ETF on margin). When you sell shares, you reduce your margin balance.

Finally, don't exercise an out-of-the-money option . If you do this, you’re simply buying or selling shares at a worse price than what they’re currently priced in the open market. If you want to own the shares, it’s often better to sell your long call, and then buy the shares in a separate transaction. If you want to sell the shares, it’s often better to sell your put, and then sell the shares in a separate transaction.

Holding your position into expiration can result in a max gain or loss scenario and carries certain risks that you should be aware of. Learn more about expiration, exercise, and assignment .

If both options expire out-of-the-money , both options will expire worthless and be removed from your account. You’ll lose the premium you paid for both options and will realize a max loss.

If one option expires in-the-money , and the other expires out-of-the-money, one of your options will be automatically exercised. 100 shares of the underlying will either be purchased (if the call is exercised) or sold (if the put is exercised) for every contract exercised. The other option will expire worthless and be removed from your account. If you don't have the necessary buying power or shares to support the exercise, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

Note : If you don’t want your options to be exercised, you can submit a Do Not Exercise (DNE) request by contacting our Support team. To implement a DNE request, you can submit it after 4 PM ET, and we must receive it by no later than 5 PM ET on the expiration date. (This only applies to regular market hour days.)

Additional risks

For a long straddle, be cautious of automatic exercise . As mentioned, if your call option is in-the-money at expiration, your long call will automatically be exercised, and you’ll buy 100 shares of the underlying for each contract that’s exercised. If you don’t have the available funds to support the exercise, your account will be in a deficit.

If your put option is in-the-money at expiration, your long put will automatically be exercised, and you’ll sell 100 shares of the underlying for each contract that’s exercised. If you don’t own the underlying shares, this will result in a short stock position, which has undefined risk, and isn't allowed at Robinhood.

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you're fully responsible for managing the risk within your account .

What happens if a corporate action impacts the underlying asset?

Sometimes, the option’s underlying stock can undergo a corporate action , such as a stock split, a reverse stock split, a merger, or an acquisition. A corporate action can impact the option you hold, such as changes to the option’s structure, price, or deliverable.

Long strangle

What’s a long strangle.

A long strangle is a two-legged, volatility strategy that involves simultaneously buying a call and put with different strike prices. Both options have the same expiration date and are on the same underlying stock or ETF. Typically, both options are out-of-the-money and equidistant from the underlying stock price.

A long strangle is a premium buying strategy. Since you’re buying 2 options you’ll pay a net debit to open the position. Like most long premium strategies, the goal of buying a strangle is to sell it later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction).

Although a strangle is designed to profit if the underlying stock moves up or down, buying strangles can be costly, and they can have a low theoretical probability of success. If the underlying stock or ETF doesn’t move far enough, it’s possible you’ll lose the entire premium paid for both options.

A long strangle is a volatility strategy . You might use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. In addition, a long strangle benefits from an increase in implied volatility and is a cheaper alternative to buying a straddle. However there are tradeoffs between the 2 strategies.

To buy a strangle, pick an underlying stock or ETF, select an expiration date, and choose a call and a put. Typically, the 2 strikes are out-of-the-money and equidistant from the current underlying stock price.

For example, if the underlying stock is trading at $100, an example strangle would be buying the $95 put and the $105 call. If you have a stronger feeling about the stock moving up or down you could also skew your strangle, meaning your options aren't equidistant from the underlying stock price. This is a more complex approach to the strategy and would be considered a variation.

Strangles are traded simultaneously using a multi-leg order . A multi-leg order is a combination of individual orders, known as legs . The combined order is sent and both legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening 1 leg first and the other later using individual orders. This is a more complicated approach and carries certain risks.

After you’ve built the strangle, choose a quantity, select your order type, and specify your price. The net price of the strangle is a combination of the 2 individual options. As such, it will have its own bid/ask spread . When buying a strangle, the closer your order price is to the natural ask price, the more likely your order will be filled.

Note : There’s also a variation of a strangle that involves buying 2 in-the-money options. It’s called a “gut strangle” and is a seldom-used strategy. While it might work in rare circumstances, the cost and risk associated with buying a guts strangle generally keeps some traders away from this variation.

A long strangle is typically used to speculate on the future volatility of the underlying stock and has no directional bias. Instead, you want the underlying stock or ETF to make a large move up or down. If this happens, one option will likely increase in value, while the other typically decreases. This creates potential opportunities to sell the strangle for a profit before expiration. While this may seem like a foolproof strategy, it’s not that simple.

If the market anticipates higher volatility, the cost of options will be higher, and vice versa. Essentially, you’ll need the underlying stock to move far enough to offset the cost of the strangle. Put another way, the underlying stock must be more volatile than what the market was expecting. And since a strangle is commonly constructed using out-of-the-money options, the magnitude of the move may need to be substantial.

When you buy a strangle you’re buying 2 options, a call and a put. As a result, you pay 2 premiums. For example, imagine a call trading for $2 and a put $2.25. You’d pay $4.25 to buy the strangle. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $425 for each strangle you purchase.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated strangles are cheaper, but will be more impacted by time decay. Longer-dated strangles are more expensive and more sensitive to changes in implied volatility. Meanwhile options expiring in 60-90 days provide a window for the underlying stock to potentially move while balancing costs and mitigating losses from time decay, which accelerate as expiration approaches.

Strangles are typically created using out-of-the-money strike prices . That means the put’s strike will be below the current underlying stock price and the call’s strike will be above it. The closer your strikes are to the underlying stock price, the more expensive it will be, but the probability of success is greater. Meanwhile, the further out-of-the-money your strikes are, the less expensive the strangle will be, but the probability of success will be much lower.

The total premium paid (and how many strangles you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Remember that long strangles are costly, and typically have less than a 50% probability of success. Manage your risk accordingly.

How is buying a strangle different from buying a straddle?

Although long strangles and long straddles are both volatility strategies, there are many differences between them.

Strangles consist of a call and put with different strike prices. Straddles consist of a call and put with the same strike price.

Strangles are typically created using out-of-the-money options, whereas a straddle typically uses at-the-money options.

The value of a strangle is less reactive to price changes of the underlying compared to a straddle. This means the same price change of the underlying will typically cause the straddle to gain or lose more value than a strangle.

A long strangle is typically cheaper than buying a straddle but has a lower probability for success.

The options within a strangle can and often do expire worthless. Meanwhile, because the 2 options of a straddle share the same strike price, more often than not, one option will have value at expiration while the other will expire worthless.

Strangles are more sensitive to time decay. Meanwhile, a straddle will hold a larger percentage of its value throughout equal time periods, all other factors remaining constant.

A long strangle has an unlimited theoretical max gain and a limited theoretical max loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is unlimited because it contains a long call. A long call has theoretically unlimited profit potential, while the theoretical max gain of the long put is also large, but limited if the underlying stock price falls to $0.

The theoretical max loss is limited to the total premium paid for the strangle. If the underlying stock is trading between the 2 strike prices at expiration, both options will be out-of-the-money and expire worthless.

At expiration, a strangle has 2 breakeven points—one above the call strike and one below the put strike. To calculate the upside breakeven, add the total premium paid to the strike price of the long call. To calculate the downside breakeven, subtract the total premium paid from the put’s strike price.

Yes. If either your call or put is exercised, you’ll purchase, or sell 100 shares of the underlying stock. In this scenario, you’ll either own stock, or possibly be short stock, and it’s possible to experience losses greater than the premium paid for the strangle.

Imagine XYZ stock is trading for $100.25 The following lists the options expiring in 60 days. The options shaded in green are in-the-money, the ones shaded in white are out-of-the-money.

You think the stock price will move in either direction over the next 2 months. You decide to buy the $95/$105 strangle expiring in 60 days.

Buy 1 XYZ $95 Put for ($4.20))

Buy 1 XYZ $105 Call for ($4.95)

= Total net debit is ($9.15)

The theoretical max gain to the upside is unlimited because there’s no limit to how high the XYZ’s stock price can rise. Meanwhile, the theoretical max gain to the downside is $8,585. This is calculated by subtracting the total premium paid ($9.15) from the strike price of the put ($95). Although this is unlikely, it’s always possible.

The theoretical max loss is $9.15 per share, or $915 total. Max loss occurs if XYZ closes between $95 and $105 at expiration. In this scenario, both options would be out-of-the-money, and expire worthless.

The breakeven point at expiration is $85.85 or 114.15. Remember, there are 2 breakeven points at expiration. The lower breakeven is calculated by subtracting the total premium paid ($9.15) from the lower put strike price ($95). The higher breakeven is calculated by adding the total premium paid ($9.15) to the higher call strike price ($105).

A long strangle benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below the strike prices of the strangle. In addition, if implied volatility rises both options will likely increase in value, all other factors held constant.

Around 30 days to expiration, time decay begins to accelerate and the closer your strangle is to expiration, the more extrinsic value each option will lose each day. Ultimately, the value of your strangle will only be worth its intrinsic value (the in-the-money amount) at expiration.

At some point, you must decide whether or not to sell your strangle, or hold it into expiration. If the combined position is profitable, consider taking action before expiration. The longer you wait, the more extrinsic value will come out of both options. Of course, this may be offset by any movement in the underlying stock price.

Meanwhile, a decreasing implied volatility, and a stable, sideways moving stock price will hurt the value of your strangle. This isn't ideal. If the position is worth less than your original purchase price you can attempt to cut your losses and close it before expiration. If both options are out-of-the-money at expiration, the position will expire worthless, and you’ll take a max loss on the trade.

A long strangle involves both a long call and put. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the strangle is delta and rho neutral . It has a negative theta and a positive gamma and vega . Over time, delta and gamma can change as the underlying stock moves up or down.

If the stock rises, the put’s deltas will decrease and the call’s deltas will increase. Conversely, if the stock drops, the long put’s deltas will increase and the long call’s deltas will decrease. If implied volatility increases, vega will likely increase the value of both options. As time goes by, theta will reduce the extrinsic value of both options.

Although you have the right to exercise either of your options, typically, this isn't how many traders close a long strangle. Instead, you might consider selling your strangle before expiration to avoid the exercise process, and any additional risk that it may introduce. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long strangle you can do the following that's described in this section:

To close your position, take the opposite actions that you took to open it. For a long strangle, this involves simultaneously selling-to-close both the long call and long put. Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your strangle for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a strangle. You can do this by selling one option, and then selling the other option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy.

When you own a strangle, you have the right to buy or sell 100 shares of the underlying asset at the strike price by expiration (assuming you have the required buying power to exercise the call or necessary shares to exercise the put). Typically, you’d only consider doing this if one of your options is in-the-money at expiration .

To capture an upcoming dividend payment . Remember, shareholders receive dividends, options holders do not. If your call option is in-the-money, and the remaining extrinsic value is less than the upcoming dividend, it could make sense to exercise the call of your strangle prior to the ex-dividend date.

If one option expires in-the-money and the other expires out-of-the-money , one of your options will be automatically exercised . 100 shares of the underlying will either be purchased (if the call is exercised) or sold (if the put is exercised) for every contract exercised. The other option will expire worthless and be removed from your account. If you don't have the necessary buying power or shares, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

Note : If you don’t want your options to be exercised, you can submit a Do Not Exercise (DNE) request by contacting our Support team. To implement a DNE request, you can submit it after 4 PM ET, and we must receive it by no later than 5 PM ET on the expiration date . (This only applies to regular market hour days.)

For a long strangle, be cautious of automatic exercise . As mentioned, if your call option is in-the-money at expiration, your long call will automatically be exercised, and you’ll buy 100 shares of the underlying for each contract that’s exercised. If you don’t have the available funds to support the exercise, your account will be in a deficit.

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account .

Call debit spread

What’s a call debit spread.

A call debit spread is one type of vertical spread . It’s a bullish, two-legged options strategy that involves buying a call option and selling another with a higher strike price. Both options have the same expiration date and underlying stock or ETF. This strategy is also known as a long call vertical, long call spread, or bull call spread.

A call debit spread is a premium buying strategy. Typically, the debit you pay for buying the lower-strike call is greater than the credit you’ll receive for selling the higher-strike call. Therefore, you’ll pay a net debit to open the position. It’s called a spread because the value of the position is based on the difference or spread between the strike prices.

A call debit spread is a bullish strategy because ideally you want the price of the underlying to rise beyond the short strike. You might consider a call debit spread when you’re bullish but believe the upside move will be limited. If you’re extremely bullish, buying a call may provide a more desirable profit potential.

Compared to a long call, a call debit spread is less expensive. In a sense, the short call helps finance the purchase of the long call. This limits the theoretical max gain but increases your theoretical probability of success by lowering the breakeven price the stock needs to reach by expiration. The tradeoff is your potential profit is much lower. Meanwhile, buying a call offers unlimited profit potential, but has a lower probability of success.

To buy a call spread, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Typically, a call debit spread is constructed in one of 2 ways:

• Buying an in-the-money call option and selling an out-of-the-money call option (called an “in and out” spread)
• Buying and selling out-of-the-money call options

Debit spreads traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and both legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one leg first and the other later using individual orders. This is a more complicated approach and carries certain risks.

The width of the spread is the distance between the short and long strike prices and is a key detail. A narrower spread has a lower potential profit but requires less collateral and has less theoretical risk. Meanwhile, a wider spread has a higher potential profit but is more expensive and has greater theoretical risk.

After you’ve built the spread, choose a quantity, select your order type, and specify your price. The net price of the spread is a combination of the individual options (the one you’re buying and the one you’re selling). As such, the debit spread will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders will work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you’ll need a seller to drop their asking price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A call debit spread is commonly used to speculate on the future direction of the underlying stock. When buying a call spread you want both options to increase in value. This happens when the underlying stock price rises (ideally above the long and short call strikes) and implied volatility increases. Prior to expiration, if the spread is worth more than your original purchase price, you can attempt to close it for a profit.

If you hold the position through expiration, and the underlying stock is trading above the strike price of your short call, both options should expire in-the-money, your long call will be exercised, and your short call will likely be assigned, resulting in a max gain on the trade.

To buy a call debit spread, you must pay a net debit. Let’s say, the long call is worth $4 and the short call is worth $2. The net debit to purchase this call spread is $2 ($4 minus $2). Since a standard option controls 100 shares of the underlying, you’d need $200 to purchase one spread. To buy 10 spreads, you’d need $2,000, and so on.

Look for an underlying stock or ETF whose price is trending up or likely to increase soon. Consider one on the lower end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that aligns with your expectation for when the underlying price will increase. Technically, you can choose any available expiration date, but the textbook approach is to generally buy a call spread with about 30-60 days until expiration. This provides a window of time for the underlying price to potentially go up, while not spending too much time waiting for the time value of the short call to decay.

Which strike prices you choose to buy and sell is an important consideration.

• Buying an in-the-money call and selling an out-the-money call (in and out spread) balances the considerations of wanting the long strike to be in-the-money while allowing the underlying to rise up to the short strike. Often, traders will look to buy the first in-the-money call and sell an out-of-the-money call based on their preferred risk and reward ratio.
• Buying an out-of-the-money call and selling an out-the-money call . This is a more bullish approach. While the cost of this spread can be cheaper than an in and out spread, the theoretical probability of success is lower. Essentially, you’ll be paying less to make more, but will need the underlying stock to increase a greater amount.

Important : It’s best to avoid buying an in-the-money call spread. An in-the-money call spread is when both strike prices are below the underlying stock price. Although it may appear to have a high probability of success, your short call may be assigned early and you might be exposed to dividend risk. Instead, you can achieve a similar risk and reward profile by selling an out-of-the-money put spread with the same strikes while avoiding these risks.

The net debit and width of the spread determine the risk and reward of the trade. For example, if you bought a 10-point wide spread for $1, you’d be risking $100 to make $900 and would theoretically have a 10% of success. If you paid $5 for the same 10-point spread, you’d be risking $500 to make $500, and would theoretically have a 50/50 chance of success. Taking this into account, some traders adhere to the general guideline of not paying less than ¼ or more than ½ the width of the spread. This roughly translates to a 25-50% theoretical chance of success on the trade. Ultimately, you decide which risk and reward ratio is appropriate based on your opinion of how far the underlying stock will move by expiration.

How is a call debit spread different from only buying a call?

Buying a call option and buying a call spread are both bullish strategies. They’re opened for a debit, and perform best when the underlying stock or ETF makes a significant move to the upside. Both strategies include a long option and the theoretical max loss is limited to the total premium paid.

However, a call debit spread includes a short call, which changes the risk profile of the trade. Since the underlying stock or ETF can rise to virtually any number, buying a call option has unlimited profit potential. Yet, a call debit spread has limited profit potential. By selling a call at a higher strike price, a call debit spread will always be cheaper than buying a single call option (assuming the same long call). While this decreases your risk and increases your theoretical probability of success, it also limits your potential gains.

A call debit spread has both defined theoretical profit and loss. At expiration, it profits if the underlying stock is trading above the breakeven price.

The theoretical max gain is limited to the width of the spread, minus the net debit paid. To realize a max gain, the underlying stock price must close above the strike price of the short call at expiration.

The theoretical max loss is limited to the net debit paid to open the spread. Max loss occurs when the price of the underlying closes below the strike price of the long call at expiration, and both calls expire worthless.

At expiration, the breakeven point is calculated by adding the net debit to the strike price of the long call.

Yes. If you close the short call and keep the long call, the risk profile (as described earlier) no longer holds true. Your risk and reward will be that of a long call until expiration. If your long call is exercised, you’ll purchase 100 shares of the underlying stock. Owning shares can result in losses greater than the premium paid for the call option.

Imagine XYZ stock is trading for $100. The following lists the options expiring in 30 days. The options shaded in green are in-the-money, the ones shaded in white are out-of-the-money.

You’re bullish and expect XYZ stock to rise above $105 over the next 30 days. You decide to buy the $100/$105 call debit spread:

Buy 1 XYZ $100 Call for ($3.70)

Sell 1 XYZ $105 Call for $1.75

= Total net debit is ($1.95)

The theoretical max gain is $3.05 per share, or $305. This is calculated by taking the width of the spread ($5) and subtracting the net debit paid ($1.95). Max gain is realized if the price of the underlying stock closes above $105 at expiration. The long call will be exercised and the short call should be assigned.

The theoretical max loss is the premium paid, which is $1.95 per share, or $195 total. Max loss occurs if the price of the underlying closes below $100 at expiration. Both calls should expire worthless.

The breakeven point at expiration is $101.95. This is calculated by taking the strike price of the long call ($100) and adding the net debit paid ($1.95).

A call debit spread benefits if the underlying stock price rises above the strike price of your short option and implied volatility increases. These outcomes would likely increase the value of your call spread. That being said, the value of your short call will always offset the value of your long call. As a result, the total value of the spread will fluctuate at a slower rate compared to a single option strategy.

If the position is profitable, consider taking action before expiration. Typically, vertical spreads are managed during the week of expiration, although not always. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of both options is greatly reduced. Often, traders will exit the position for slightly less than max value to free up capital and avoid going through exercise and assignment.

If the underlying stock price falls and implied volatility decreases, the value of both options will likely decrease. This isn't ideal. If the spread is worth less than your original purchase price, you can attempt to cut your losses and close the position before expiration. You can also try to leg out by closing the short call and keeping the long call. This allows you to realize some profit on the short call, while leaving the long call intact in case the stock reverses and begins to rise.

As expiration nears, you may need to proactively manage your position if the underlying stock is trading between the 2 strikes. If no action is taken, at expiration your long call will be automatically exercised and your short call would expire worthless. This may result in a long stock position, and a potential max loss that is greater than theoretical max loss of the spread.

Keep in mind : Any time you have a short call option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like short stock or dividend risk.

A call debit spread involves both a long and short call. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the spread.

When the trade is established, the spread has a positive delta and negative theta . Meanwhile, gamma and vega will be slightly positive , which means the position benefits from upward movement in the underlying stock and an increase in implied volatility. Depending on where the underlying stock price is relative to either strike price, gamma, theta, and vega can be either positive or negative.

Bottom line, this strategy is about delta and theta—you want the underlying stock price to rise as quickly as possible before time decay accelerates.

Keep in mind : Option Greeks are calculated using options pricing models and are theoretical estimates. All Greek values assume all other factors are held equal.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a call debit spread you can do the following that's described in this section:

Sell to close the spread

Leg out of the spread, hold the spread through expiration.

To close your position, take the opposite actions that you took to open it. For a call debit spread, this involves simultaneously selling-to-close the long call option (the one you initially bought to open) and buying-to-close the short call option (the one you initially sold to open).

Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your spread for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Keep in mind : Prior to expiration, you’ll unlikely be able to close the position for a max gain or max loss. In many cases, you may have to collect slightly less than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a call debit spread. You can do this by buying to close the short call option, and then selling to close the long option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, to leg out of a call debit spread you must buy to close the short call option first before you can sell to close your long option.

If the underlying’s price is below the long strike price , then both options should expire worthless and will be removed from your account. You’ll realize a max loss on the position.

If the underlying’s price is above the short strike price , both options will expire in-the-money. Your long call will be automatically exercised and you’ll likely be assigned on your short call. You’ll realize a max gain on the position.

If the underlying’s price closes above the long strike but below the short strike , your long call will be exercised and your short call will likely expire worthless. Be cautious of this scenario. If your long call is exercised, you’ll be left with a long stock position. Your individual investing account will display a reduced buying power or account deficit as a result of the early assignment. Meanwhile, your short call will no longer exist to offset the exercise. This may potentially result in losses greater than the theoretical max loss of the call debit spread.

Important : To help mitigate this risk, Robinhood may close your entire spread prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account .

For call credit spreads, be cautious of an early assignment or an upcoming dividend .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on the short call option of your call debit spread, you can take one of the following actions by the end of the following trading day:

• Buy the shares at the current market price

Exercise your long call option (thereby buying the shares at the long strike price)

In either circumstance, your individual investing account may temporarily show a reduced buying power or account deficit as a result of the early assignment. Exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Dividend risk is the risk that you’ll be assigned on a short call option the night before the ex-dividend date (where you have to pay the dividend to the exerciser). This is one of the biggest risks of trading spreads with a short call option and could result in a greater loss (or lower gain) than the theoretical max gain and loss scenarios described earlier. Traders can avoid this by closing their position during regular trading hours prior to the ex-dividend date. To learn more, see Dividend risks .

What happens if there’s a corporate action on the underlying asset?

Sometimes, the option’s underlying stock can undergo a corporate action , such as a stock split, a reverse stock split, a merger, or an acquisition. Any corporate action will impact the option you hold, potentially resulting in changes to the option, such as its structure, price, and deliverable.

Call credit spread

What’s a call credit spread.

A call credit spread is a type of vertical spread . It’s a bearish, two-legged options strategy that involves selling a call option and buying another with a higher strike price. Both options have the same expiration date and underlying stock or ETF. This strategy is also known as a short call vertical, short call spread, or bear call spread. It’s called a spread because the value of the position is based on the difference or spread between the 2 strike prices.

A call credit spread is a premium selling strategy. Typically, the credit you receive for selling the lower-strike call is greater than the debit you’ll pay to buy the higher-strike call. Therefore, you’ll collect a net credit to open the position. Although you receive a cash credit at the outset, your potential profit or loss isn't realized until the position is closed.

A call credit spread is a bearish strategy because ideally you want the price of the underlying to stay below the short strike. You might consider using it when you expect the price of the underlying stock to moderately decrease and implied volatility is on the high end of its range. If you’re extremely bearish, buying a put option may provide a more desirable profit potential. Although a call credit spread has a lower potential profit, it benefits from time decay and has a higher theoretical chance for success. Meanwhile, a put option offers a higher profit potential.

To sell a call spread, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Credit spreads are typically constructed using out-of-the-money options , which are traded simultaneously using a spread order.

A spread order is a combination of individual orders, known as legs . The combined order is sent and both legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one leg first and the other later using individual orders. This is a more complicated approach and carries certain risks.

After you’ve built the spread, choose a quantity, select your order type, and specify your price. The net price of the spread is a combination of the individual options (the one you’re buying and the one you’re selling). As such, the credit spread will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders will work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you may need a buyer to increase their bid. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A call credit spread is commonly used to generate income . When selling a call spread, you want both options to decrease in value. This happens when the underlying stock price falls (ideally staying below the short call strike), time passes, and implied volatility drops. Prior to expiration, if the spread is worth less than your original selling price, you can attempt to close it for a profit. If you hold the position through expiration, and the underlying stock is trading below the strike price of the short call, both options should expire worthless, and you’ll keep the full premium.

Although you collect a credit for selling a call spread, you’re required to put up enough cash collateral to cover the potential max loss of the spread. This collateral is netted against the amount of the credit you receive and is calculated by taking the width of the spread, subtracting the total premium collected, and then multiplying that number by 100.

Let’s say, you sell a 5-point wide call spread for $2. Because a standard option controls 100 shares of the underlying, you’ll collect $200 for selling the spread. Meanwhile, the collateral required will be $500, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $2,000, but the required collateral would be $5,000, and so on.

Look for an underlying stock or ETF that is trending sideways or one you think may decrease soon. Consider choosing an underlying that’s on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that optimizes your window for success. Options expiring in 30-45 days tend to provide the best window to sell a call spread. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll collect more premium but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, if you choose a shorter-dated expiration, you might not receive enough premium to make the trade worthwhile.

When selecting strike prices , the most common approach is to use out-of-the-money options. Out-of-the-money calls are when the strike price is higher than the underlying stock price. This approach has the highest theoretical probability of success and can be profitable at expiration if the stock price drops, stays where it’s at, or rises slightly (as long as it stays below your short strike).

Important : It’s best to avoid selling an in-the-money call spread. In-the-money options are when the strike price is below the underlying stock price. Although you’ll collect more premium upfront, this approach has a much lower probability of success, and it might lead to an early assignment and dividend risk. Instead, you can achieve a similar risk/reward profile by buying an out-of-the-money put spread with the same strikes.

The amount of premium you collect determines the risk and reward ratio of the trade. Many traders will look to collect roughly ⅓ the width of the spread. For example, if selling a 1-point wide spread, they’d look to collect around $0.33. A 5-point spread, around $1.65. A 10-point spread, $3.33 in premium, and so on. If the potential premium collected is less than this, the reward may not be worth the risk for some. If it’s more than this ratio, it may signal that the market is pricing in more implied volatility, which is worth investigating before placing the trade. While this isn’t an absolute rule to be followed, it’s a helpful guideline.

How is a call credit spread different from selling a naked call?

A short naked call has undefined risk because the underlying stock or ETF can rise to virtually any number and so can the value of a call. Meanwhile a call credit spread contains a long call, which theoretically defines your risk. Although you collect a larger premium for selling a naked call, it comes with the risk of undefined losses, which is why you cannot use this strategy at Robinhood.

A call credit spread has both defined theoretical profit and loss. At expiration, it profits if the underlying stock is trading below the breakeven price.

The theoretical max gain is limited to the credit you receive for selling the spread. To realize a max gain, the underlying stock price must close at or below the short strike on the expiration date, and both options must expire worthless.

The theoretical max loss is equal to the width of the spread, minus the net credit collected. If the underlying stock price closes above the strike price of the long call (the one with a higher strike price) on the expiration date, the short option will likely be assigned, and your long option will be automatically exercised. This will result in a max loss on the trade.

At expiration, the breakeven point is calculated by adding the net credit collected to the strike price of the short call (the lower strike price).

Yes. If you close one leg of the spread and keep the other, the risk profile (as described earlier) no longer holds true. If you buy to close the short call, your risk will be that of a long call until expiration. If your short call is assigned, you could also realize a greater max loss on the trade.

Imagine XYZ stock is trading for $99.75. The following lists the options expiring in 30 days. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money.

You’re bearish and expect XYZ stock to stay below $102 over the next 30 days. You decide to sell the $102/$105 call credit spread:

Sell 1 XYZ $102 Call for $2.80

Buy 1 XYZ $105 Call for ($1.75)

= Total net credit is $1.05

The theoretical max gain is $1.05 per share, or $105 total. This is the net credit received for selling the spread. Max gain occurs if XYZ stock closes at or below $102 at expiration, and both options expire worthless.

The theoretical max loss is $1.95 per share, or $195. It’s calculated by taking the width of the spread ($3) and subtracting the net credit received ($1.05). Max loss occurs if XYZ closes above $105 at expiration.

The breakeven point at expiration is $103.05. It’s calculated by taking the strike price of the short call ($102) and adding the net credit collected ($1.05).

A call credit spread benefits if the underlying stock price stays below the strike price of your short option, time goes by, and implied volatility decreases. These outcomes would likely decrease the value of your call spread. That being said, the value of your long call will always offset the value of your short call. As a result, the total value of the spread will fluctuate at a slower rate compared to a single option strategy.

If the position is profitable, consider taking action before expiration. You can try to close the spread, or leg out by closing the short call and keeping the long call. This allows you to realize some profit on the short call, while leaving the long call intact in case the stock reverses and begins to rise. Just remember, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of both options is greatly reduced.

If the underlying stock price climbs and implied volatility rises, the value of both options will likely increase. This isn't ideal. If the spread is worth more than your original selling price, you can attempt to cut your losses and close the position before expiration. This would result in a loss on the trade.

As expiration nears, you may need to proactively manage your position if the underlying stock is trading between the strikes. If no action is taken, at expiration your short call will likely be assigned and your long call would expire worthless. This may result in a short stock position, and a potential max loss that is greater than theoretical max loss of the spread.

A call credit spread involves both a long and short call. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the spread.

When the trade is established, the spread has a negative delta and a positive theta . Meanwhile, gamma and vega will be slightly negative which means the position benefits from no movement in the underlying stock and a decrease in implied volatility. Depending on where the underlying stock price is relative to either strike price, gamma, theta, and vega can be either positive or negative. Rho is essentially neutral .

Bottom line, this strategy is about delta and theta—you want the underlying stock price to decline and need time to pass.

Keep in mind : Option Greeks are calculated by using options pricing models and are theoretical estimates. All Greek values assume all other factors are held equal.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a call credit spread you can do the following that's described in this section:

Buy to close the spread

To close your position, take the opposite actions that you took to open it. For a call credit spread, this involves simultaneously buying-to-close the short call option (the one you initially sold to open) and selling-to-close the long call option (the one you initially bought to open).

Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy to close your spread for less than you sold it for, you’ll profit. If you buy to close it for more than you sold it for, you’ll realize a loss. And if you buy to close it at the same price as your sale price, you’ll break even.

Some traders prefer to leg out of a call credit spread. You can do this by buying to close the short call option, and then selling to close the long option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, to leg out of a call credit spread you must buy to close the short call option first before you can sell to close your long option.

If the underlying’s price is below the short strike price , then both options should expire worthless . The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price is above the long strike price , both options will expire in-the-money . You’ll most likely be assigned on your short call and your long call will be automatically exercised. You’ll keep the credit received, but you’ll realize a max loss on the position.

If the underlying’s price closes above the short strike but below the long strike , your short call will likely be assigned and your long call will expire worthless . Be cautious of this scenario. If your short call is assigned you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your long call will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the call credit spread.

Important : To help mitigate this risk, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account.

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short call, you can take one of the following actions by the end of the following trading day:

• Exercise your long call (thereby buying the shares at the long strike price and realizing a max loss)

In either circumstance, your individual investing account may temporarily display a reduced buying power or an account deficit as a result of the early assignment. An exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Dividend risk is the risk that you’ll be assigned on your short call option the night before the ex-dividend date (where you have to pay the dividend to the exerciser). This is one of the biggest risks of trading spreads with a short call option, which could result in a greater loss (or lower gain) than the theoretical max gain and loss scenarios, as described earlier. Traders can avoid this by closing their position during regular trading hours prior to the ex-dividend date. To learn more, see Dividend risks .

Put debit spread

What’s a put debit spread.

A put debit spread is one type of vertical spread . It’s a bearish, two-legged options strategy that involves buying a put option and selling another with a lower strike price. Both options have the same expiration date and underlying stock or ETF. This strategy is also known as a long put vertical, long put spread, or bear put spread.

A put debit spread is a premium buying strategy. Typically, the debit you pay for buying the higher-strike put is greater than the credit you’ll receive for selling the lower-strike put. Therefore, you’ll pay a net debit to open the position. It’s called a spread because the value of the position is based on the difference, or spread, between the strike prices.

A put debit spread is a bearish strategy because ideally you want the price of the underlying to fall below the short strike. You might consider a put debit spread when you’re bearish, but believe the downside move will be limited. If you’re extremely bearish, buying a put may provide a more desirable profit potential.

Compared to a long put, a put debit spread is less expensive. In a sense, the short put helps finance the purchase of the long put. This limits the theoretical max gain, but increases your probability of success by raising the breakeven price the stock needs to fall to by expiration. The tradeoff is your potential profit is much lower, whereas buying a put offers a larger profit potential but has a lower probability of success.

To buy a put spread, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Typically, a put debit spread is constructed in one of two ways:

• Buying an in-the-money put option and selling an out-of-the-money put option (called an “in and out” spread)
• Buying and selling two out-of-the-money put options

Debit spreads traded simultaneously using a spread order . A spread order is a combination of individual orders, known as legs . The combined order is sent and both legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one leg first and the other later using individual orders. This is a more complicated approach and carries certain risks.

A put debit spread is commonly used to speculate on the future direction of the underlying stock. When buying a put spread you want both options to increase in value. This happens when the underlying stock price falls (ideally below the long and short put strikes) and implied volatility increases. Prior to expiration, if the spread is worth more than your original purchase price, you can attempt to close it for a profit.

If you hold the position through expiration, and the underlying stock is trading below the strike price of your short put, both options should expire in-the-money, your long put will be exercised, and your short put will likely be assigned, resulting in a max gain on the trade.

To buy a put debit spread, you must pay a net debit. Let’s say, the long put is worth $4 and the short put is worth $2. The net debit to purchase this put spread is $2 ($4 minus $2). Since a standard option controls 100 shares of the underlying, you’d need $200 to purchase one spread. To buy 10 spreads, you’d need $2,000, and so on.

Look for an underlying stock or ETF whose price is trending down or likely to decrease soon. Consider one on the lower end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that aligns with your expectation for when the underlying price will decrease. Technically, you can choose any available expiration date, but the textbook approach is to generally buy a put spread with about 30-60 days until expiration. This provides a window of time for the underlying price to potentially drop, while not spending too much time waiting for the time value of the short put to decay.

• Buying an in-the-money put and selling an out-the-money put (in and out spread) balances the considerations of wanting the long strike to be in-the-money while allowing the underlying to fall to the short strike. Often, traders will look to buy the first in-the-money put and sell an out-of-the-money put based on their preferred risk and reward ratio.
• Buying an out-of-the-money put and selling an out-the-money put . This is a more bearish approach. While the cost of this spread can be cheaper than an in and out spread, the theoretical probability of success is lower. Essentially, you’ll be paying less to make more, but will need the underlying stock to fall a greater amount.

Important : It’s best to avoid buying an in-the-money put spread. An in-the-money put spread is when both strike prices are above the underlying stock price. Although it may appear to have a high probability of success, your short put may be assigned early. Instead, you can achieve a similar risk and reward profile by selling an out-of-the-money call spread with the same strikes.

How is a put debit spread different from only buying a put?

Buying a put option and buying a put spread are both bearish strategies. They’re opened for a debit and perform best when the underlying stock or ETF makes a significant move to the downside. Also, both strategies contain a long option and the theoretical max loss is limited to the total premium paid.

However, a put debit spread contains a short put, which changes the risk profile of the trade. Since the underlying stock or ETF can fall to $0, buying a put option has large profit potential. Yet, a put debit spread has limited profit potential. By selling a put at a lower strike price, a put debit spread will always be cheaper than buying a single put option (assuming the same long put). While this decreases your risk and increases your theoretical probability of success, it also limits your potential gains.

A put debit spread has both defined theoretical profit and loss. At expiration, it profits if the underlying stock is trading below the breakeven price.

The theoretical max gain is limited to the width of the spread, minus the net debit paid. To realize a max gain, the underlying stock price must close below the strike price of the short put at expiration.

The theoretical max loss is limited to the net debit paid to open the spread. Max loss occurs when the price of the underlying closes above the strike price of the long put at expiration, and both puts expire worthless.

At expiration, the breakeven point is calculated by subtracting the net debit from the strike price of the long put.

Yes. If you close the short put and keep the long put, the risk profile (as described earlier) no longer holds true. Your risk and reward will be that of a long put until expiration. If your long put is exercised, you’ll sell 100 shares of the underlying stock and potentially create a short stock position, which has undefined risk.

Imagine XYZ stock is trading for $99.85. The following lists the options expiring in 30 days. The options shaded in green are in-the-money, the ones shaded in white are out-of-the-money.

You’re bearish and expect XYZ stock to drop below $95 over the next 30 days. You decide to buy the $100/$95 put debit spread:

Buy 1 XYZ $100 Put for ($5.40)

Sell 1 XYZ $95 Put for $3.60

= Total net debit is ($1.80)

The theoretical max gain is $3.20 per share, or $320 total. This is calculated by taking the width of the spread ($5) and subtracting the net debit paid ($1.80). Max gain is realized if the price of the underlying stock closes below $95 at expiration. The long put will be exercised and the short put should be assigned.

The theoretical max loss is the premium paid, which is $1.80 per share, or $180 total. Max loss occurs if the price of the underlying closes above $100 at expiration. Both puts should expire worthless.

The breakeven point at expiration is $98.20. This is calculated by taking the strike price of the long put ($100) and subtracting the net debit paid ($1.80).

A put debit spread benefits if the underlying stock price falls below the strike price of your short option and implied volatility increases. These outcomes would likely increase the value of your put spread. That being said, the value of your short put will always offset the value of your long put. As a result, the total value of the spread will fluctuate at a slower rate compared to a single option strategy.

If the underlying stock price rises and implied volatility decreases, the value of both options will likely decrease. This isn't ideal. If the spread is worth less than your original purchase price, you can attempt to cut your losses and close the position before expiration. You can also try to leg out by closing the short put and keeping the long put. This allows you to realize some profit on the short put, while leaving the long put intact in case the stock reverses and begins to fall.

As expiration nears, you may need to proactively manage your position if the underlying stock is trading between the strikes. If no action is taken, at expiration your long put will be automatically exercised and your short put would expire worthless. This may result in a short stock position, and a potential max loss that is greater than theoretical max loss of the spread.

Keep in mind : Any time you have a short put option in your position, there’s the possibility of an early assignment, which exposes you to certain risks, like being long the underlying stock.

A put debit spread involves both a long and short put. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the spread. When the trade is established, the spread has a negative delta and negative theta . Essentially, the position benefits if the underlying stock price drops before time decay reduces the value of the spread.

Meanwhile, gamma and vega will be slightly positive which means the position benefits from downward movement in the underlying stock and an increase in implied volatility. Depending on where the underlying stock price is relative to either strike price, gamma, theta, and vega can be either positive or negative.

Bottom line, this strategy is about delta and theta—you want the underlying stock price to drop as quickly as possible before time decay accelerates.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a put debit spread you can do the following that's described in this section:

To close your position, take the opposite actions that you took to open it. For a put debit spread, this involves simultaneously selling-to-close the long put option (the one you initially bought to open) and buying-to-close the short put option (the one you initially sold to open).

Some traders prefer to leg out of a put debit spread. You can do this by closing one option, and then closing the other option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, if you sell to close the long put option first, you’ll need to have enough buying power to purchase 100 shares of the underlying stock for each remaining short put.

If the underlying’s price is above the long strike price , then both options should expire worthless and will be removed from your account. You’ll realize a max loss on the position.

If the underlying’s price is below the short strike price , both options will expire in-the-money. Your long put will be automatically exercised and you’ll likely be assigned on your short put. You’ll realize a max gain on the position.

If the underlying’s price closes below the long strike but above the short strike , your long put will be exercised and your short put will likely expire worthless. Be cautious of this scenario. If your long put is assigned you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your short put will no longer exist to offset the exercise. This may potentially result in losses greater than the theoretical max loss of the put debit spread.

For put debit spreads, be cautious of early assignment. This occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short put, you can take one of the following actions by the end of the following trading day:

• Sell the shares at the current market price
• Exercise your long put (thereby selling the shares at the long strike price and realizing a max loss)

In either circumstance, your individual investing account may temporarily show as a reduced buying power or account deficit because of the early assignment. Exercise of the long put is Typically settled within 1-2 trading days and restores buying power partially or fully. To learn more, check out early assignments .

Put credit spread

What’s a put credit spread.

A put credit spread is a type of vertical spread . It’s a bullish, two-legged options strategy that involves selling a put option and buying another with a lower strike price. Both options have the same expiration date and underlying stock or ETF. This strategy is also known as a short put vertical, short put spread, or bull put spread. It’s called a spread because the value of the position is based on the difference or spread between the strike prices.

A put credit spread is a premium selling strategy. Typically, the credit you receive for selling the higher-strike put is greater than the debit you’ll pay to buy the lower-strike put. Therefore, you’ll collect a net credit to open the position. Although you receive a cash credit at the outset, your potential profit or loss isn't realized until the position is closed.

A put credit spread is a bullish strategy because ideally you want the price of the underlying to stay above the short strike. You might consider using it when you expect the price of the underlying stock to moderately increase and implied volatility is on the high end of its range. If you’re extremely bullish, buying a call option may provide a more desirable profit potential. Although a put credit spread has a lower potential profit, it benefits from time decay and has a higher theoretical chance for success. Meanwhile, a call option offers unlimited profit potential.

To sell a put spread, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Credit spreads are typically constructed using out-of-the-money options , which are traded simultaneously using a spread order.

A put credit spread is commonly used to generate income . When selling a put spread you want both options to decrease in value. This happens when the underlying stock price rises (ideally staying above the short put strike), time passes, and implied volatility drops. Prior to expiration, if the spread is worth less than your original selling price, you can attempt to close it for a profit. If you hold the position through expiration and the underlying stock is trading above the strike price of your short put, both options should expire worthless and you’ll keep the full premium.

Although you collect a credit for selling a put spread, you’re required to put up enough cash collateral to cover the potential max loss of the spread. This collateral is netted against the amount of the credit you receive and is calculated by taking the width of the spread, subtracting the total premium collected, and then multiplying that number by 100.

Let’s say, you sell a 5-point wide put spread for $2. Because a standard option controls 100 shares of the underlying, you’ll collect $200 for selling the spread. Meanwhile, the collateral required will be $500, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $2,000, but the required collateral would be $5,000, and so on.

Look for an underlying stock or ETF that is trending sideways, or one you think may increase soon. Consider choosing an underlying that’s on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that optimizes your window for success. Options expiring in 30-45 days tend to provide the best window to sell a put spread. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll collect more premium, but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, If you choose a shorter-dated expiration, you might not receive enough premium to make the trade worthwhile.

When selecting strike prices , the most common approach is to use out-of-the-money options. Out-of-the-money puts are when the strike price is lower than the underlying stock price. This approach has the highest theoretical probability of success and can be profitable at expiration if the stock price rises, stays where it’s at, or drops slightly (as long as it stays above your short strike).

Important : It’s best to avoid selling an in-the-money put spread. In-the-money puts are when the strike price is higher than the underlying stock price. Although you’ll collect more premium up front, this approach has a much lower probability of success, and you may be at risk of an early assignment. Instead, you can achieve a similar risk/reward profile by buying a call spread with the same strikes.

How is a put credit spread different from selling a put?

To sell a put at Robinhood, you need to have enough buying power to purchase 100 shares of the underlying asset for each put you sell. This is a capital intensive strategy and has a large theoretical max loss. Meanwhile a put credit spread contains a long put, which theoretically defines your risk and greatly reduces the capital required to enter the trade. Although you’ll collect a larger premium for selling a put, it requires more buying power and comes with the risk of limited but potentially large losses.

A put credit spread has both defined theoretical profit and loss. At expiration, it profits if the underlying stock is trading above the breakeven price.

The theoretical max gain is limited to the credit you receive for selling the spread. To realize a max gain, the underlying stock price must close at or above the short strike at expiration, and both strikes must expire worthless.

The theoretical max loss is equal to the width of the spread, minus the net credit collected. If the underlying stock price closes below the strike price of the long put (the one with a lower strike price) on the expiration date, the short option will likely be assigned, and your long option will be automatically exercised. This will result in a max loss on the trade.

At expiration, the breakeven point is calculated by subtracting the net credit collected from the strike price of the short put (the higher strike price).

Yes. If you close one leg of the spread and keep the other, the risk profile (as described earlier) no longer holds true. If you buy to close the short put, your risk will be that of a long put until expiration. If your short put is assigned, you could also realize a greater max loss on the trade.

You’re bullish and expect XYZ stock to stay above $98 over the next 30 days. You decide to sell the $95/$98 put credit spread:

Sell 1 XYZ $98 Put for $4.60

Buy 1 XYZ $95 Put for ($3.60)

= Total net credit is $1

The theoretical max gain is $1 per share, or $100 total. This is the net credit received for selling the spread. Max gain occurs if XYZ stock closes at or above $98 at expiration, and both options expire worthless.

The theoretical max loss is $2.00 per share, or $200. It’s calculated by taking the width of the spread ($3) and subtracting the net credit received ($1). Max loss occurs if XYZ closes below $95 at expiration.

The breakeven point at expiration is $97. It’s calculated by taking the strike price of the short put ($98) and subtracting the net credit collected ($1).

A put credit spread benefits if the underlying stock price stays above the strike price of your short option, time goes by, and implied volatility decreases. These outcomes would likely decrease the value of your put spread. That being said, the value of your long put will always offset the value of your short put. As a result, the total value of the spread will fluctuate at a slower rate compared to a single option strategy.

If the position is profitable, consider taking action before expiration. You can try to close the spread, or leg out by closing the short put and keeping the long put. This allows you to realize some profit on the short put, while leaving the long put intact in case the stock reverses and begins to fall. Just remember, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of both options is greatly reduced.

If the underlying stock price falls and implied volatility rises, the value of both options will likely increase. This isn't ideal. If the spread is worth more than your original selling price, you can attempt to cut your losses and close the position before expiration. This would result in a loss on the trade.

As expiration nears, you may need to proactively manage your position if the underlying stock is trading between the strikes. If no action is taken, at expiration your short put will likely be assigned and your long put would expire worthless. This may result in a long stock position, and a potential max loss that is greater than theoretical max loss of the spread.

A put credit spread involves both a long and short put. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the spread.

When the trade is established, the spread has a positive delta and a positive theta . Meanwhile, gamma and vega will be slightly negative which means the position benefits from no movement in the underlying stock and a decrease in implied volatility. Depending on where the underlying stock price is relative to either strike price, gamma, theta, and vega can be either positive or negative. Rho is essentially neutral .

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a put credit spread, you can do the following that's described in this section:

To close your position, take the opposite actions that you took to open it. For a put credit spread, this involves simultaneously buying-to-close the short put option (the one you initially sold to open) and selling-to-close the long put option (the one you initially bought to open).

Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy to close your spread for less than you sold it for, you’ll profit. If you buy to close it for more than you sold it for, you’ll realize a loss. And if you buy to close it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a put credit spread. You can do this by closing one leg first, and then closing the other later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, if you sell to close the long put first, you must have enough buying power to purchase 100 shares of the underlying stock for each remaining short put.

If the underlying’s price is above the short strike price , then both options should expire worthless . The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price is below the long strike price , both options will expire in-the-money . You’ll most likely be assigned on your short put and your long put will be automatically exercised. You’ll keep the credit received, but you’ll realize a max loss on the position.

If the underlying’s price closes below the short strike but above the long strike , your short put will likely be assigned and your long put will expire worthless. Be cautious of this scenario . If your short put is assigned you’ll be left with a long stock position. Your individual investing account will display a reduced buying power or account deficit as a result of the early assignment. Meanwhile, your long put will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the put credit spread.

Important : To help mitigate the risk, Robinhood may close your entire spread prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account .

For put credit spreads, be cautious of early assignment . This occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short put, you can take one of the following actions by the end of the following trading day:

In either circumstance, your individual investing account may temporarily display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long put is typically settled within 1-2 trading days and partially or fully restores buying power. To learn more, see Early assignments .

Long call calendar

What is a long call calendar.

A long call calendar is a two-legged options strategy that involves selling a short-dated call and simultaneously buying a longer-dated call with an identical strike price. Both options are on the same underlying stock or ETF. This strategy is also known as a time spread or horizontal spread.

A long call calendar is a premium buying strategy. Typically, the debit paid for the longer-dated call option is greater than the credit received from selling the short-dated call option. Therefore you’ll pay a net debit to open the position.

It’s called a calendar spread because the value of the position is based on the difference or spread in time value between the options. The short-dated option is commonly referred to as the front-month (if it’s the closest expiration) or near-term option and the longer-dated option is commonly referred to as the back-month option .

Typically, a long call calendar is created as a neutral strategy using at-the-money options. You might consider this strategy when you think the underlying stock won't move far from its current price and implied volatility is low. If you’re moderately bullish , the strategy can be adjusted by using slightly out-of-the-money calls.

A calendar spread is also used to trade differences in time value between the short- and longer-dated options. Short-dated options decay at a faster rate than longer-dated options. This dynamic sets up potential opportunities to profit from differences in the extrinsic value of the two options. The greater the difference, the more potential profit but with that comes added risk.

To buy a call calendar, pick an underlying stock or ETF, and select your expiration dates. Next, select your strike price. Typically, a long call calendar is created as a neutral strategy using 2 at-the-money options , but can also be created as a bullish strategy using out-of-the-money options . Meanwhile, it’s generally best to avoid buying in-the-money calendars as they contain a short in-the-money call option, increasing the chances of early assignment or possible dividend risk.

Calendar spreads are routed using spread orders. A spread order is a combination of individual orders, known as legs. The combined order is sent to the exchange and both legs are executed simultaneously. You can also leg into the strategy by buying the longer-dated call first, and then selling the shorter-dated call later. This is a more complicated approach and carries certain risks.

After you’ve built the calendar, choose a quantity, select your order type, and specify your price. The net price of the calendar is a combination of the prices of the individual options. As such, it will have its own bid/ask spread . When buying a calendar, the closer your order price is to the natural ask price, the more likely your order will be filled.

A calendar spread is commonly used to generate income . Ideally, you want the price of the underlying stock or ETF to trade at or near the strike price by the expiration of the short call, and time to pass. Also, it’s beneficial if the implied volatility decreases in the short-dated call and increases in the longer-dated one. If the value of the combined spread increases, you can try to sell it for a profit before the short call expires.

Unlike other strategies, a calendar spread’s theoretical max profit and breakeven prices at expiration are somewhat unknown because you won’t know how much extrinsic value will be left in the long call when the short call expires. Not to mention, depending on how many expiration cycles are between the options, it’s possible to roll your short call multiple times, collecting premiums along the way. The total gain or loss of the strategy won't be known until you close the longer-dated call option.

The cost of a long call calendar is calculated by taking the premium paid for the longer-dated option and subtracting the credit received for selling the shorter-dated option. Let’s say the longer-dated call is trading for $5 and the short-dated call is trading for $3. The net debit to buy this calendar spread is $2. Since a standard option controls 100 shares of the underlying, you’d need $200 to purchase one spread. To buy 10 spreads, you’d need $2,000, and so on.

Since both options have the same strike price, the net debit is ultimately determined by the difference in extrinsic value between the options. The closer the options are to the current underlying stock price and the further out in time the long option is, the more expensive the spread will be. The nearer the options are to expiration and further out-of-the-money they are, the cheaper the spread will be.

Look for an underlying stock or ETF whose price is range bound and trending sideways. Consider one on the lower end of its implied volatility range, with potential to stay low or moderately increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Which expiration dates you choose depends on a number of factors. One factor is implied volatility. Look for a short-dated expiration that has a higher implied volatility than the longer-dated expiration. This is typically an ideal setup for a calendar spread and can help increase the likelihood of success, although it's no guarantee of profit.

When buying call calendars, it’s common for some traders to choose the first two monthly expiration dates . Often, they’ll buy the back month (60-90 days to expiration) and sell the front month (30-45 days to expiration). This is one way to create a calendar. Other combinations can be created using shorter-dated weekly options or longer-dated monthly options.

Which strike price you choose will depend on your directional sentiment.

• Buying an at-the-money calendar is directionally neutral. Ideally, the stock hovers around the current price and doesn’t move too far up or down.
• Buying an out-of-the-money call is bullish and costs less than an at-the-money calendar spread. This allows the underlying stock price to potentially rise from its current price, hopefully to the strike price by expiration of the short option. While this type of calendar spread is cheaper, its theoretical probability of success is lower.

Important : If you’re bearish it’s generally best to avoid buying an in-the-money call calendar. Trading a spread that involves a short, in-the-money, call option can lead to an early assignment, dividend risk, and a max loss scenario. Instead, if you’re bearish you can achieve a similar risk and reward profile by buying an out-of-the-money put calendar with the same strike price.

The net debit (and how many spreads you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is a calendar spread different from a vertical or diagonal spread?

Although calendar, vertical, and diagonal spreads involve buying and selling two options, there are many differences between them:

A calendar spread involves 2 options with the same strike prices but different expiration dates. The 2 options in a vertical spread (credit or debit spreads) have different strike prices but the same expiration date.

Call verticals look to take advantage of a directional move in the underlying stock, while a call calendar also looks to take advantage of differences in implied volatility between the 2 options.

Meanwhile, a diagonal spread involves 2 options with different strike prices and expiration dates.

A long call calendar has both defined theoretical profit and loss. At the expiration of the short-dated call, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is unknown. It occurs if the underlying stock closes at the strike price of the calendar on the expiration date of the short call. Until that time it’s impossible to know how much extrinsic value will be left in the longer-dated option until the expiration date of the short-dated option. However, you can estimate the value using a theoretical pricing model.

The theoretical max loss is limited to the net debit paid. This occurs if both calls expire out-of-the-money on their respective expiration dates. It’s also possible if you’re assigned on the short call and the long call is exercised to cover the assignment.

Breakeven stock price at expiration

There are 2 breakeven prices at expiration of the shorter-dated call. One is higher and the other is lower than the strike price of the spread. The exact breakeven prices will only be known at expiration of the short call and are dependent on the time value left in the long call. While these prices are somewhat unknown, they can be estimated using a theoretical pricing model.

Yes. If the short call expires worthless, and you keep the long call, your risk profile will be that of a long call until its expiration. If your long call is ever exercised, you’ll buy shares of the underlying. Owning shares can result in a greater loss than the net debit paid for the calendar spread. Greater max loss is also possible if your short call is assigned early, and you’re exposed to dividend risk, and/or the long call isn't exercised.

Imagine XYZ is trading for $100 on July 25. The following lists the prices and implied volatilities for the $100 calls expiring in 32 days (August 26) and 53 days (September 16):

You’re neutral and expect XYZ to stay near $100, so you decide to buy the XYZ $100 call calendar using the options listed above.

• Sell 1 XYZ August 26 $100 Call (32 DTE) for $4
• Buy 1 XYZ September 16 $100 Call (53 DTE) for ($5)

= Total net debit of ($1)

The theoretical max gain occurs if the underlying stock is trading at $100 at the close on August 26. The exact amount is unknown but you could use a theoretical pricing model to estimate it.

The theoretical max loss is $1 per share, or $100. Max loss occurs if XYZ is below $100 at both expiration dates and both options expire worthless. Max loss can also occur if the short option is assigned, and your long option is exercised to cover the short shares. The underlying stock will be bought and sold at $100 and you’ll lose the net debit paid.

This trade has 2 breakeven points . The exact prices are unknown until expiration of the short call. There is one breakeven price above and below the strike price of the calendar. Both amounts are dependent on the amount of extrinsic value left in the long option at the expiration of the short-dated option.

This position benefits if the underlying stock price trades near the strike price of your calendar spread, implied volatility increases moderately, and time passes. These outcomes would likely increase the value of your spread. Meanwhile, If the underlying stock price rises or falls sharply, the value of the calendar will decrease and approach theoretical max loss. This isn't ideal.

Often, calendar spreads are managed in the last week before the expiration of the shorter-dated option. You can choose to close the spread, roll the short option, or carry the position into expiration. Each has its risks and rewards and ultimately depends on your opinion of the future direction of the underlying stock. If your opinion on the underlying stock hasn’t changed, you can roll the short call and re-establish the calendar spread with a new expiration date. If your opinion has changed you can sell the spread for either a profit or loss.

If you carry the spread into expiration, you’re inviting more risk but can potentially collect the full premium from the short option (assuming the underlying stock is below the strike price). If the short call expires worthless you’ll keep the credit for selling it and be left with the longer-dated long call. This allows you to own a call for less premium than you would have paid originally to only buy the long call. If the underlying stock price is above the short strike at expiration, it’s likely you’ll be assigned and take on a short stock position. If this happens, don’t panic. You can exercise your long option to offset the assignment but will take a max loss on the trade.

Keep in mind : Any time you have a short call option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like owning the underlying stock.

A long call calendar contains both a short and long call and each has a different expiration date. Their individual Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho. Depending on where the underlying stock price is relative to the strike price of the calendar, the net delta and net gamma can be positive , neutral , or negative .

The net theta is positive because the short-term option decays at a faster rate than the longer-term option. The net vega is also positive because the longer-term option has higher vega and rho than the shorter-term option. A rising implied volatility (especially in the longer-dated long call) will typically benefit the spread’s overall value. Meanwhile, rho is net negative .

Bottom line, theta and vega drive the value of a long calendar spread. You want time to go by, implied volatility to increase moderately, and the underlying stock to pin the strike price of the calendar.

There are multiple ways to close a calendar spread. Which one you use depends on whether or not you want to close the entire spread or keep the long option. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long call calendar, you can do the following that's described in this section:

Close the entire spread

Roll the short option, hold the spread through expiration of the short call.

To close the entire spread, take the opposite actions that you took to open it. For a long call calendar, this involves simultaneously selling-to-close the long call option (the one you initially bought to open) and buying-to-close the short call option (the one you initially sold to open).

In doing so, you’ll realize any profits or losses associated with the trade. If you sell your spread for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

You can also roll your short put . Rolling a calendar spread involves buying to close the short put and selling to open another put expiring prior to the long put. This is only possible if there are options expiring before the expiration date of your long put. When you do this, you’re closing the short put (realizing any gains or losses) and simultaneously selling a new put with an identical strike price (but different expiration date) as your long put. This allows you to establish a similar position, while managing and closing your short option prior to expiration.

Some traders prefer to leg out of a calendar spread. You can do this by buying to close the short call option, and then selling to close the long option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, you must buy to close the short call option first before you can sell to close your long option.

Holding a position into expiration can result in a max gain or loss scenario and carries certain risks that you should be aware of. Learn more about expiration, exercise, and assignment .

If the underlying’s price is at or below the strike price of the calendar , the short option should expire worthless . The short call will be removed from your account, and you’ll keep the premium you collected for selling it. If you take no further action, you’ll be left holding the longer-dated long call option.

If the underlying’s price closes above the strike price of the calendar , the short call will likely be assigned . As a result, you’ll sell 100 shares of the underlying stock for each call that is assigned. If you don’t own the underlying shares ahead of time, you’ll be left with a short stock position and the longer-dated long call. In this case, Robinhood may take action in your account to close the resulting position.

For long call calendars, be cautious of early assignment and dividend risk .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on the short call option of your calendar spread, you can take one of the following actions by the end of the following trading day:

In either circumstance, your brokerage account may temporarily show a reduced buying power or account deficit as a result of the early assignment. Exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Long put calendar

What’s a long put calendar.

A long put calendar is a two-legged options strategy that involves selling a short-dated put and simultaneously buying a longer-dated put with an identical strike price. Both options are on the same underlying stock or ETF. This strategy is also known as a time spread or horizontal spread.

A long put calendar is a premium buying strategy. Typically, the debit paid for the longer-dated put option is greater than the credit received from selling the short-dated put option. Therefore you’ll pay a net debit to open the position.

It’s called a calendar spread because the value of the position is based on the difference, or spread, in time value between the 2 options. The short-dated option is commonly referred to as the front-month (if it’s the closest expiration) or near-term option and the longer-dated option is commonly referred to as the back-month option .

Typically, a long put calendar is created as a neutral strategy using at-the-money options. You might consider this strategy when you think the underlying stock won't move far from its current price and implied volatility is low. If you’re moderately bearish , the strategy can be adjusted by using slightly out-of-the-money puts.

A calendar spread is also used to trade differences in time value between the short- and longer-dated options. Short-dated options decay at a faster rate than longer-dated options. This dynamic sets up potential opportunities to profit from differences in the extrinsic value of the 2 options. The greater the difference, the more potential profit, but with that comes added risk.

To buy a put calendar, pick an underlying stock or ETF, and select your expiration dates. Next, select your strike price. Typically, a long put calendar is created as a neutral strategy using 2 at-the-money options , but can also be created as a bearish strategy using out-of-the-money options . Meanwhile, it’s best to avoid buying in-the-money calendars as they contain a short in-the-money put option, increasing the chances of an early assignment.

Calendar spreads are routed using spread orders. A spread order is a combination of individual orders, known as legs. The combined order is sent to the exchange and both legs are executed simultaneously. You can also leg into the strategy by buying the longer-dated put first, and then selling the shorter-dated put later. This is a more complicated approach and carries certain risks.

A calendar spread is commonly used to generate income . Ideally, you want the price of the underlying stock or ETF to trade at or near the strike price by the expiration of the short put. Also, it’s beneficial if implied volatility decreases in the short-dated put and increases in the longer-dated one. If the value of the combined spread increases, you can attempt to sell it for a profit before the short put expires.

Unlike other options strategies, a calendar spread’s theoretical max profit and breakeven prices at expiration are somewhat unknown because you won't know how much extrinsic value will be left in the long put when the short put expires. Not to mention, depending on how many expiration cycles are between the options, it’s possible to roll your short put multiple times and collect premiums along the way. The total gain or loss of the strategy won't be known until you close the longer-dated put option.

The cost of a long put calendar is calculated by taking the premium paid for the longer-dated option and subtracting the credit received for selling the shorter-dated option. Let’s say the longer-dated put is trading for $5 and the short-dated put is trading for $3. The net debit to buy this calendar spread is $2. Since a standard option controls 100 shares of the underlying, you’d need $200 to purchase one spread. To buy 10 spreads, you’d need $2,000, and so on.

Which expiration dates you choose depends on a number of factors. One factor is implied volatility. Look for a short-dated expiration that has a higher implied volatility than the longer-dated expiration. This is an ideal setup for a calendar spread and can help increase the likelihood of success, although it's no guarantee of profit.

Often, traders may sell the monthly option expiring around 30 days and buy the monthly option expiring around 60 days. This setup allows you to take advantage of the higher rate of time decay in the short option, while balancing cost considerations of the long option. This is only one way to create a calendar. Other combinations can be created using shorter-dated weekly options or longer-dated monthly options.

• Buying an at-the-money calendar is directionally neutral. Ideally, the stock hovers around the stock price and doesn’t move too far up or down.
• Buying an out-of-the-money put is bearish and costs less than an at-the-money calendar spread. This setup allows for the underlying stock to potentially fall from its current price, hopefully to the strike price by expiration of the short option. While this type of calendar spread is cheaper, its theoretical probability of success is lower.

Important : If you’re bullish it’s best to avoid buying an in-the-money put calendar. Trading a spread that involves a short, in-the-money, put option can lead to early assignment and a max loss scenario. Instead, if you’re bullish you can achieve a similar risk and reward profile by buying an out-of-the-money call calendar with the same strike price.

Put verticals look to take advantage of a directional move in the underlying stock, while a put calendar also looks to take advantage of differences in implied volatility between the 2 options.

A long put calendar has both defined theoretical profit and loss. At the expiration of the short-dated put, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is unknown. It’s impossible to know how much extrinsic value will be left in the longer-dated option until the expiration date of the short-dated option. However, you can estimate the value using a theoretical pricing model.

The theoretical max loss is limited to the net debit paid. This occurs if both puts expire out-of-the-money on their respective expiration dates. It’s also possible if you’re assigned on the short put and the long put is exercised to cover the assignment.

There are 2 breakeven prices at expiration of the shorter-dated put. One is higher and the other is lower than the strike price of the spread. The exact breakeven prices will only be known at expiration of the short put and are dependent on the time value left in the long put. While these prices are somewhat unknown, they can be estimated using a theoretical pricing model.

Yes. If the short put expires worthless, and you keep the long put, your risk profile will be that of a long put until its expiration. If your long put is ever exercised, you’ll sell shares of the underlying and possibly be left with a short stock position, which has undefined risk. Also, a greater max loss is possible if your short put is assigned early and/or the long put isn't exercised. This will leave you with a long stock position, which can realize losses greater than the net debit paid for the spread.

Imagine XYZ is trading for $100 on July 25. The following lists the prices and implied volatilities for the $100 puts expiring in 32 days (August 26) and 53 days (September 16):

You’re neutral and expect XYZ to stay near $100 so you decide to buy the $100 put calendar.

Sell 1 XYZ August 26 $100 Put (32 DTE) for $4

Buy 1 XYZ September 16 $100 Put (53 DTE) for ($5)

= Total net debit is ($1)

The theoretical max loss is $1 per share, or $100. Max loss occurs if XYZ is below $100 at both expiration dates and both options expire worthless. Max loss can also occur if the short option is assigned, and your long option is exercised to sell the long shares. The underlying stock will be bought and sold at $100 and you’ll lose the net debit paid.

Often, calendar spreads are managed in the last week before the expiration of the shorter-dated option. You can choose to close the spread, roll the short option, or carry the position into expiration. Each has its risks and rewards and ultimately depends on your opinion of the future direction of the underlying stock. If your opinion on the underlying stock hasn’t changed, you can roll the short put and re-establish the calendar spread with a new expiration date. If your opinion has changed you can sell the spread for either a profit or loss.

If you carry the spread into expiration, you’re inviting more risk but can potentially collect the full premium from the short option (assuming the underlying stock is above the strike price). If the short put expires worthless you’ll keep the credit for selling it and be left with the longer-dated long put. This allows you to own a put for less premium than you would have paid originally to only buy the long put. If the underlying stock price is below the short strike, it’s likely you’ll be assigned and take on a long stock position. If this happens, don’t panic. You can exercise your long option to offset the assignment but will take a max loss on the trade.

Keep in mind : Any time you have a short put option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like owning the underlying stock.

A long put calendar contains both a short and long put and each has a different expiration date. Their individual Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho. Depending on where the underlying stock price is relative to the strike price of the calendar, the net delta and net gamma can be positive , neutral , or negative .

The net theta is positive because the short-term option decays at a faster rate than the longer-term option. The net vega is also positive because the longer-term option has higher vega and rho than the shorter-term option. A rising implied volatility (especially in the long put) will typically benefit the spread’s overall value. Meanwhile, rho is net negative .

Bottom line, theta and vega drive the value of a calendar spread. You want time to go by, implied volatility to increase, and the underlying stock to pin the strike price of the calendar.

There are multiple ways to close a calendar spread. Which one you use depends on whether or not you want to close the entire spread or keep the long option. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long put calendar you can do the following that's described in this section:

Hold the spread through expiration of the short put

To close the entire spread, take the opposite actions that you took to open it. For a long put calendar, this involves simultaneously selling-to-close the long put option (the one you initially bought to open) and buying-to-close the short put option (the one you initially sold to open). In doing so, you’ll realize any profits or losses associated with the trade. If you sell your spread for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a calendar spread. You can do this by buying to close the short put option, and then selling to close the long option later, using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, if you sell to close the long put option first, you must continue to maintain enough cash collateral to support the resulting short put.

If the underlying’s price is above the strike price of the calendar , the short option should expire worthless . The short put will be removed from your account, and you’ll keep the premium you collected for selling it. If you take no further action, you’ll be left holding the longer-dated long put option.

If the underlying’s price closes below the strike price of the calendar , the short put will likely be assigned . As a result, you’ll buy 100 shares of the underlying stock for each put that is assigned and be left with a long stock position and the longer-dated long put. In this case, Robinhood may take action in your account to close the resulting position if you don't have the necessary funds to hold the long stock position.

For long put calendars, be cautious of an early assignment .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on the short put option of your calendar spread, you can take one of the following actions by the end of the following trading day:

• Sell the assigned shares at the current market price
• Exercise your long put option (thereby selling the shares at the long strike price)

In either circumstance, your individual investing account may temporarily show a reduced buying power or account deficit as a result of the early assignment. Exercise of the long put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Short put calendar

What’s a short put calendar.

A short put calendar is a two-legged options strategy that involves buying a short-dated put and simultaneously selling a longer-dated put with an identical strike price. Both options are on the same underlying stock or ETF. This strategy is also known as a time spread or horizontal spread.

A short put calendar is a premium selling strategy. Typically, the debit paid for the short-dated put option is less than the credit received from selling the longer-dated put option. Therefore you'll collect a net credit to open the position. It’s called a calendar spread because the value of the position is based on the difference or spread in time value between the 2 options.

At Robinhood, you must have enough buying power to purchase 100 shares of the underlying stock for each put calendar you sell. This is because a short put calendar can potentially result in a short put position (obligating you to buy 100 shares of the underlying if assigned). The potential purchase of shares is secured by cash in your account.

A short put calendar is a volatility strategy. You might consider a short put calendar when you think the underlying stock will move far from its current price and implied volatility is high with the potential to decrease. When implied volatility is higher in the longer-dated options, selling the longer-dated option and buying the short-dated option sets up potential opportunities to profit from differences in the extrinsic value of the 2 options.

To sell a put calendar, pick an underlying stock or ETF, and select your expiration dates. Next, select your strike price. Typically, a short put calendar is created using 2 at-the-money options using a spread order.

A spread order is a combination of individual orders, known as legs. The combined order is sent to the exchange and both legs are executed simultaneously. You can also leg into the strategy by opening one leg of the calendar first, and then the other leg later. This is a more complicated approach and carries certain risks.

After you’ve built the calendar, choose a quantity, select your order type, and specify your price. The net price of the calendar is a combination of the prices of the 2 individual options. As such, it will have its own bid/ask spread . When selling a calendar, the closer your order price is to the natural bid price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders will work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you’ll need a buyer to increase their bid price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A short calendar spread is commonly used to generate income . Ideally, you want the price of the underlying stock or ETF to rise or fall far from the strike price by the expiration of the long put. Also, it’s beneficial if implied volatility decreases in the longer-dated put and increases in the short-dated one. If the value of the combined spread decreases you can attempt to buy to close it for a profit before the long put expires.

Although you collect the net credit. you’re required to put up enough cash collateral to cover the potential purchase of 100 shares of the underlying (for each calend sold). For example, if you sold the $50 put calendar, you’d need $5,000 to open the position ($50 x 100 shares per contract). Although the calendar spread has defined risk, if the long put expires and you take no other action, you’ll be left with a cash-secured put.

When you sell a put calendar, you’re simultaneously buying and selling a put option. Let’s say the longer-dated put is trading for $5 and the short-dated put is trading for $3. The net credit collected from selling this calendar spread is $2. Since a standard option controls 100 shares of the underlying, you would collect $200 to sell one spread. For selling 10 spreads, you’d collect $2,000, and so on.

Look for an underlying stock or ETF whose price you think is about to break out of a range and become volatile. Consider one on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

When selling put calendars, it’s common for some traders to choose the first 2 monthly expiration dates . Often, they’ll sell the back month (60-90 days to expiration) and buy the front month (30-45 days to expiration).

Typically, short put calendars are created using at-the-money strike prices since it’s a volatility strategy.

Potential profits are limited to the credit received, so look for a total premium that’s enough to warrant the additional capital required to establish the trade.

A calendar spread involves 2 options with the same strike prices but different expiration dates. The 2 options in a vertical spread (credit or debit spreads) have different strike prices but the same expiration date. Put verticals look to take advantage of a directional move in the underlying stock, while a put calendar also looks to take advantage of differences in implied volatility between the 2 options. Meanwhile, a diagonal spread involves 2 options with different strike prices and expiration dates.

A short put calendar has defined theoretical profit and loss. At expiration of the short-dated put, it profits if the underlying stock is trading above or below the 2 breakeven prices.

The theoretical max gain is limited to the credit collected. This occurs if both puts expire out-of-the-money on their respective expiration dates.

The theoretical max loss is limited, but somewhat unknown. It occurs if the underlying is trading at the strike price of the calendar on the expiration date of the short-dated long option. The exact amount is somewhat unknown because you won't know how much extrinsic value will be left in the longer-dated short option when the short-dated long option expires. However, you can estimate it using a theoretical pricing model.

There are 2 breakeven prices at expiration of the shorter-dated put. One is higher and the other is lower than the strike price of the spread. The exact breakeven prices will only be known at expiration of the long put and are dependent on the time value left in the short put. While these prices are somewhat unknown, they can be estimated using a theoretical pricing model.

Yes. If you hold the short put after the long put expires, your risk and reward becomes that of a cash-secured put. The losses can potentially be greater than the theoretical loss of the calendar spread, but are limited to the strike price of the option minus the net credit collected.

You expect XYZ to become volatile and decide to sell the $100 put calendar.

Buy 1 XYZ August 26 $100 Put (32 DTE) for ($4)

Sell 1 XYZ September $100 16 Put (53 DTE) for $5

= Net credit is $1

The theoretical max gain is $1 per share, or $100 and occurs if the both options expire worthless on their respective expiration dates. Since this involves additional risk, most traders will buy to close their position prior to the expiration of the long option, and therefore don't achieve max gain.

The theoretical max loss is limited but somewhat unknown. It occurs if XYZ closes at $100 on August 26. The amount depends on how much extrinsic value is left in the September 16 put option.

The breakeven prices are also unknown until August 26, but can be estimated using a theoretical pricing model.

This is a theoretical example. Actual gains and losses will depend on factors, such as the actual prices and number of contracts involved.

This position benefits if the underlying stock price rises or falls sharply away from the strike price of the calendar spread and implied volatility decreases. These outcomes would likely decrease the value of the spread. Often, short put calendars are closed prior to expiration of the short-dated long option.

Meanwhile, if the underlying stock price stays close to the strike price, the value of the calendar will increase. This isn't ideal. If the spread is worth more than the original selling price, you can try to cut your losses and close the position before expiration. This would result in a loss on the trade.

A short put calendar contains both a long and short put and each has a different expiration date. Their individual Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho.

Depending on where the underlying stock price is relative to the strike price of the calendar, the net delta and net gamma can be positive , neutral , or negative . The net theta is negative because the short-term option decays at a faster rate than the longer-term option.

The net vega is also negative because the longer-term option has higher vega than the shorter-term option. A rising implied volatility (especially in the short put) will increase the spread’s overall value. Meanwhile, net rho is positive.

Bottom line, gamma and vega drive the profits of a short calendar spread. You want the underlying stock price to move far away from the strike price and implied volatility to decrease before time decay accelerates.

There are multiple ways to close a calendar spread. Which one you use depends on whether or not you want to close the entire spread. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short put calendar you can do the following that's described in this section:

Roll the long option

Hold the spread through expiration of the long put.

To close the entire spread, take the opposite actions that you took to open it. For a short put calendar, this involves simultaneously selling-to-close the long put option (the one you initially bought to open) and buying-to-close the short put option (the one you initially sold to open).

In doing so, you’ll realize any profits or losses associated with the trade. If you buy to close the spread for more than the original selling price, you’ll profit. If you buy it for more than the selling price, you’ll realize a loss. And if you buy it at the same price as the original selling price, you’ll break even.

You can also roll your long put . Rolling a calendar spread involves selling to close the long put, and buying to open another put expiring prior to the short put. This is only possible if there are options expiring before the expiration date of your short put. When you do this, you’re closing the long put (realizing any gains or losses) and simultaneously buying a new put with an identical strike price (but different expiration date) as your short put. This allows you to establish a similar position, while managing and closing your long option prior to expiration.

Some traders prefer to leg out of a calendar spread. You can do this by buying to close the short put option, and then selling to close the long option later, or vice versa, each using separate orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Holding your position into expiration can result in a max gain or loss scenario and carries certain risks. Learn more about expiration, exercise, and assignment.

If the underlying’s price is at or above the strike price of the calendar , the long option will expire worthless . The long put will be removed from your account, and you’ll lose the premium paid for it. If you take no further action, you’ll be left with a short put.

If the underlying’s price closes below the strike price of the calendar , the long put will automatically be exercised . As a result, you’ll sell shares of the underlying stock at the strike price of the option. If you don't own those shares ahead of time, you’ll be left with a short stock position. In this case, Robinhood may take action in your account to close the resulting position.

For short put calendars, be cautious of an early assignment .

Sometimes, the option’s underlying stock can undergo a corporate action , such as a stock split, a reverse stock split, a merger, or an acquisition. Any corporate action will impact the option held, potentially resulting in changes to the option, such as its structure, price, and deliverable.

Long call condor

What’s a long call condor.

A long call condor is a four-legged neutral strategy that involves simultaneously buying a call debit spread and selling a call credit spread with higher strike prices. All options have the same expiration date and are on the same underlying stock or ETF. Generally, at the outset, the call debit spread is in-the-money and the call credit spread is out-of-the-money, but that’s not always the case. Typically, the width of both spreads are the same, and the short strikes are the same distance from the underlying stock.

A long call condor is a premium buying strategy. Since the call spread you’re buying has lower strike prices than the one you’re selling, typically you’ll pay a net debit to open the position. Like most premium buying strategies, the goal of buying a call condor is to sell it later, hopefully for a profit. Ideally, you want the underlying stock price to be between the short strikes at expiration.

Buying a call condor is quite similar to selling an iron condor. They’re both neutral strategies, contain four option legs, and perform best when the underlying stock price remains steady and range-bound. In fact, when the same strike prices are used, a long call condor and short iron condor will have nearly the same risk and reward profiles.

However, you’ll pay a net debit for buying a call condor, but collect a net credit for selling an iron condor. Additionally, the long call condor is often constructed using an in-the-money call spread, which exposes you to possible dividend risk while increasing the likelihood of an early assignment. For these reasons, if you have a neutral outlook, you might consider avoiding buying a call condor, and opt for selling an iron condor instead.

A long call condor is generally considered a neutral strategy. Typically, you use it when you expect the underlying stock price to be range-bound for a period of time. However, a neutral call condor centered around the current underlying stock price is rarely used as an opening strategy. More often, it’s used as a bullish strategy or a trade management strategy.

For example, if you buy a call debit spread that’s initially out-of-the-money, and the underlying stock rallies above the short strike, the spread will be in-the-money. If you think the upward trend is likely to pause, you might sell an out-of-the-money call credit spread against your in-the-money long call debit spread, thus creating a long call condor.

Additionally, a long call condor can be created at the outset as a bullish strategy by buying and selling 2 out-of-the-money call spreads. With this variation, you want the underlying stock to rise, but settle within the range between the short strike prices. In a sense, you’re financing the purchase of the lower strike call debit spread with a sale of a higher strike call credit spread.

To buy a call condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. The textbook, but less common approach is to buy an in-the-money call debit spread and sell an out-of-the-money call credit spread . Typically, both spreads have the same width between their respective strike prices and the short strikes of each call spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example long call condor would be buying the $90/$95 call spread and simultaneously selling the $105/$110 call spread. Both spreads have the same width between the strikes ($5), and both short options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, call condors are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all four legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the condor first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

Next, specify your price. The net debit is a combination of the four individual options (the ones you’re buying and selling in each call spread). As such, a call condor will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders , trying to get them filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you’ll need a seller to drop their asking price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A long call condor is used to generate income . It’s a unique strategy in the sense that you pay a debit, but it acts like a premium selling strategy. Just like selling an iron condor, ideally you want the underlying stock or ETF to stay in a range between your short strikes. If this happens over time, the long call spread will approach max value and the short call spread will decrease in value.

This creates potential opportunities to close the call condor for a profit before expiration. If you hold the position through expiration and the underlying stock is trading at or between your short strikes, your long call spread will be in-the-money (and at max value) and the short call spread should expire worthless. The premium collected from selling the higher strike call spread will be added to the profit earned from the long call spread, resulting in a max gain.

When you buy a call condor, you’re buying a more expensive lower strike call spread and selling a cheaper higher strike call spread. As a result, you’ll pay one combined net debit for the call condor. For example, imagine the long call spread costs $3.75 and the short call spread is trading for a net credit of $1.25. You’d pay $2.50 to buy the call condor. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $250 for each call condor you purchase.

Look for an underlying stock or ETF that you think is likely to stay within a range (if trading a neutral condor) or one that you think is likely to rise but settle within a range (if trading a bullish condor). It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest. Be aware if the underlying stock or ETF pays a dividend, as a call condor may contain an in-the-money short call option.

Choose an expiration date that optimizes your probability for success. Shorter-dated call condors will be more impacted by time decay, but will likely be more expensive. Longer-dated call condors are less expensive, but you’ll be waiting longer for the options to decay while giving the underlying more opportunity to move. Meanwhile, options expiring in 30-45 days generally provide a window for the underlying stock to stay within its range while balancing costs and capturing the benefits of time decay, which accelerate as the expiration approaches. Remember, call condors are a premium buying strategy, but tend to act like a premium selling strategy which benefits from time decay.

As mentioned, the strike prices of a long call condor depends on the situation. A neutral call condor is created by buying an in-the-money call spread and selling an out-of-the-money call spread. A bullish call condor involves 2 out-of-the-money call spreads. Meanwhile, it’s more common to leg into a call condor by buying an out-of-the-money call spread, and then selling another out-of-the-money call spread if the first one becomes in-the-money.

The total premium paid (and how many call condors you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is a long call condor different from a short iron condor?

Although long call condors and short iron condors are both neutral strategies, there are many differences between them.

A long call condor involves buying and selling 2 different call spreads, whereas a short iron condor consists of selling a call spread and a put spread.

You pay a net debit to buy a call condor whereas you collect a credit for selling an iron condor.

Opening a long call condor may involve buying an in-the-money call spread whereas an iron condor typically involves selling 2 out-of-the-money spreads, a call spread and a put spread.

A long call condor is more often used as a trade management strategy, whereas a short iron condor is often used as an opening strategy.

A long call condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the lower breakeven price and below the upper breakeven price.

The theoretical max gain is limited to the width of the debit spread minus the total net debit paid for the entire condor. To realize a max gain, the underlying stock price must close at or between the 2 short strikes of the debit and credit spreads. In this scenario, the call debit spread will be at max value and the call credit spread will expire worthless.

Assuming both spreads of the call condor are of equal width the theoretical max loss is limited to the net debit paid. This occurs if the underlying stock price is above the long call of the credit spread or below the long call of the debit spread at expiration.

At expiration, a call condor has 2 breakeven points—one above the short call strike of the credit spread and one below the short call strike of the debit spread. To calculate the upside breakeven, subtract the total premium paid from the strike price of the long call of the credit spread.

To calculate the downside breakeven, add the total premium paid to the strike price of the long call of the debit spread.

Yes. If the long call of the debit spread is exercised or short call of the credit spread is assigned, you’ll either buy or sell 100 shares of the underlying stock. In this scenario, you’ll be left with either a long or short stock position, and it’s possible to experience losses greater than the theoretical max loss of the call condor.

Imagine XYZ stock is trading for $101.88. The following lists the options chain for an expiration date of 45 days in the future. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money. The strike prices are in the middle.

You believe XYZ will trade in a narrow range and decide to buy the XYZ $90/$95/$105/$110 call condor:

Buy 1 XYZ $90 Call for ($14.50)

Sell 1 XYZ $95 Call for $11.00

Sell 1 XYZ $105 Call for $4.95

Buy 1 XYZ $110 Call for ($3.20)

= Total net debit is ($1.75)

The theoretical max gain is $3.25 or $325 total. Max gain occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, the debit spread would be at max value ($5) and the credit spread would be out-of-the-money, and would likely expire worthless. Your profit on the debit spread would be $1.50 and the profit on the credit spread would be $1.75, for a total of $3.25 per share.

The theoretical max loss is $1.75 per share or $175 total. This occurs if XYZ is trading above $110 or below $90 at expiration.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by adding the total premium paid ($1.75) to the long call strike price of the debit spread ($90). The higher breakeven is calculated by subtracting the total premium paid ($1.75) from the long call strike price of the credit spread ($110).

A long call condor benefits if the underlying stock price remains stable and range-bound. Ideally the underlying stock trades between the short strike prices of the lower strike call debit spread and the higher strike call credit spread. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. However, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help or hurt the value of your long call condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to or between the short strikes, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your condor or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the condor and how many days are left until expiration. If the position is profitable, you can try to sell it (or leg out) before expiration. If the position is worth less than your original purchase price, you can attempt to cut your losses by doing the same.

Also, as the expiration nears, watch out if the underlying stock price starts trading between the long and short strikes of either call spread. This might result in a potential exercise or assignment and you may need to manage the position as it approaches expiration.

A long call condor involves four options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. The long call condor is generally delta and rho neutral (although it could be slightly positive or negative). The net delta will fluctuate as the underlying stock price moves up or down, but will generally stay close to neutral.

Meanwhile gamma is negative and is at its lowest point when the underlying stock is between the 2 short strikes. It will become more positive the lower or higher the stock gets. A long call condor has a positive theta and a negative vega . Over time, these can change as the underlying stock moves up or down.

Bottom line, this strategy is about stability and time passing. You want the underlying stock to stay between your short strikes as time passes.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long call condor, you can do the following that's described in this section:

Sell to close the call condor

Close the call debit spread or call credit spread.

To close your position, take the opposite actions that you took to open it. For a long call condor, this involves simultaneously selling to close the call debit spread and buying to close the call credit spread. Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your call condor for less than your purchase price, you’ll realize a loss. If you sell it for more than your purchase price, you’ll realize a gain. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a call condor. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this, you could create a greater gain or loss than the theoretical max gain or loss of the original condor.

Note : At Robinhood, to leg out of a call condor, you must buy to close a short call option before you can sell to close a long call option. After you’ve closed one short and one long option, you must once again close the remaining short call option before you close the last long call option.

You can also decide to close one side of the call condor. This involves buying-to-close the call credit spread or selling-to-close the call debit spread individually, allowing you to take profits or cut losses on one-half of the spread. This approach can potentially result in a greater max loss as compared to the call condor.

If the underlying’s price is below all four strike prices , all four options should expire worthless . The options will be removed from your account and you’ll realize a max loss on the position.

If the underlying’s price closes in between the strikes of the call debit spread , your long call will be exercised and the other 3 options should expire worthless . Be cautious of this scenario. You’ll be left with a long stock position at the long strike price of the call debit spread. Your brokerage account will show a reduced buying power or account deficit as a result. This can potentially result in losses greater than the theoretical max loss of the condor. If you don't have the necessary buying power, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying stock price is between the short strike prices of the 2 spreads , the call debit spread will be in-the-money and at max value and the call credit spread should expire worthless . The long call of the call debit spread will be automatically exercised and the short call of the call debit spread should be assigned. The options of the call credit spread will be removed from your individual investing account and you’ll realize a max gain on the overall position.

If the underlying’s price closes in between the strikes of the call credit spread , both strikes of the debit spread and the short call of the credit spread will be in-the-money . The long call of the credit spread will be out-of-the-money . Be cautious of this scenario. While you will realize a max gain on the call debit spread (the long and short call will be exercised and assigned), the short call of the credit spread will also likely be assigned, and you’ll be left with a short stock position, which carries undefined risk. Meanwhile, the long call of the credit spread will no longer exist to offset the assignment. This can potentially result in losses greater than the theoretical max loss of the condor.

If the underlying’s price is above all four strike prices , all four options will expire in-the-money . Both long calls will be exercised and both short calls will likely be assigned. You’ll realize a max loss on the overall position.

For call condors, be cautious of an early assignment and an upcoming dividend .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on one or both of your short call options, you can take one of the following actions by the end of the following trading day:

• Exercise one or both of your long calls (thereby buying the shares at the respective long strike prices)

In either circumstance, your individual investing account will display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Dividend risk is the risk that you’ll be assigned on one or both of your short call options the night before the ex-dividend date (where you have to pay the dividend to the exerciser). This is one of the biggest risks of trading spreads with a short call option, which could result in a greater loss (or lower gain) than the theoretical max gain and loss scenarios, as described earlier. Traders can avoid this by closing their position during regular trading hours prior to the ex-dividend date. To learn more, see Dividend risks .

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account.

Short call condor

What’s a short call condor.

A short call condor is a four-legged, volatility strategy that involves simultaneously selling a call credit spread and buying a call debit spread with higher strikes. All options have the same expiration date and are on the same underlying stock or ETF. Generally, at the outset the call credit spread is in-the-money and the call debit spread is out-of-the-money, but that’s not always the case. Typically, the width of both spreads are the same, and the long strikes are the same distance from the underlying stock.

A short call condor is a premium selling strategy. Since the call spread you’re selling has lower strike prices than the one you’re buying, typically you’ll collect a net credit to open the position. Like most premium selling strategies, the goal of selling a call condor is to buy it back later, hopefully for a profit. Ideally, you want the underlying stock price to rise or fall sharply, moving beyond either short strike by expiration.

Selling a call condor is quite similar to buying an iron condor. They’re both volatility strategies, contain four option legs, and perform best when the underlying stock price rises or falls by a large amount. In fact, when the same strike prices are used, a short call condor and long iron condor will have nearly the same risk and reward profiles.

However, a short call condor is often constructed using an in-the-money call spread which exposes you to possible dividend risk while increasing the likelihood of an early assignment. In fact, this strategy is rarely used as an opening strategy, and more commonly utilized as a trade management technique. For these reasons, if you have a volatile outlook, you might consider avoiding selling a call condor, and instead opt for buying a straddle, strangle, iron condor, or iron butterfly.

A short call condor is generally considered a volatility strategy. Typically, you use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. However, a short call condor is rarely used by retail traders because other strategies (long straddle, long strangle, long iron condor, or long iron butterfly) are generally better suited to take advantage of expected volatility. More often, a short call condor is used as a trade management strategy.

For example, if you sell a call credit spread that’s initially out-of-the-money, and the underlying stock rallies above the long strike, the spread will be in-the-money and trading for a loss. If you believe the upward trend is likely to continue, you might manage the losing trade by buying an out-of-the-money call debit spread, thus creating a short call condor. This allows you to speculate on the upward trend and attempt to offset losses of the call credit spread if the stock continues to rise. Of course, this strategy comes with added risk because it may add to existing losses.

To sell a call condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. The textbook approach is to sell an in-the-money call credit spread and buy an out-of-the-money call debit spread . Typically, both spreads have the same width between their respective strike prices and the long strikes of each call spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example short call condor would be selling the $90/$95 call spread and simultaneously buying the $105/$110 call spread. Both spreads have the same width between the strikes ($5), and both long options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

Next, specify your price. The net credit is a combination of the four individual options (the ones you’re buying and selling in each call spread). As such, a call condor will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders , trying to get them filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). You might get a fill, but you’ll more likely need a buyer to increase the bid. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A short call condor is typically used to speculate on the future volatility of the underlying stock and typically has no directional bias. It’s a unique strategy because you collect a credit, but it acts like a premium buying strategy strategy. Just like buying a straddle, strangle, or iron condor, you want the underlying stock or ETF to make a large move up or down (ideally past either short strike). This creates potential opportunities to close the call condor for a profit before expiration. If you hold the position through expiration and the underlying stock is below or above your short strikes, you’ll likely realize a max gain.

Although you collect a credit, you’re required to have enough cash collateral to cover the potential max loss of the strategy. This collateral is netted against the total credit that you receive and is calculated by taking the width of the short call spread, subtracting the total net credit collected, and then multiplying that number by 100.

For example, let’s say you sell a call condor where both sides are 5-points wide. Imagine you sell the more expensive, lower strike call spread trading for a net credit of $3.75 and buy the cheaper higher strike call spread which costs $1.25. You’d collect $2.50 to sell the call condor. And since each option typically controls 100 shares of the underlying asset, your credit would be $250 for each condor you sell. Meanwhile, the collateral required will be $500, which is the width of the short call spread multiplied by 100. If you sold 10 condors, you’d collect $2,500, but the required collateral would be $5,000, and so on.

Look for an underlying stock or ETF that is likely to break out of its range and make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the lower end of its implied volatility range, with a potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest. Be aware if the underlying stock or ETF pays a dividend as a call condor may contain an in-the-money short call option.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated call condors may bring in a higher premium, but are more likely to experience a max loss. Longer-dated call condors provide a longer window for the underlying stock to move, but the credit received may not be worth the risk for some. Meanwhile, the options expiring in 60-90 days generally provide a window for the underlying stock to move while balancing the risk and reward while mitigating losses from time decay, which accelerate as expiration approaches.

Short call condors are typically created by selling an in-the-money call credit spread and buying an out-of-the-money call debit spread. This means the short call spread will be below the current stock price and the long call spread will be above it. The closer your strikes are to the underlying stock price, the less credit you’ll collect, but the theoretical probability of success is greater. Meanwhile, the further away your strikes are, the more credit you’ll collect, but the theoretical probability of success will be much lower.

The amount of premium you collect determines the risk and reward ratio of the trade. Many traders will look to collect roughly ⅓ to ½ the width of the spread. For example, if you’re selling a 1-point wide call condor, you’d look to collect around $0.40. A 5-point wide condor would be around $2, a 10-point wide spread, $4 in premium, and so on. If the potential premium collected is less than this, the reward may not be worth the risk. If the ratio is more than this, you may be building your condor with strikes that are too far away from the current underlying stock price. While this isn’t an absolute rule to follow, it’s a helpful guideline.

How is selling a call condor different from buying an iron condor?

Although a short call condor and a long iron condor are both volatility strategies, there are many differences between them.

A short call condor involves buying and selling 2 different call spreads, whereas a long iron condor consists of buying a call spread and a put spread.

You collect a credit to sell a call condor whereas you’ll pay a debit to buy an iron condor.

Opening a short call condor may involve selling an in-the-money call spread whereas an iron condor typically involves buying 2 out-of-the-money spreads, a call spread and a put spread.

In general, a short call condor is less commonly used by traders compared to buying an iron condor.

A short call condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to credit received for selling the condor. Max gain occurs if the underlying stock is trading below the short call strike of the credit spread, or above the short call strike of the debit spread at expiration.

Assuming both spreads of the call condor are of equal width, the theoretical max loss is equal to the width of the spread minus the credit collected. This occurs if the underlying stock is trading at or between the long strikes of the debit and credit spreads at expiration. In this scenario, the call credit spread will be in-the-money and at max value. Meanwhile, the call debit spread will expire worthless.

At expiration, a short call condor has 2 breakeven points—one above the long call strike of the debit spread and one below the long call strike of the credit spread. To calculate the upside breakeven, subtract the total credit collected from the short call strike price of the debit spread. To calculate the downside breakeven, add the total premium collected to the short call strike price of the credit spread.

Yes. If the long call of the debit spread is exercised or the short call of the credit spread is assigned, you’ll purchase or sell 100 shares of the underlying stock. In this scenario, you’ll have either a long or short stock position and it’s possible to experience losses greater than the theoretical max loss of the call condor.

Imagine XYZ stock is trading for $101.88. The following lists the options chain for an expiration date 75 days in the future. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money. The strike prices are in the middle.

You expect volatility and decide to sell the XYZ $90/$95/$105/$110 call condor:

Sell 1 XYZ $90 Call for $14.50

Buy 1 XYZ $95 Call for ($11.00)

Sell 1 XYZ $110 Call for $3.20

= Total net credit is $1.75

The theoretical max gain is $1.75 per share or $175 total. This is the net credit collected for selling the condor. Max gain occurs if XYZ is trading above $110, or below $90 at expiration.

The theoretical max loss is $3.25 or $325 total. Max loss occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, the credit spread would be at max value and the debit spread would likely expire worthless.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by adding the total premium collected ($1.75) to the short call strike price of the credit spread ($90). The higher breakeven is calculated by subtracting the total premium collected ($1.75) from the short call strike price of the debit spread ($110).

A short call condor benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below either short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help or hurt the value of a short call condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your short condor, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the condor and how many days are left until expiration. If the position is profitable, you can try to buy to close it (or leg out) before expiration. If the position is worth more than your original selling price, you can attempt to cut your losses by buying to close the short call condor.

Also, as expiration nears, watch out if the underlying stock price starts trading between the long and short strikes of either call spread. This might result in a potential exercise or assignment and you may need to manage the position as it approaches expiration.

A short call condor involves four options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. The short call condor is generally delta neutral (although it could be slightly positive or negative). The net delta will fluctuate as the underlying stock price moves up or down, but will generally stay close to neutral.

Meanwhile gamma is positive and is at its highest point when the underlying stock is between the 2 short strikes. It will become more negative the lower or higher the stock gets. A short call condor has a negative theta and a positive vega . Over time, these can change as the underlying stock moves up or down.

Bottom line, this strategy is about movement—you want the underlying stock to make a large move in either direction, ideally beyond either short strike, and stay there.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short call condor, you can do the following that's described in this section:

Buy to close the short call condor

To close your position, take the opposite actions that you took to open it. For a short call condor, this involves simultaneously buying-to-close the call credit spread and selling-to-close the call debit spread. Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your call condor for less than your selling price, you’ll profit. If you buy it for more than your selling price, you’ll realize a loss. And if you buy it at the same price as your selling price, you’ll break even.

Keep in mind : Prior to expiration, you’ll unlikely be able to close the position for a max gain or max loss. In many cases, you may have to pay slightly more than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a call condor. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this, you could create a greater gain or loss than the theoretical max gain or loss of the original call condor.

You can also decide to close one side of the call condor. This involves buying-to-close the call credit spread or selling-to-close the call debit spread individually, allowing you to take profits or cut losses on one-half of the spread. This approach can potentially result in a greater max loss as compared to the original condor.

If the underlying’s price is below all four strike prices , all four options should expire worthless. The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price closes in between the strikes of the call credit spread , the short call of the credit spread will be in-the-money , and the long call of the credit spread and both calls of the debit spread will expire out-of-the-money . Be cautious of this scenario. While the call debit spread should expire worthless, the short call of the credit spread will be assigned, and you’ll be left with a short stock position, which carries undefined risk. Meanwhile, the long call of the credit spread will no longer exist to offset the assignment. This can potentially result in losses greater than the theoretical max loss of the condor.

If the underlying’s price closes in between the long strikes of both spreads , the credit spread will be in-the-money and the debit spread will be out-of-the-money . The short call of the credit spread should be assigned and the long call of the credit spread will be automatically exercised. The options of the call debit spread will be removed from your account and you’ll realize a max loss on the overall position.

If the underlying’s price closes in between the strikes of the call debit spread , the call credit spread and long call of the debit spread will be in-the-money , and the short call of the debit spread should expire out-of-the-money . Be cautious of this scenario. You’ll be left with a long stock position at the long call strike price of the call debit spread. Your brokerage account will show a reduced buying power or account deficit as a result. This can potentially result in losses greater than the theoretical max loss of the condor. If you don't have the necessary buying power, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price is above all four strike prices , all four options will expire in-the-money . Both long calls will be exercised and both short calls will likely be assigned. You’ll realize a max gain on the overall position.

In either circumstance, your brokerage account will show a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call is typically settled within 1-2 trading days, which will partially or fully restore your buying power. To learn more, see Early assignments .

Long put condor

What’s a long put condor.

A long put condor is a four-legged neutral strategy that involves simultaneously buying a put debit spread and selling a put credit spread with lower strike prices. All options have the same expiration date and are on the same underlying stock or ETF. Generally, at the outset the put debit spread is in-the-money and the put credit spread is out-of-the-money, but that’s not always the case. Typically, the width of both spreads are the same, and the short strikes are the same distance from the underlying stock.

A long put condor is a premium buying strategy. Since the put spread you’re buying has higher strike prices than the one you’re selling, typically you’ll pay a net debit to open the position. Like most premium buying strategies, the goal of buying a put condor is to sell it later, hopefully for a profit. Ideally, you want the underlying stock price to be between the 2 short strikes at expiration.

Buying a put condor is quite similar to selling an iron condor. They’re both neutral strategies, contain four option legs, and perform best when the underlying stock price remains steady and range bound. In fact, when the same strike prices are used, a long put condor and short iron condor will have nearly the same risk and reward profiles.

However, you’ll pay a net debit for buying a put condor, but collect a net credit for selling an iron condor. In addition, the long put condor is often constructed using an in-the-money put spread which increases the likelihood of an early assignment. For these reasons, if you have a neutral outlook, you might consider avoiding buying a put condor, and opt for selling an iron condor instead.

A long put condor is generally considered a neutral strategy. The textbook approach is to use it when you expect the underlying stock price to be range bound for a period of time. Having said that, a neutral put condor centered around current underlying stock price is rarely used as an opening strategy. More often, it’s used as a bearish strategy and/or as a trade management strategy.

For example, if you buy a put debit spread that’s initially out-of-the-money, and the underlying stock falls below the short strike, the spread will be in-the-money. If you believe the downward trend is likely to pause, you might sell an out-of-the-money put credit spread against your in-the-money long put debit spread, thus creating a long put condor.

Additionally, a long put condor can be created at the outset as a bearish strategy by buying and selling 2 out-of-the-money put spreads. With this variation, you want the underlying stock to fall, but settle within the range between the 2 short strike prices. In a sense, you’re financing the purchase of the higher strike put debit spread with a sale of a lower strike put credit spread.

To buy a put condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. The textbook, but less common approach is to buy an in-the-money put debit spread and sell an out-of-the-money put credit spread . Typically, both spreads have the same width between their respective strike prices and the short strikes of each put spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example long put condor would be selling the $90/$95 put spread and simultaneously buying the $105/$110 put spread. Both spreads have the same width between the strikes ($5), and both short options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, put condors are traded simultaneously using a spread order . A spread order is a combination of individual orders, known as legs . The combined order is sent and all four legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the condor first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

Next, specify your price. The net debit is a combination of the four individual options (the ones you’re buying and selling in each put spread). As such, a put condor will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

A long put condor is used to generate income . It’s a unique strategy in the sense that you pay a debit, but it acts like a premium selling strategy. Just like selling an iron condor, ideally, you want the underlying stock or ETF to stay in a range between your short strikes. If this happens, over time, the long put spread will approach max value and the short put spread will decrease in value.

This creates potential opportunities to close the put condor for a profit before expiration. If you hold the position through expiration and the underlying stock is trading at or between your short strikes, your long put spread will be in-the-money (and at max value) and the short put spread should expire worthless. The premium collected from selling the lower strike put spread will be added to the profit earned from the long put spread, resulting in a max gain.

When you buy a put condor, you’re buying a more expensive higher strike put spread and selling a cheaper lower strike put spread. As a result, you’ll pay one combined net debit for the put condor. For example, imagine the long put spread costs $3.75 and the short put spread is trading for a net credit of $1.25. You’d pay $2.50 to buy the put condor. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $250 for each put condor you purchase.

Look for an underlying stock or ETF that you think is likely to stay within a range (if trading a neutral condor) or one that you think is likely to fall but settle within a range (if trading a bearish condor). It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that optimizes your probability for success. Shorter-dated put condors will be more impacted by time decay, but will likely be more expensive. Longer-dated put condors are less expensive, but you’ll be waiting longer for the options to decay while giving the underlying more opportunity to move. Meanwhile, options expiring in 30-45 days generally provide a window for the underlying stock to stay within its range while balancing costs and capturing the benefits of time decay, which accelerate as the expiration approaches. Remember, put condors are a premium buying strategy, but tend to act like a premium selling strategy which benefits from time decay.

As mentioned, the strike prices of a long put condor depends on the situation. A neutral put condor is created by buying an in-the-money put spread and selling an out-of-the-money put spread. A bearish put condor involves 2 out-of-the-money put spreads. Meanwhile, it’s more common to leg into a put condor by buying an out-of-the-money put spread, and then selling another out-of-the-money put spread if the first one becomes in-the-money.

The total premium paid (and how many put condors you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is a long put condor different from a short iron condor?

Although long put condors and short iron condors are both neutral strategies, there are many differences between them.

A long put condor involves buying and selling 2 different put spreads, whereas a short iron condor consists of selling a put spread and a call spread.

You pay a net debit to buy a put condor whereas you collect a credit for selling an iron condor.

Opening a long put condor may involve buying an in-the-money put spread whereas an iron condor typically involves selling 2 out-of-the-money spreads, a put spread and a call spread.

A long put condor is more often used as a trade management strategy, whereas a short iron condor is often used as an opening strategy.

A long put condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the lower breakeven price and below the upper breakeven price.

The theoretical max gain is limited to the width of the debit spread minus the total net debit paid for the entire condor. To realize a max gain, the underlying stock price must close at or between the 2 short strikes of the debit and credit spreads at expiration. In this scenario, the put debit spread will be at max value and the put credit spread will expire worthless.

Assuming both spreads of the put condor are of equal width, the theoretical max loss is limited to the net debit paid. This occurs if the underlying stock price is above the long put of the debit spread or below the long put of the credit spread at expiration.

At expiration, a put condor has 2 breakeven points—one above the short put strike of the credit spread and one below the short put strike of the debit spread. To calculate the upside breakeven, subtract the total premium paid from the strike price of the long put of the debit spread. To calculate the downside breakeven, add the total premium paid to the strike price of the long put of the credit spread.

Yes. If the long put of the debit spread is exercised or short put of the credit spread is assigned, you’ll either buy or sell 100 shares of the underlying stock. In this scenario, you’ll be left with either a long or short stock position, and it’s possible to experience losses greater than the theoretical max loss of the put condor.

You believe XYZ will trade in a narrow range and decide to buy the XYZ $90/$95/$105/$110 put condor:

Buy 1 XYZ $90 put for ($3.20)

Sell 1 XYZ $95 put for $4.95

Sell 1 XYZ $105 put for $11.00

Buy 1 XYZ $110 put for ($14.50)

The theoretical max gain is $3.25, or $325 total. Max gain occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, the debit spread would be at max value ($5) and the credit spread would be out-of-the-money, and would likely expire worthless. Your profit on the debit spread would be $1.50 and the profit on the credit spread would be $1.75, for a total of $3.25 per share.

The theoretical max loss is $1.75 per share, or $175 total. This occurs if XYZ is trading above $110 or below $90 at expiration.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by adding the total premium paid ($1.75) to the long put strike price of the credit spread ($90). The higher breakeven is calculated by subtracting the total premium paid ($1.75) from the long put strike price of the debit spread ($110).

A long put condor benefits if the underlying stock price remains stable and range bound. Ideally the underlying stock trades between the short strike prices of the lower strike put credit spread and the higher strike put debit spread. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help or hurt the value of your long put condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to or between the short strikes, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

Also, as the expiration nears, watch out if the underlying stock price starts trading between the long and short strikes of either put spread. This might result in a potential exercise or assignment and you may need to manage the position as it approaches expiration.

Keep in mind : Any time you have a short put option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like being long the underlying stock.

A long put condor involves four options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. The long put condor is generally delta and rho neutral (although it could be slightly positive or negative). The net delta will fluctuate as the underlying stock price moves up or down, but will generally stay close to neutral.

Meanwhile gamma is negative and is at its lowest point when the underlying stock is between the 2 short strikes. It will become more positive the lower or higher the stock gets. A long put condor has a positive theta and a negative vega . Over time, these can change as the underlying stock moves up or down.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long put condor, you can do the following that's described in this section:

Sell to close the put condor

Close the put debit spread or put credit spread.

To close your position, take the opposite actions that you took to open it. For a long put condor, this involves simultaneously selling to close the put debit spread and buying to close the put credit spread. typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your put condor for less than your purchase price, you’ll realize a loss. If you sell it for more than your purchase price, you’ll realize a gain. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a put condor. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this, you could create a greater gain or loss than the theoretical max gain or loss of the original condor.

Note : At Robinhood, to leg out of a put condor, if you don’t have the required collateral to support a cash secured put, you must buy to close a short put option before you can sell to close a long put option. Once you’ve closed one short and one long option, you must once again close the remaining short put option before you close the last long put option.

You can also decide to close one side of the put condor. This involves buying-to-close the put credit spread or selling-to-close the put debit spread individually, allowing you to take profits or cut losses on one-half of the spread. This approach can potentially result in a greater max loss as compared to the put condor.

If the underlying’s price is below all 4 strike prices , all 4 options will expire in-the-money . Both long puts will be exercised and both short puts will likely be assigned. You’ll realize a max loss on the overall position.

If the underlying’s price closes in between the strikes of the put credit spread , both strikes of the debit spread and the short put of the credit spread will be in-the-money . The long put of the credit spread will be out-of-the-money . Be cautious of this scenario. While you will realize a max gain on the put debit spread (the long and short put will be exercised and assigned), the short put of the credit spread will also likely be assigned, and you’ll be left with a long stock position. Meanwhile, the long put of the credit spread will no longer exist to offset the assignment. Your brokerage account may display a reduced buying power or account deficit as a result. This can potentially result in losses greater than the theoretical max loss of the condor.

If the underlying stock price is between the short strike prices of the 2 spreads , the put debit spread will be in-the-money and at max value and the put credit spread should expire worthless . The long put of the put debit spread will be automatically exercised and the short put of the put debit spread should be assigned. The options of the put credit spread will be removed from your individual investing account and you’ll realize a max gain on the overall position.

If the underlying’s price closes in between the strikes of the put debit spread , your long put will be exercised and the other 3 options should expire worthless . Be cautious of this scenario. You’ll be left with a short stock position at the long strike price of the put debit spread, which carries undefined risk. Your brokerage account may display a reduced buying power or account deficit as a result. This can potentially result in losses greater than the theoretical max loss of the condor and Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price is above all 4 strike prices , all 4 options should expire worthless . The options will be removed from your account and you’ll realize a max loss on the position.

For put condors, be cautious of an early assignment .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on one or both of your short put options, you can take one of the following actions by the end of the following trading day:

• Exercise one or both of your long puts (thereby selling the shares at the respective long strike prices)

In either circumstance, your individual investing account will display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Short put condor

What’s a short put condor.

A short put condor is a four-legged, volatility strategy that involves simultaneously selling a put credit spread and buying a put debit spread with lower strikes. All options have the same expiration date and are on the same underlying stock or ETF. Generally, at the outset the put credit spread is in-the-money and the put debit spread is out-of-the-money, but that’s not always the case. Typically, the width of both spreads are the same, and the long strikes are the same distance from the underlying stock.

A short put condor is a premium selling strategy. Since the put spread you’re selling has higher strike prices than the one you’re buying, typically you’ll collect a net credit to open the position. Like most premium selling strategies, the goal of selling a put condor is to buy it back later, hopefully for a profit. Ideally, you want the underlying stock price to rise or fall sharply, moving beyond either short strike by expiration.

Selling a put condor is quite similar to buying an iron condor. They’re both volatility strategies that contain 4 option legs and perform best when the underlying stock price rises or falls by a large amount. In fact, when the same strike prices are used, a short put condor and long iron condor will have nearly the same risk and reward profiles.

However, a short put condor is often constructed using an in-the-money put spread, increasing the likelihood of an early assignment. In fact, this strategy is rarely used as an opening strategy, and more commonly utilized as a trade management technique. For these reasons, if you have a volatile outlook, you might consider avoiding selling a put condor, and instead opt for buying a straddle, strangle, iron condor, or iron butterfly.

A short put condor is generally considered a volatility strategy. The textbook approach is to use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. However, a short put condor is rarely used by retail traders because other strategies (long straddle, long strangle, long iron condor, long iron butterfly) are typically better suited to take advantage of expected volatility. More often, a short put condor is used as a trade management strategy.

For example, if you sell a put credit spread that’s initially out-of-the-money, and the underlying stock drops below the long strike, the spread will be in-the-money and trading for a loss. If you think the downward trend is likely to continue, you might manage the losing trade by buying an out-of-the-money put debit spread, thus creating a short put condor. This allows you to speculate on the downward trend and attempt to offset losses of the put credit spread if the stock continues to fall. Of course, this strategy comes with added risk as you may add to existing losses.

To sell a put condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. The textbook approach is to sell an in-the-money put credit spread and buy an out-of-the-money put debit spread . Typically, both spreads have the same width between their respective strike prices and the long strikes of each put spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example short put condor would be buying the $90/$95 put spread and simultaneously selling the $105/$110 put spread. Both spreads have the same width between the strikes ($5), and both long options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, put condors are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 4 legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the condor first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

Next, specify your price. The net credit is a combination of the 4 individual options (the ones you’re buying and selling in each put spread). As such, a put condor will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

A short put condor is typically used to speculate on the future volatility of the underlying stock and typically has no directional bias. It’s a unique strategy because you collect a credit, but it acts like a premium buying strategy. Just like buying a straddle, strangle, or iron condor, you want the underlying stock or ETF to make a large move up or down (ideally past either short strike). This creates potential opportunities to close the put condor for a profit before expiration. If you hold the position through expiration and the underlying stock is below your lower short strike or above your higher short strike, you’ll likely realize a max gain.

Although you collect a credit, you’re required to have enough cash collateral to cover the potential max loss of the strategy. This collateral is netted against the total credit that you receive and is calculated by taking the width of the short put spread, subtracting the total net credit collected, and then multiplying that number by 100.

For example, let’s say you sell a put condor where both sides are 5-points wide. Imagine you sell the more expensive, higher strike put spread trading for a net credit of $3.75 and buy the cheaper lower strike put spread which costs $1.25. You’d collect $2.50 to sell the put condor. And since each option typically controls 100 shares of the underlying asset, your credit would be $250 for each condor you sell. Meanwhile, the collateral required will be $500, which is the width of the short put spread multiplied by 100. If you sold 10 condors, you’d collect $2,500, but the required collateral would be $5,000, and so on.

Look for an underlying stock or ETF that is likely to break out of its range and make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the lower end of its implied volatility range, with a potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated put condors may bring in a higher premium, but are more likely to experience a max loss. Longer-dated put condors provide a longer window for the underlying stock to move, but the credit received may not be worth the risk for some. Meanwhile, the options expiring in 60-90 days generally provide a window for the underlying stock to move while balancing the risk and reward while mitigating losses from time decay, which accelerate as expiration approaches.

When selecting strike prices , short put condors are typically created by selling an in-the-money put credit spread and buying an out-of-the-money put debit spread. This means the short put spread will be above the current stock price and the long put spread will be below it. The closer your strikes are to the underlying stock price, the less credit you’ll collect, but the theoretical probability of success is greater. Meanwhile, the further away your strikes are, the more credit you’ll collect, but the theoretical probability of success will be much lower.

The amount of premium you collect determines the risk and reward ratio of the trade. Many traders will look to collect roughly ⅓ to ½ the width of the spread. For example, if you’re selling a 1-point wide put condor, you’d look to collect around $0.40. A 5-point wide condor would be around $2, a 10-point wide spread, $4 in premium, and so on. If the potential premium collected is less than this, the reward may not be worth the risk. If the ratio is more than this, you may be building your condor with strikes that are too far away from the current underlying stock price. While this isn’t an absolute rule to follow, it’s a helpful guideline.

How is selling a put condor different from buying an iron condor?

Although a short put condor and a long iron condor are both volatility strategies, there are many differences between them.

A short put condor involves buying and selling 2 different put spreads, whereas a long iron condor consists of buying a put spread and a call spread.

You collect a credit to sell a put condor whereas you’ll pay a debit to buy an iron condor.

Opening a short put condor may involve selling an in-the-money put spread whereas an iron condor typically involves buying 2 out-of-the-money spreads, a put spread and a call spread.

In general, a short put condor is less commonly used by traders compared to buying an iron condor.

A short put condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to credit received for selling the condor. Max gain occurs if the underlying stock is trading above the short put strike of the credit spread, or below the short put strike of the debit spread at expiration.

Assuming both spreads of the put condor are of equal width the theoretical max loss is equal to the width of the spread minus the credit collected. This occurs if the underlying stock is trading at or between the long strikes of the debit and credit spreads. In this scenario, the put credit spread will be in-the-money and at a max loss. Meanwhile, the put debit spread will expire worthless.

At expiration, a short put condor has 2 breakeven points—one above the long put strike of the credit spread and one below the long put strike of the debit spread. To calculate the upside breakeven, subtract the total credit collected from the short put strike price of the credit spread. To calculate the downside breakeven, add the total premium collected to the short put strike price of the debit spread.

Yes. If the long put of the debit spread is exercised or the short put of the credit spread is assigned, you’ll purchase or sell 100 shares of the underlying stock. In this scenario, you’ll either have a long or short stock position and could experience losses greater than the theoretical max loss of the put condor.

You expect volatility and decide to sell the XYZ $90/$95/$105/$110 put condor:

Sell 1 XYZ $90 put for $3.20

Buy 1 XYZ $95 put for ($4.95)

Buy 1 XYZ $105 put for ($11.00)

Sell 1 XYZ $110 put for $14.50

The theoretical max gain is $1.75 per share, or $175 total. This is the net credit collected for selling the condor. Max gain occurs if XYZ is trading above $110, or below $90 at expiration.

The theoretical max loss is $3.25, or $325 total. Max loss occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, the credit spread would be at max value and the debit spread would likely expire worthless.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by adding the total premium collected ($1.75) to the short put strike price of the debit spread ($90). The higher breakeven is calculated by subtracting the total premium collected ($1.75) from the short put strike price of the credit spread ($110).

A short put condor benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below either short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of short put condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your short condor, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the condor and how many days are left until expiration. If the position is profitable, you can try to buy to close it before expiration. If the position is worth more than your original selling price, you can attempt to cut your losses by doing the same.

Also, as expiration nears, watch out if the underlying stock price starts trading between the long and short strikes of either put spread. This might result in a potential exercise or assignment and you may need to manage the position as it approaches expiration.

Keep in mind : Any time you have a short put option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like long stock.

A short put condor involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. The short put condor is generally delta neutral (although it could be slightly positive or negative). The net delta will fluctuate as the underlying stock price moves up or down, but will generally stay close to neutral.

Meanwhile gamma is positive and is at its highest point when the underlying stock is between the 2 short strikes. It will become more negative the lower or higher the stock gets. A short put condor has a negative theta and a positive vega . Over time, these can change as the underlying stock moves up or down.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short put condor, you can do the following that's described in this section:

Buy to close the short put condor

To close your position, take the opposite actions that you took to open it. For a short put condor, this involves simultaneously buying-to-close the put credit spread and selling-to-close the put debit spread. Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your put condor for less than your selling price, you’ll profit. If you buy it for more than your selling price, you’ll realize a loss. And if you buy it at the same price as your selling price, you’ll break even.

Some traders prefer to leg out of a put condor. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. However, by doing this, you could create a greater gain or loss than the theoretical max gain or loss of the original put condor.

Note : At Robinhood, to leg out of a put condor, if you don’t have the collateral available to support a cash secured put, you must buy to close a short put option before you can sell to close a long put option. After you’ve closed one short and one long option, you must once again close the remaining short put option before you close the last long put option.

You can also decide to close one side of the put condor. This involves buying-to-close the put credit spread or selling-to-close the put debit spread individually, allowing you to take profits or cut losses on one-half of the spread. This approach can potentially result in a greater max gain as compared to the original condor.

If the underlying’s price is below all 4 strike prices , all 4 options will expire in-the-money . Both long puts will be exercised and both short puts will likely be assigned. You’ll realize a max gain on the overall position.

If the underlying’s price closes in between the strikes of the put debit spread , the put credit spread and long put of the debit spread will be in-the-money , and the short put of the debit spread should expire out-of-the-money . Be cautious of this scenario. You’ll be left with a short stock position at the long put strike price of the put debit spread, which carries unlimited risk. This can potentially result in losses greater than the theoretical max loss of the condor. If you don't have the necessary shares of the underlying to sell, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price closes in between the long strikes of both spreads , the credit spread will be in-the-money , and the debit spread will be out-of-the-money . The short put of the credit spread should be assigned and the long put of the credit spread will be automatically exercised. The options of the put debit spread will be removed from your account and you’ll realize a max loss on the overall position.

If the underlying’s price closes in between the strikes of the put credit spread , the short put of the credit spread will be in-the-money , and the long put of the credit spread and both puts of the debit spread will expire out-of-the-money . Be cautious of this scenario. While the put debit spread should expire worthless, the short put of the credit spread will be assigned, and you’ll be left with a long stock position. Meanwhile, the long put of the credit spread will no longer exist to offset the assignment. Your brokerage account may show a reduced buying power or account deficit as a result. This can potentially result in losses greater than the theoretical max loss of the condor.

If the underlying’s price is above all 4 strike prices , all 4 options should expire worthless . The options will be removed from your account and you’ll realize a max gain on the position.

In either circumstance, your brokerage account will display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long put is typically settled within 1-2 trading days, which will partially or fully restore your buying power. To learn more, see Early assignments .

Long iron condor

What’s a long iron condor.

A long iron condor is a four-legged, volatility strategy that involves simultaneously buying both an out-of-the-money call debit spread and an out-of-the-money put debit spread . All options have the same expiration date and are on the same underlying stock or ETF. Typically, the width of both spreads are the same, and the long strikes are the same distance from the underlying stock.

A long iron condor is a premium buying strategy. Since you’re buying 2 vertical spreads, you’ll pay a net debit to open the position. Like most long premium strategies, the goal of buying an iron condor is to sell it later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction).

A long iron condor isn't commonly used by many retail traders. It can be costly and only one side of your iron condor can be profitable at expiration. Therefore, you’re paying for 2 debit spreads for no added reward. Lastly, if the underlying stock or ETF doesn’t move far enough, it’s possible you’ll lose the entire premium paid for both spreads.

A long iron condor is a volatility strategy. You might use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. In addition, a long iron condor may benefit from an increase in implied volatility and is a cheaper alternative to buying a strangle (assuming the same long strikes). However, a strangle has greater profit potential, among other tradeoffs.

To buy an iron condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. Almost always, iron condors are built by buying an out-of-the-money put spread and an out-of-the-money call spread . Typically, both spreads have the same width between their respective strike prices and the long strikes of each debit spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example long iron condor would be buying the $90/$95 put spread and simultaneously buying the $105/$110 call spread. Both spreads have the same width between the strikes ($5), and both long options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

After you’ve selected your spread, choose a quantity, and select your order type. Like other spreads, iron condors are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 4 legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the iron condor first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you think the stock is more likely to move up or down, you could also skew your iron condor, meaning your spreads aren't equidistant from the underlying stock price and/or they aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard iron condor.

Next, specify your price. The net price of the spread is a combination of the 4 individual options (the ones you’re buying and the one you’re selling in each debit spread). As such, an iron condor will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you’ll need a seller to drop their asking price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

Note : The “gut iron condor” is a variation of the iron condor that involves buying 2 in-the-money spreads, which is a seldom-used strategy. While it might work in rare circumstances, the cost and risk associated with buying a gut iron condor generally keeps traders away from this variation.

A long iron condor is typically used to speculate on the future volatility of the underlying stock and typically has no directional bias. Instead, you want the underlying stock or ETF to make a large move up or down (ideally past either short strike). If this happens, one debit spread will likely increase in value, while the other typically decreases. This creates potential opportunities to sell the entire iron condor for a profit before expiration. While this may seem like a foolproof strategy, it’s not that simple.

If the market anticipates higher volatility, the cost of options will be higher, and vice versa. Essentially, you’ll need the underlying stock to move far enough to offset the total cost of the iron condor. Put another way, the underlying stock must be more volatile than what the market was expecting. And since an iron condor is commonly constructed using out-of-the-money options, the magnitude of the move may need to be substantial.

When you buy an iron condor, you’re buying 2 debit spreads—a call debit spread and a put debit spread. As a result, you’ll pay one combined net debit for the iron condor. For example, imagine a call spread is trading for a net debit of $1.75 and a put spread for $1.50. You’d pay $3.25 to buy the iron condor. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $325 for each iron condor you purchase.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated iron condors are cheaper, but will be more impacted by time decay. Longer-dated iron condors are more expensive and more sensitive to changes in implied volatility. Meanwhile, the options expiring in 60-90 days generally provide a window for the underlying stock to move while balancing costs and mitigating losses from time decay, which accelerate as expiration approaches.

Iron condors are typically created using out-of-the-money strike prices . This means the put strikes will be below the current stock price and the call strikes will be above it. The closer your strikes are to the underlying stock price, the more expensive it will be, but the theoretical probability of success is greater. Meanwhile, the further out-of-the-money your strikes are, the less expensive the iron condor will be, but the theoretical probability of success will be much lower.

The total premium paid (and how many iron condors you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Remember that long iron condors are costly, and typically have less than a 50% probability of success. Manage your risk accordingly.

How is buying an iron condor different from buying a strangle?

Although long iron condors and long strangles are both volatility strategies, there are many differences between them.

Iron condors consist of a call debit spread and put debit spread. Strangles consist of a single call and a single put.

The value of an iron condor is less reactive to price changes of the underlying compared to strangle. This means the same price change of the underlying will typically cause the strangle to gain or lose more value than an iron condor.

A long iron condor is typically cheaper than buying a strangle (assuming the same long strikes) but has a lower theoretical max gain and loss.

A strangle is more sensitive to time decay and changes in implied volatility. Because an iron condor contains long and short options, these factors are lessened.

A strangle consists of 2 long options whereas an iron condor is 4 options—2 long and 2 short. As a result, an iron condor exposes you to assignment risk.

A long iron condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to the width of the widest spread in the iron condor minus the total net debit paid. Max gain occurs if the underlying stock is trading below the short strike of the put spread, or above the short strike of the call spread at expiration (assuming both spreads are the same width).

The theoretical max loss is limited to the total premium paid for the iron condor. If the underlying stock is trading at or between the long strikes of your iron condor at expiration, both option spreads will be out-of-the-money and all 4 options should expire worthless.

At expiration, an iron condor has 2 breakeven points—one above the long call strike and one below the long put strike. To calculate the upside breakeven, add the total premium paid to the strike price of the long call. To calculate the downside breakeven, subtract the total premium paid from the put’s strike price.

Yes. If either your long call or long put is exercised, you’ll purchase, or sell 100 shares of the underlying stock. In this scenario, you’ll either own stock, or possibly have a short stock position. With either of these positions, it’s possible to experience losses greater than the total premium paid for the iron condor.

You decide to buy the XYZ $90/$95/$105/$110 iron condor that expires in 75 days:

Sell 1 XYZ $90 Put for $2.70

Buy 1 XYZ $95 Put for ($4.20)

= Total net debit is ($3.25)

The theoretical max gain is $1.75 per share, or $175 total. This is calculated by taking the width of the widest debit spread ($5) and subtracting the amount paid for the iron condor ($3.25). Max gain occurs if XYZ is trading above $110, or below $90 at expiration.

The theoretical max loss is $3.25, or $325 total. Max loss occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, both debit spreads would be out-of-the-money, and all 4 options should expire worthless.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by subtracting the total premium paid ($3.25) from the long put strike price ($95). The higher breakeven is calculated by adding the total premium paid ($3.25) to the long call strike price ($105).

A long iron condor benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below either short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your iron condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to sell your iron condor, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the iron condor and how many days are left until expiration. If the position is profitable, you can try to sell it (or leg out) before expiration. If the position is worth less than your original purchase price, you can attempt to cut your losses by selling the iron condor.

Also, as expiration nears, watch out for if the underlying stock price starts trading between the long and short strikes of either debit spread. This can result in a potential exercise of the long call or put and you may need to proactively manage your position prior to expiration.

Keep in mind : Any time there’s a short call option in the position, there’s a possibility of an early assignment, which exposes the trader to certain risks, like short stock or dividend risk. Any time you have a short put option in your position, there’s the possibility of an early assignment, which exposes you to certain risks, like being long the underlying stock.

A long iron condor involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the iron condor is delta and rho neutral . It has a negative theta and a positive gamma and vega . Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises, the put spread’s deltas will decrease and the call spread’s deltas will increase. Conversely, if the stock drops, the long put spread’s deltas will increase and the long call spread’s deltas will decrease. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Bottom line, this strategy is about movement—you want the underlying stock to make a large move in either direction and stay there.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long iron condor, you can do the following that's described in this section:

Sell to close the iron condor

Close the call spread or put spread.

To close your position, take the opposite actions that you took to open it. For a long iron condor, this involves simultaneously selling-to-close both debit spreads (the ones you initially bought to open). Typically, you’ll receive a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your iron condor for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of an iron condor. You can do this by closing each of the options individually rather than as spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this, you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, to leg out of an iron condor, you must buy to close the short call option first before you can sell to close your long call option. If you sell to close the long put option first, you’ll need to have enough buying power to purchase 100 shares of the underlying asset for each remaining short put.

You can also decide to close one side of the iron condor. This involves selling to close the put spread or the call spread individually, allowing you to take profits or cut losses on one-half of the spread. This resulting position will either be a call debit spread or put debit spread. This approach can potentially result in a greater max gain than that of the iron condor.

When you own an iron condor, you have the right to buy (sell) 100 shares of the underlying asset at the long call (long put) strike price by expiration (assuming you have the required buying power to exercise the call or necessary shares to exercise the put). Typically, you’d only consider doing this if one of your options is in-the-money at expiration . However, if you exercise before expiration, you’ll forfeit any extrinsic value (also known as time value ) remaining in the option.

For this reason, it rarely makes sense to exercise a call or put option prior to expiration. However, there are some scenarios where exercising early could make sense, including:

To capture an upcoming dividend payment . Remember, shareholders receive dividends, options holders do not. If your call option is in-the-money, and the remaining extrinsic value is less than the upcoming dividend, it could make sense to exercise the call of your iron condor prior to the ex-dividend date.

Finally, don't exercise an out-of-the-money option . If you do this, you’re simply buying or selling shares at a worse price than what they’re currently priced in the open market. If you want to own the shares, it’s often better to sell your long call, and then buy the shares in a separate transaction. If you want to sell the shares, it’s often better to sell your put then sell the shares in a separate transaction.

If the underlying stock price is below the short put’s strike price , the put spread will be at max value . In this scenario, the long put will be exercised and the short put would likely be assigned. You’ll realize a max gain. Meanwhile, both call options should expire worthless.

If the underlying stock price is below the long put’s strike price but above the short put’s strike price , the long put will be exercised and the short put should expire worthless . Be cautious of this scenario. You’ll sell 100 shares of the underlying for each contract that’s exercised. Meanwhile, the short put will no longer be available to offset the exercise. As a result, you might experience an overall gain or loss that is greater than theoretical max gain or loss. If you don’t have the necessary shares to sell, this may result in a short stock position and undefined risk and Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf. Meanwhile, both call options should expire worthless.

If the underlying stock price is between the strike prices of the long put and long call , all 4 options should expire worthless . The options will be removed from your account and you’ll realize a max loss on the position.

If the underlying’s price closes above the long call’s strike price but below the short call’s strike price , the long call will be exercised and the short call should expire worthless . Be cautious of this scenario. You’ll buy 100 shares of the underlying for each contract that’s exercised. Meanwhile, the short call will no longer be available to offset the exercise. As a result, you might experience an overall gain or loss that is greater than theoretical max gain or loss. If you don’t have the available funds to purchase the necessary shares, your account will be in a deficit, and Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf. Meanwhile, both put options should expire worthless.

If the underlying stock price is above the short call’s strike price , the call spread will be at max value . In this scenario, the long call will be exercised and the short call would likely be assigned. You’ll realize a max gain. Meanwhile, both put options should expire worthless.

For iron condors, be cautious of an early assignment , an upcoming dividend , and automatic exercise .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short options, you can take one of the following actions by the end of the following trading day:

• Buy or sell the shares at the current market price
• Exercise your long call or put (thereby buying or selling the shares at the long strike price)

In either circumstance, your brokerage account may temporarily display a reduced or negative buying power as a result of the early assignment. An exercise of the long call or put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

If your long call option is in-the-money at expiration, it will automatically be exercised , and you’ll buy 100 shares of the underlying for each contract that’s exercised. If you don’t have the available funds to support the exercise, your account will be in a deficit.

If your long put option is in-the-money at expiration, it will automatically be exercised , and you’ll sell 100 shares of the underlying for each contract that’s exercised. If you don’t own the underlying shares, this will result in a short stock position, which has undefined risk, and isn't allowed at Robinhood.

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you bear the full responsibility of managing the risk within your account .

Short iron condor

What’s a short iron condor.

A short iron condor is a four-legged, neutral strategy that involves simultaneously selling both an out-of-the-money call credit spread and an out-of-the-money put credit spread . All options have the same expiration date and are on the same underlying stock or ETF. Typically, the width of both spreads are the same, and the short strikes are the same distance from the underlying stock.

A short iron condor is a premium selling strategy. Since you’re selling 2 vertical spreads, you’ll collect a net credit to open the position. Like most premium selling strategies, the goal of selling an iron condor is to buy it back later, hopefully for a profit, or allow it to expire worthless. To profit, you’ll need a steady, sideways moving underlying. Ideally, the underlying stock trades between your short strikes at expiration and you’ll get to keep all the premium collected from the sale.

Remember, only one of your spreads can be in the money at expiration, yet you’re collecting the premium from 2 credit spreads. Therefore, you’re collecting double the premium for a limited amount of added risk (such as dividend or assignment risk), assuming each spread is of equal width. It’s this generally favorable risk/reward that makes a short iron condor a popular strategy with some retail traders.

A short iron condor is a neutral strategy. You might use it when you expect the underlying stock price to be range bound for a period of time. In addition, a short iron condor may benefit from a decrease in implied volatility and requires less collateral than selling a strangle. However, a strangle has greater profit potential.

To sell an iron condor, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. Almost always, iron condors are built by selling an out-of-the-money put spread and an out-of-the-money call spread . Typically, both spreads have the same width between their respective strike prices and the short strikes of each credit spread are equidistant from the underlying stock price.

For example, if the underlying stock is trading at $100, an example short iron condor would be selling the $90/$95 put spread and simultaneously selling the $105/$110 call spread. Both spreads have the same width between the strikes ($5), and both short options ($95 and $105) are the same distance ($5) from the current underlying stock price ($100).

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, iron condors are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 4 legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the iron condor first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving up or down you could also skew your iron condor, meaning your spreads aren't equidistant from the underlying stock price and/or they aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard iron condor.

Next, specify your price. The net credit is a combination of the 4 individual options (the ones you’re buying and selling in each credit spread). As such, an iron condor will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

Note : A “gut iron condor” is a variation of an iron condor that involves selling 2 in-the-money spreads, which is a seldom-used strategy. While it might work in rare circumstances, the cost and risk associated with selling a gut iron condor generally keeps traders away from this variation.

A short iron condor is typically used to generate income . Ideally, the underlying stock or ETF stays in a range between your short strikes, or even better, doesn’t move at all, and implied volatility drops. If this happens, over time, both spreads will eventually decrease in value. This creates potential opportunities to close the iron condor for a profit before expiration. If you hold the position through expiration and the underlying stock is trading at or between your short strikes, both options should expire worthless and you’ll keep the full premium.

Although you collect a credit, you’re required to reserve enough cash collateral to cover the potential max loss of the iron condor. This collateral is netted against the total credit amount that you receive. This is calculated by taking the width of the widest spread, subtracting the total premium collected, and then multiplying that number by 100.

For example, let’s say you sell an iron condor where both sides are 5-points wide. Imagine the call spread is trading for a net credit of $1.75 and a put spread of $1.50. You’d collect $3.25 to sell the iron condor. And since each option typically controls 100 shares of the underlying asset, your credit would be $325 for each iron condor you sell. Meanwhile, the collateral required will be $500, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $3,250, but the required collateral would be $5,000, and so on.

Look for an underlying stock or ETF that is likely to stay within its range and likely won’t make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that aligns with your expectation for how long the underlying price will stay stable. Shorter-dated iron condors will be more impacted by time decay, but won't bring in as much premium. Longer-dated iron condors bring in more premium, but are more sensitive to changes in implied volatility and give the underlying more opportunity to move. Meanwhile, options expiring in 30-45 days generally provide a window for the underlying stock to move while balancing costs and capturing the benefits of time decay, which accelerate as the expiration approaches.

Iron condors are typically created using out-of-the-money strike prices . That means the put strikes will be below the current stock price and the call strikes will be above it. The closer your strikes are to the underlying stock price, the more premium you will collect, but the probability of success is lower. Meanwhile, the further out-of-the-money your strikes are, the lower the premium collected for the iron condor, but the probability of success will be much higher.

The amount of premium you collect determines the risk and reward ratio of the trade. Many traders will look to collect roughly ⅓ to ½ the width of the spread. For example, if you’re selling a 1-point wide condor on both sides, you’d look to collect around $0.40. A 5-point wide spread would be around $2, a 10-point wide spread, $4 in premium, and so on. If the potential premium collected is less than this, the reward may not be worth the risk. If the ratio is more than this, it may signal more implied volatility, which is worth investigating before placing the trade. While this isn’t an absolute rule to follow, it’s a helpful guideline.

How is an iron condor different from a strangle?

Although short iron condors and short strangles are both neutral strategies, there are many differences between them.

Iron condors consist of a call credit spread and put credit spread. Strangles consist of a single call and a single put.

A short iron condor typically brings in less premium than a strangle (assuming the same short strikes) but has a lower theoretical max gain and loss.

A short iron condor has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is limited to the credit you receive for selling the iron condor. To realize a max gain, the underlying stock price must close at or between the 2 short strikes (the short put and short call), and all 4 options must expire worthless.

The theoretical max loss is equal to the width of the widest spread of the iron condor, minus the net credit collected. If the underlying stock price closes below the strike price of the long put (the one with a lowest strike price) on the expiration date, the short put will likely be assigned, and your long option will be automatically exercised. Alternatively, if the underlying stock price closes above the strike price of the long call (the one with a highest strike price) on the expiration date, the short call will likely be assigned, and your long option will be automatically exercised. Either scenario will result in a max loss on the trade.

At expiration, an iron condor has 2 breakeven points—one above the short call strike and one below the short put strike. To calculate the upside breakeven, add the total premium collected to the strike price of the short call. To calculate the downside breakeven, subtract the total premium collected from the short put’s strike price.

Yes. If either your short call or short put is assigned, you’ll sell (call assignment) or purchase (put assignment) 100 shares of the underlying stock. In this scenario, you’ll either own stock, or possibly have a short stock position. With either of these, it’s possible to experience losses greater than the theoretical max loss of the short iron condor.

You decide to sell the XYZ $90/$95/$105/$110 iron condor that expires in 45 days:

Buy 1 XYZ $90 Put for ($2.70)

Sell 1 XYZ $95 Put for $4.20

= Total net credit is $3.25

The theoretical max gain is $3.25, or $325 total. Max gain occurs if XYZ closes at or between $95 and $105 at expiration. In this scenario, both credit spreads would be out-of-the-money, and all 4 options would expire worthless.

The theoretical max loss is $1.75 per share, or $175 total. To calculate max loss, take the width of the widest credit spread ($5) and subtract the amount collected for the iron condor ($3.25). A max loss occurs if XYZ is trading above $110 or below $90 at expiration.

The breakeven points at expiration are $91.75 and $108.25. The lower breakeven is calculated by subtracting the total premium collected ($3.25) from the short put strike price ($95). The higher breakeven is calculated by adding the total premium collected ($3.25) to the short call strike price ($105).

A short iron condor benefits if the underlying stock price remains stable and range bound, ideally between the short strike prices. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help or hurt the value of your iron condor depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your iron condor or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the iron condor and how many days are left until expiration. If the position is profitable, you can try to buy to close it before expiration. If the position is worth more than your original sale price, you can attempt to cut your losses by doing the same.

Also, as the expiration nears, watch out if the underlying stock price starts trading between the long and short strikes of either credit spread. This might cause a potential assignment of the short call or put that you’ll need to manage as the position approaches expiration.

A long iron condor involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the iron condor is delta and rho neutral . It has a positive theta and a negative gamma and vega . Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises, the put spread’s deltas will increase and the call spread’s deltas will decrease. Conversely, if the stock drops, the deltas of the long put spread will decrease and the deltas of the long call spreads will increase. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short iron condor, you can do the following that's described in this section:

Buy to close the iron condor

To close your position, take the opposite actions that you took to open it. For a short iron condor, this involves simultaneously buying to close both credit spreads (the ones you initially sold to open). Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your iron condor for more than your sale price, you’ll realize a loss. If you buy it for less than your sale price, you’ll realize a gain. And if you buy it at the same price as your sale price, you’ll break even.

Some traders prefer to leg out of an iron condor. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this, you could create a greater gain or loss than the theoretical max gain or loss of the original iron condor.

You can also decide to close one side of the iron condor. This involves buying to close the put spread or the call spread individually, allowing you to take profits or cut losses on one-half of the spread. This resulting position will either be a call credit spread or put credit spread. This approach can potentially result in a greater max loss as compared to the iron condor.

If the underlying’s price is below the long put strike price , both options of the put spread will expire in-the-money . You’ll most likely be assigned on your short put and your long put will be automatically exercised. You’ll keep the credit received for the iron condor, but you’ll realize a max loss on the position. Meanwhile, both call options should expire worthless.

If the underlying’s price closes below the short put strike but above the put long strike , your short put will likely be assigned and your long put will expire worthless . Be cautious of this scenario. If your short put is assigned you’ll be left with a long stock position. Your individual investing account will display a reduced or negative buying power as a result of the early assignment. Meanwhile, your long put will no longer exist to offset the assignment. This can potentially result in losses greater than the theoretical max loss of the short iron condor. Meanwhile, both call options should expire worthless.

If the underlying stock price is between the strike prices of the short put and short call , all 4 options should expire worthless . The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price closes above the short call strike but below the long call strike , your short call will likely be assigned and your long call will expire worthless . Be cautious of this scenario. If your short call is assigned, you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your long call will no longer exist to offset the assignment. This can potentially result in losses greater than the theoretical max loss of the short iron condor. Meanwhile, both put options should expire worthless.

If the underlying’s price is above the long call strike price , both options of the call spread will expire in-the-money . You’ll most likely be assigned on your short call and your long call will be automatically exercised. You’ll keep the credit received for the iron condor, but you’ll realize a max loss on the position. Meanwhile, both put options should expire worthless.

For iron condors, be cautious of an early assignment and an upcoming dividend.

In either circumstance, your individual investing account may temporarily display a reduced or negative buying power as a result of the early assignment. An exercise of the long call or put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date; however, this is done on a best-effort basis. Ultimately, you bear the full responsibility of managing the risk within your account.

Long call butterfly

What’s a long call butterfly.

A long call butterfly has 3 legs (4 options total). It involves simultaneously buying 1 call, selling 2 higher strike calls, and buying 1 even higher strike call. All 4 options have the same expiration date and are on the same underlying stock or ETF. The 2 short calls are identical. It’s called a butterfly because of its structure—long 1, short 2, long 1. The 2 short calls are the body of the butterfly, and the 2 long calls are the wings.

Typically, a butterfly is used as a neutral strategy. The distance between the long and short options are the same and the short strikes are at-the-money. A long call butterfly is a premium buying strategy and typically you’ll pay a net debit to open the position. The goal of buying a call butterfly is to sell it later, hopefully for a profit. In order to profit, you’ll need a steady, sideways moving underlying stock. Ideally, the underlying stock trades exactly at or near the short strike and remains there until expiration.

A long call butterfly is essentially a combination of 2 vertical spreads—a call debit spread and a higher strike call credit spread and each vertical spread shares the same short strike. It also has a similar risk profile as a short iron butterfly, but only uses calls. Although a long call butterfly is typically bought for a debit, the goal of both strategies is the same, which is for the underlying stock to pin the short strike.

A long call butterfly is generally considered a neutral strategy. You might use it when you believe the stock will stay within a tight range near its current price and its implied volatility is high. This makes a long butterfly a potential candidate for earnings plays and event driven trades when you think the actual movement of the underlying stock will be less than the expected move as implied by the option prices.

Additionally, a long call butterfly can also be created as a bullish strategy by positioning the short strikes out-of-the-money. For example, if you’re bullish, the body of the butterfly will be above the current underlying stock price. With this variation, you want the underlying stock to rise, but settle near the short strike price of the butterfly.

Additionally, you can leg into a butterfly as a trade management technique. For example, if you buy a call debit spread that’s initially out-of-the-money, and the underlying stock rallies to the short strike, the spread will likely increase in value. If you believe the upward trend is due to pause, you might consider selling the at-the-money call credit spread against your call debit spread, thus creating a long call butterfly.

To buy a long call butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. A neutral call butterfly is built by selling 2 at-the-money calls, buying 1 in-the-money call, and buying an additional out-of-the-money call. The 2 long calls are equidistant from the 2 short calls. This creates a ratio of long 1, short 2, long 1.

For example, if the underlying stock is trading at $100, an example long call butterfly would be buying the $90/$100/$110 call butterfly. The 2 short calls are at-the-money ($100) and the long calls are the $90 and $110 strikes, which are equidistant ($10) from the short call strike. After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, long call butterflies are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs. The combined order is sent and all 3 legs (4 total options) must be executed simultaneously on one exchange. You can also leg into the strategy by opening one side of the long call butterfly first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving up you could also skew your long call butterfly, meaning your short strike is out-of-the-money and/or the credit and debit spreads aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard butterfly.

Next, specify your price. The net debit is a combination of the 4 individual options (the 2 you’re buying and the 2 you’re selling). As such, a long call butterfly will have its own bid/ask spread. When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders, trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you may need a seller to decrease their ask, or offer. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A long call butterfly is typically used as a neutral strategy. Ideally, the underlying stock or ETF stays near your short strike, or even better, doesn’t move at all, and implied volatility drops. If this happens, over time the butterfly spread will increase in value. This creates potential opportunities to close the call butterfly for a profit before expiration. Although the position achieves theoretical max gain if the underlying stock is trading exactly at the short strike at expiration, this isn’t a realistic outcome. In fact, holding a butterfly into expiration exposes you to potential exercise and assignment risk, and many traders usually look to close the position prior to expiration for this reason.

When you buy a long call butterfly, you’re essentially buying a more expensive lower strike call debit spread and selling a cheaper, higher strike call credit spread. As a result, you’ll pay one combined net debit for the long call butterfly. For example, let’s say you buy a long call butterfly where both sides are 10-points wide. Imagine the lower call spread is trading for a net debit of $7.25 and the call credit spread for $2.40. You’d pay $4.85 to buy the long call butterfly. And since each option typically controls 100 shares of the underlying asset, your total cost would be $485 for each call butterfly. If you bought 10 butterflies, you’d pay $4,850, and so on.

Look for an underlying stock or ETF that you think is likely to stay within a range and won’t make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest. Be aware if the underlying stock or ETF pays a dividend as a long call butterfly may contain an in-the-money short call option.

Choose an expiration date that optimizes your window for success. Options expiring in 30-45 days tend to provide the best window to buy a long call butterfly. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll pay less premium but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, if you choose a shorter-dated expiration, the higher premium may not make the trade worthwhile for some. Remember, long call butterflies are a premium buying strategy, but tend to act like a premium selling strategy which benefits from time decay.

Long call butterflies are typically created using a long 1, short 2, long 1 ratio where the short strike is at-the-money. One long call strike price will be below the current underlying price and the other long call will be above the current underlying strike price, creating the wings of the butterfly. The 2 at-the-money short calls create the body. The closer the long strikes are to the short strike price, the less risk in the trade, but also a lower profit potential. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will have a greater potential max loss.

Important : It’s generally best to avoid buying an in-the-money call butterfly. In-the-money call options are when the strike prices are below the underlying stock price. This approach might lead to an early assignment and dividend risk. Instead, you can achieve a similar risk/reward profile by buying an out-of-the-money put butterfly with the same strikes.

The total premium paid (and how many butterflies you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Remember, although butterflies are relatively inexpensive when compared to other strategies, they have a lower theoretical probability of success. Manage your risk accordingly.

How is a long call butterfly different from a short iron butterfly?

Although a long call butterfly and short iron butterfly are both neutral strategies, there are differences between the 2.

A short iron butterfly consists of a call credit spread and put credit spread. A long call butterfly consists of a call debit spread and a call credit spread.

Although the risk profiles are very similar, a long call butterfly is done for a net debit, but a short iron butterfly is done for a net credit.

A short iron butterfly will carry a collateral requirement equal to the max loss of the strategy’s widest spread minus the credit collected whereas a long call butterfly will only require the premium paid for the strategy.

A long call butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is limited to the width of the call debit spread minus the premium paid to open the strategy. To realize a max gain, the underlying stock price must close exactly at short strike of the butterfly, allowing both the call debit spread and call credit spread to expire at max gain. However, a max gain is only achieved if one of your short calls is assigned at expiration, which isn't guaranteed.

Assuming an equal width of both the credit and debit spreads, the theoretical max loss is limited to the premium paid for the long call butterfly. If the underlying stock price closes outside the wings of the butterfly (either long call strike price) on the expiration date, this will result in a max loss on the trade.

At expiration, a long call butterfly has 2 breakeven points—one above the short calls’ strike and one below the short calls’ strike. To calculate the upside breakeven, subtract the total premium paid from the strike price of the higher long call. To calculate the downside breakeven, add the total premium paid to the lower long call strike price.

Yes. If either your long call is exercised or your short call is assigned, you’ll sell (call assignment), or purchase (call exercise) 100 shares of the underlying stock. In this scenario, you’ll either own stock, or possibly be short stock. With either of these positions, it’s possible to experience losses greater than the theoretical max loss of the long call butterfly.

Imagine XYZ stock is trading for $104.95. The following lists the options chain for an expiration date of 45 days in the future. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money.

You think XYZ will trade near $105 over the next 45 days and decide to buy the XYZ $100/$105/$110 call butterfly:

Buy 1 XYZ $100 Call for ($9.40)

Sell 2 XYZ $105 Call for $6.35 x 2 = $12.70

Buy 1 XYZ $110 Call for ($4.00)

= Total net debit is ($0.70)

The theoretical max gain is $4.30 per share, or $430 total. Max gain occurs if XYZ closes exactly at $105 at expiration. In this scenario, both the call debit spread ($100/$105) and the call credit spread ($105/$110) would expire at max gain. However, a max gain is only achieved if one of your $105 calls is assigned, which isn't guaranteed.

The theoretical max loss is $0.70 per share, or $70 total. Max loss occurs if XYZ is trading above $110, or below $100 at expiration. If the underlying expires below $100, all 4 options would expire worthless. If the underlying expires above $110, the 2 call spreads would cancel each other out. In both scenarios, you would lose the entire premium paid for the strategy.

The breakeven points at expiration are $100.70 and $109.30. The lower breakeven is calculated by adding the total premium paid ($0.70) to the lower long call strike price ($100). The higher breakeven is calculated by subtracting the total premium paid ($0.70) from the higher long call strike price ($110).

A long call butterfly benefits if the underlying stock price remains stable and range bound, ideally right around the short strike price. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your long call butterfly depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to the short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your long call butterfly, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the call butterfly and how many days are left until expiration. If the position is profitable, you can try to sell it before expiration. If the position is worth less than your original sale price you can attempt to cut your losses by doing the same.

Generally speaking, most traders close out a long butterfly to avoid the risk of exercise and assignment. As expiration nears, if the underlying stock is trading within the wings of the butterfly, this can result in a potential assignment of your short calls or an exercise of the lower strike long call, resulting in a long or short stock position. It’s important to monitor this going into expiration and you may need to manage your position accordingly.

Keep in mind : Any time there’s a short call option in the position, there’s a possibility of an early assignment, which exposes you to certain risks, like short stock or dividend risk.

A long call butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the long call butterfly is delta and rho neutral. It has a positive theta and a negative gamma and vega. Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises slightly, the long call spread’s deltas will increase and the short call spread’s deltas will decrease, leaning negative. Conversely, if the stock drops, the long call spread’s deltas will decrease and the short call spread’s deltas will increase, leaning positive. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Bottom line, this strategy is about stability and time passing. You want the underlying stock to stay near your short strike and you need time to pass.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long call butterfly you can do the following that's described in this section:

Sell to close the long call butterfly

To close your position, take the opposite actions that you took to open it. For a long call butterfly, this involves simultaneously buying-to-close the 2 short options and selling-to-close the 2 long options. Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your long call butterfly for more than your purchase price, you’ll realize a gain. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Keep in mind : Prior to expiration, it’s not likely that you’ll be able to close the position for a max gain or max loss. In many cases you may have to collect slightly less than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a long call butterfly. You can do this by closing each of the options individually rather than as spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the theoretical max gain or loss of the original long call butterfly.

Note : At Robinhood, to leg out of a call butterfly, you must buy to close a short call option before you can sell to close a long call option. Once you’ve closed one short and one long option, you must once again close the remaining short call option before you close the last long call option.

You can also decide to close one side of the long call butterfly. This involves buying to close the higher strike call credit spread or selling to close the lower strike call debit spread individually, allowing you to take profits or cut losses on one-half of the strategy. This resulting position will either be a call credit spread or debit spread. This approach can potentially result in a greater max loss than that of the long call butterfly.

Holding your position into expiration can result in a max gain or loss scenario and carries certain risks that you should be aware of. Learn more about expiration, exercise, and assignment.

• If the underlying’s price is below the strike price of the lower strike long call , all 4 options will expire out-of-the-money . The options will expire worthless, be removed from your account, and you’ll realize a max loss on the position.

If the underlying’s price closes above the lower strike long call and at or below the strike price of the short calls , the lower strike long call will be in-the-money and the other 3 options will be out-of-the-money. Be cautious of this scenario . Your lower strike long call will be exercised while your short call will no longer exist to offset the exercise. You’ll be left with a long stock position at the lower strike price and your individual investing account may temporarily display a reduced buying power or account deficit as a result. This may potentially result in losses greater than the theoretical max loss of the long call butterfly.

If you don't have the necessary buying power , Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf . Meanwhile, all 3 higher strike call options should expire worthless. Although theoretical max gain occurs if the underlying stock closes exactly at the short strike of the butterfly on expiration, you would need the long holder of one of your short calls to exercise their option in order to realize a max gain. This isn't guaranteed to happen.

If the underlying’s price closes above the short calls’ strike price but below the strike price of the higher strike long call , the 3 lower strike options will be in-the-money and the higher strike long call will be out-of-the-money . Be cautious of this scenario as both short calls are likely to be assigned. While the lower strike long call will be exercised and offset one of the assignments, the higher strike long call will expire worthless. This will result in a short stock position which carries undefined risk and may potentially result in losses greater than the theoretical max loss of the long call butterfly.

If the underlying’s price is above the higher long call strike price , all 4 options will expire in-the-money . You’ll most likely be assigned on your short calls and your long calls will be automatically exercised, offsetting each other. You’ll lose the entire premium paid, and you’ll realize a max loss on the position.

For long call butterflies, be cautious of an early assignment and an upcoming dividend .

• Exercise your long call (thereby buying the shares at the long strike price)

In either circumstance, your individual investing account may temporarily display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments.

Dividend risk is the risk that you’ll be assigned on your short call option the night before the ex-dividend date (where you have to pay the dividend to the exerciser). This is one of the biggest risks of trading spreads with a short call option, which could result in a greater loss (or lower gain) than the theoretical max gain and loss scenarios, as described earlier. Traders can avoid this by closing their position during regular trading hours prior to the ex-dividend date. To learn more, see Dividend risks.

Sometimes, the option’s underlying stock can undergo a corporate action, such as a stock split, a reverse stock split, a merger, or an acquisition. A corporate action can impact the option you hold, such as changes to the option’s structure, price, or deliverable.

Short call butterfly

What’s a short call butterfly.

A short call butterfly is a volatility strategy with 3 legs (4 options total) that involves simultaneously selling 1 call, buying 2 higher strike calls, and selling an even higher strike call. All 4 options have the same expiration date and are on the same underlying stock or ETF. The 2 long calls are identical. It’s called a butterfly because of its structure—short 1, long 2, short 1. The 2 long calls are the body of the butterfly, and the 2 short calls are the wings. Typically, the distance between the long and short options are the same and the long strikes are at-the-money.

A short call butterfly is a premium selling strategy and typically you’ll collect a net credit to open the position. The goal of selling a call butterfly is to buy it back later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction). Ideally, the underlying moves sharply in either direction and stays there until expiration.

A short call butterfly is essentially a combination of 2 vertical spreads—a call credit spread and a higher strike call debit spread and each vertical spread shares the same long strike. It also has a similar risk profile as a long iron butterfly, but only uses calls. Although a short call butterfly is typically sold for a credit, the goal of both strategies is the same—for the underlying stock to rise or fall sharply.

A short call butterfly is a volatility strategy. You might use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down, past the wings of the butterfly. In addition, a short call butterfly may benefit from an increase in implied volatility. Although this strategy is designed for volatility, it does involve selling an in-the-money call, which increases your chances of early assignment. For that reason, you might consider buying a straddle, strangle, or iron butterfly instead.

To sell a call butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. Typically, short call butterflies are built by buying 2 at-the-money calls and selling one in-the-money call option and another out-of-the-money call option. The short calls are equidistant from the 2 long calls. This creates a ratio of short 1, long 2, short 1.

For example, if the underlying stock is trading at $100, an example short call butterfly would be selling the $90/$100/$110 call butterfly. The 2 long calls are at-the-money ($100) and the short calls are the $90 and $110 strikes, which are equidistant from the long call strike ($10).

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, short call butterflies are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 3 legs (4 total options) must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the short call butterfly first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving up or down you could also skew your short call butterfly, meaning your long strike is in or out-of-the-money and/or the credit and debit spreads aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard short call butterfly.

Next, specify your price. The net credit is a combination of the 4 individual options. As such, a short call butterfly will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you may need a buyer to increase their bid. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A short call butterfly is a volatility strategy typically used to generate income . You want the underlying stock or ETF to make a large move up or down (ideally past either short strike). This type of move creates potential opportunities to close the call butterfly for a profit before expiration. Theoretically, if the underlying is trading above the higher short strike or below the lower short strike at expiration, you could realize a max gain.

When you sell a call butterfly, you’re essentially selling a more expensive, lower strike call credit spread and buying a cheaper, higher strike call debit spread. As a result, you’ll collect one combined net credit for the short call butterfly. Although you collect a credit, you must put up collateral for the credit spread since there’s no way for the debit spread to be in-the-money unless the credit spread is trading in an area of max loss.

For example, let’s say you sell a call butterfly where both sides are 10-points wide. Imagine the call credit spread is trading for $7.25 and the call debit spread is trading for a net debit of $2.40. You’d collect $4.85 to sell the call butterfly. And since each option typically controls 100 shares of the underlying asset, your credit would be $485 for each call butterfly you sell. Meanwhile, the collateral required will be $1000, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $4850, but the required collateral would be $10,000, and so on.

Look for an underlying stock or ETF that you think is likely to break out of its range and make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the lower end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest. Be aware if the underlying stock or ETF pays a dividend as a short call butterfly may contain an in-the-money short call option.

Choose an expiration date that optimizes your window for success. Shorter-dated butterflies will often collect a larger premium but don't give the underlying a lot of time to move. On the other hand, longer-dated butterflies won't yield as large of a credit but provide a larger window for the underlying to move in either direction. Meanwhile, the options expiring in 30-60 days generally provide a window for the underlying stock to potentially move while mitigating losses from time decay, which accelerate as expiration approaches.

Short call butterflies are typically created using a short 1, long 2, short 1 ratio where the long strike is at-the-money . One short call will be below the current underlying price and the other short call will be above the current underlying strike price, creating the wings of the butterfly. The 2 at-the-money long calls create the body. The closer the short strikes are to the long strike price, the less risk in the trade, but also a lower profit potential. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will have a greater potential max loss.

The amount of premium you collect determines the risk and reward ratio of the trade. Generally speaking, this strategy doesn't collect a large credit (although this depends on the strikes and expiration dates chosen). Therefore, typically you’ll be risking more to make less, however will have a higher theoretical probability of success.

How is a short call butterfly different from a long iron butterfly?

Although a short call butterfly and a long iron butterfly are both volatility strategies, there are differences between the 2.

A long iron butterfly consists of a call debit spread and a put debit spread. A short call butterfly consists of a call debit spread and a call credit spread.

Although the risk profiles are very similar, a short call butterfly is done for a net credit , but a long iron butterfly is done for a net debit .

A short call butterfly will carry a collateral requirement equal to the max loss of the strategy’s credit spread minus the credit collected whereas a long iron butterfly will only require the premium paid for the strategy.

A short call butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to the credit you receive for selling the call butterfly. Assuming equal width of the spreads, max gain occurs if the underlying stock is trading outside of the wings of the butterfly (above or below the short call strikes). Either scenario will result in a max gain on the trade.

The theoretical max loss is equal to the width of the call credit spread of the short call butterfly, minus the net credit collected. To realize a max loss, the underlying stock price must close exactly at the strike price of the long calls, causing both the call debit spread and call credit spread to expire at max loss.

At expiration, a short call butterfly has 2 breakeven points—one above the long calls’ strike and one below the long calls’ strike. To calculate the upside breakeven, subtract the total premium collected from the strike price of the higher short call. To calculate the downside breakeven, add the total premium paid to the lower short call strike price.

You believe XYZ will make a big move in either direction and decide to sell the XYZ $100/$105/$110 call butterfly:

Sell 1 XYZ $100 Call for $9.40

Buy 2 XYZ $105 Call for ($6.35) x 2 = ($12.70)

Sell 1 XYZ $110 Call for $4.00

= Total net credit is $0.70

The theoretical max gain is $0.70 per share, or $70 total. Max gain occurs if XYZ is trading above $110, or below $100 at expiration. If the underlying expires below $100, all 4 options would expire worthless. If the underlying expires above $110, the 2 call spreads would offset each other. In both scenarios, you would realize a max gain for the strategy.

The theoretical max loss is $4.30 per share, or $430 total. Max loss occurs if XYZ closes exactly at $105 at expiration. In this scenario, both the call credit spread ($100/$105) and the call debit spread ($105/$110) would expire at max loss. At expiration, to lock in the theoretical max loss, you must exercise your long call, otherwise, you may be exposed to a short stock position.

The breakeven points at expiration are $100.70 and $109.30. The lower breakeven is calculated by adding the total premium collected ($0.70) to the lower short call strike price ($100). The higher breakeven is calculated by subtracting the total premium collected ($0.70) from the higher short call strike price ($110).

A short call butterfly benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below either short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your short call butterfly depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your short call butterfly, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the short butterfly and how many days are left until expiration. If the position is profitable, you can try to buy to close it before expiration. If the position is worth more than your original sale price you can attempt to cut your losses by doing the same.

Generally speaking, most traders close out a short butterfly to avoid the risk of exercise and assignment. As expiration nears, if the underlying stock is trading within the wings of the butterfly, this can result in a potential assignment of one of your short calls or an exercise of the long calls, resulting in a long or short stock position. It’s important to monitor this going into expiration and you may need to manage your position accordingly.

A short call butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the short call butterfly is delta and rho neutral . It has a positive gamma and negative theta . Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises slightly, the short call spread’s deltas will decrease and the long call spread’s deltas will increase. Conversely, if the stock drops, the short call spread’s deltas will increase and the long call spread’s deltas will decrease. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short call butterfly you can do the following that's described in this section:

• Buy to close the long call butterfly

Buy to close the short call butterfly

To close your position, take the opposite actions that you took to open it. For a short call butterfly, this involves simultaneously buying-to-close short options and selling-to-close the long options. Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your short call butterfly for more than your sale price, you’ll realize a loss. If you buy it for less than your sale price, you’ll realize a gain. And if you buy it at the same price as your sale price, you’ll break even.

Keep in mind : Prior to expiration, it’s not likely that you’ll be able to close the position for a max gain or max loss. In many cases you may have to pay slightly more than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a short call butterfly. You can do this by closing each of the options individually rather than as spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the theoretical max gain or loss of the original short call butterfly.

You can also decide to close one side of the short call butterfly. This involves buying to close the lower strike call credit spread or selling to close the higher strike call debit spread individually, allowing you to take profits or cut losses on one-half of the strategy. This resulting position will either be a call credit spread or debit spread. This approach can potentially result in a greater max gain than that of the short call butterfly.

If the underlying’s price is below the strike price of the lower strike short call, all 4 options will expire out-of-the-money . The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price closes above the lower strike short call and at or below the strike price of the long calls, the lower strike short call will be in-the-money and the other 3 options will be out-of-the-money. Be cautious of this scenario . Your lower strike short call will likely be assigned while your long call will no longer exist to offset the assignment. You’ll be left with a short stock position at the lower strike price which carries undefined risk and may potentially result in losses greater than the theoretical max loss of the short call butterfly. Meanwhile, all 3 higher strike call options should expire worthless. Although theoretical max loss occurs if the underlying stock closes exactly at the long strike of the butterfly on expiration, you would need to exercise one of your long calls prior to the close on expiration in order to avoid a short stock position, thus locking in the theoretical max loss of the butterfly.

If the underlying’s price closes above the long calls’ strike price but below the strike price of the higher strike short call, the 3 lower strike options will be in-the-money and the higher strike short call will be out-of-the-money . Be cautious of this scenario. Your lower strike short call will likely be assigned while your long calls will be exercised. The assignment will be offset, however the higher strike short call will expire worthless, leaving one of the long calls to be exercised and turned into a long stock position. You’ll be left with a long stock position at the middle strike price of the butterfly and your individual investing account may temporarily display a reduced buying power or account deficit as a result. This may potentially result in losses greater than the theoretical max loss of the long call butterfly. If you don't have the necessary buying power, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price is above the strike price of the higher strike short call, all 4 options will expire in-the-money . You’ll most likely be assigned on your short calls and your long calls will be automatically exercised. The 2 spreads will offset each other, and you’ll keep the credit received, and realize a max gain on the position.

For short call butterflies, be cautious of an early assignment and an upcoming dividend .

In either circumstance, your individual investing account may temporarily display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Long put butterfly

What’s a long put butterfly.

A long put butterfly is a strategy with 3 legs (4 options total) that involves simultaneously buying one put, selling 2 lower strike puts, and buying an even lower strike put. All 4 options have the same expiration date and are on the same underlying stock or ETF. The 2 short puts are identical. It’s called a butterfly because of its structure—long 1, short 2, long 1. The 2 short puts are the body of the butterfly, and the 2 long puts are the wings.

Typically, a butterfly is used as a neutral strategy. The distance between the long and short options are the same and the short strike is at-the-money. A long put butterfly is a premium buying strategy and typically you’ll pay a net debit to open the position. The goal of buying a put butterfly is to sell it later, hopefully for a profit. In order to profit, you’ll need a steady, sideways moving underlying stock. Ideally, the underlying stock trades exactly at or near your short strike and remains there until expiration.

A long put butterfly is essentially a combination of 2 vertical spreads, which includes a put debit spread and a lower strike put credit spread and each vertical spread shares the same short strike. It also has a similar risk profile as a short iron butterfly , but only uses puts. A short iron butterfly is opened for a credit while a long put butterfly is typically opened for a debit, but the goal of both strategies is the same—for the underlying stock to pin the short strike.

A long put butterfly is generally considered a neutral strategy. You might use it when you believe the stock will stay within a tight range near its current price and its implied volatility is high. This makes a long put butterfly a potential candidate for earnings plays and event driven trades when you think the actual movement of the underlying stock will be less than the expected move as implied by the option prices.

Additionally, a long put butterfly can also be created as a bearish strategy by positioning the short strikes out-of-the-money. For example, if you’re bearish, the body of the butterfly will be below the current underlying stock price. With this variation, you want the underlying stock to fall, but settle near the short strike price of the butterfly.

Additionally, you can leg into a butterfly as a trade management technique. For example, if you buy a put debit spread that’s initially out-of-the-money, and the underlying stock drops to the short strike, the spread will likely increase in value. If you believe the downward trend is due to pause, you might consider selling the at-the-money put credit spread against your put debit spread, thus creating a long put butterfly.

To buy a long put butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. A neutral put butterfly is built by selling 2 at-the-money puts, buying one in-the-money put, and buying an additional out-of-the-money put. The 2 long puts are equidistant from the 2 short puts. This creates a ratio of long 1, short 2, long 1.

For example, if the underlying stock is trading at $100, an example long put butterfly would be buying the $90/$100/$110 put butterfly. The 2 short puts are at-the-money ($100) and the long puts are the $90 and $110 strikes, which are equidistant ($10) from the short put strike.

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, long put butterflies are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 3 legs (4 total options) must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the long put butterfly first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving down you could also skew your long put butterfly, meaning your short strike is out-of-the-money and/or the credit and debit spreads aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard butterfly.

Next, specify your price. The net debit is a combination of the 4 individual options (the 2 you’re buying and the 2 you’re selling). As such, a long put butterfly will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price, the more likely your order will be filled.

Due to the nature of spread pricing, many traders may work their orders , trying to get filled closer to the mid or mark price (halfway between the bid and ask prices of the spread). It’s possible you might get a fill, but more likely, you may need a seller to decrease their ask, or offer. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A long put butterfly is typically used as a neutral strategy. Ideally, the underlying stock or ETF stays near your short strike, or even better, doesn’t move at all, and implied volatility drops. If this happens, over time the butterfly spread will increase in value. This creates potential opportunities to close the put butterfly for a profit before expiration. Although the position achieves theoretical max gain if the underlying stock is trading exactly at the short strike at expiration, this isn’t a realistic outcome. In fact, holding a butterfly into expiration exposes you to potential exercise and assignment risk, and many traders typically look to close the position prior to expiration for this reason.

When you buy a long put butterfly, you’re essentially buying a more expensive higher strike put debit spread and selling a cheaper, lower strike put credit spread. As a result, you’ll pay one combined net debit for the long put butterfly. For example, let’s say you buy a long put butterfly where both sides are 10-points wide. Imagine the higher put spread is trading for a net debit of $7.25 and the put credit spread for $2.40. You’d pay $4.85 to buy the long put butterfly. And since each option typically controls 100 shares of the underlying asset, your total cost would be $485 for each put butterfly. If you bought 10 butterflies, you’d pay $4,850, and so on.

Look for an underlying stock or ETF that you think is likely to stay within a range and won’t make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that optimizes your window for success. Options expiring in 30-45 days tend to provide the best window to buy a long put butterfly. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll pay less premium but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, if you choose a shorter-dated expiration, the higher premium may not make the trade worthwhile for some. Remember, long put butterflies are a premium buying strategy, but tend to act like a premium selling strategy which benefits from time decay.

Long put butterflies are typically created using a long 1, short 2, long 1 ratio where the short strike is at-the-money . One long put strike price will be below the current underlying price and the other long put will be above the current underlying strike price, creating the wings of the butterfly. The 2 at-the-money short puts create the body. The closer the long strikes are to the short strike price, the less risk in the trade, but also a lower profit potential. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will have a greater potential max loss.

Important : It’s generally best to avoid buying an in-the-money put butterfly. In-the-money put options are when the strike prices are above the underlying stock price. This approach might lead to an early assignment. Instead, you can achieve a similar risk/reward profile by buying an out-of-the-money call butterfly with the same strikes.

How is a long put butterfly different from a short iron butterfly?

Although a long put butterfly and short iron butterfly are both neutral strategies, there are differences between the 2.

A short iron butterfly consists of a put credit spread and call credit spread. A long put butterfly consists of a put debit spread and a put credit spread.

Although the risk profiles are very similar, a long put butterfly is opened for a net debit , but a short iron butterfly is opened for a net credit .

A short iron butterfly will carry a collateral requirement equal to the max loss of the strategy’s widest spread minus the credit collected whereas a long put butterfly will only require the premium paid for the strategy.

A long put butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is limited to the width of the put debit spread minus the premium paid to open the strategy. To realize a max gain, the underlying stock price must close exactly at short strike of the butterfly, allowing both the put debit spread and put credit spread to expire at max gain. However, max gain is only achieved if one of your short puts is assigned at expiration, which isn't guaranteed.

Assuming an equal width of both the credit and debit spreads, the theoretical max loss is limited to the premium paid for the long put butterfly. If the underlying stock price closes outside the wings of the butterfly (either above the higher long put or below the lower long put strike price) on the expiration date, this will result in a max loss on the trade.

At expiration, a long put butterfly has 2 breakeven points—one above the short puts’ strike and one below the short puts’ strike. To calculate the upside breakeven, subtract the total premium paid from the strike price of the higher long put. To calculate the downside breakeven, add the total premium paid to the lower long put strike price.

Yes. If either your long put is exercised or your short put is assigned, you’ll sell (put exercise), or purchase (put assignment) 100 shares of the underlying stock. In this scenario, you’ll either own stock, or possibly be short stock. With either of these positions, it’s possible to experience losses greater than the theoretical max loss of the long put butterfly.

You think XYZ will trade near $105 over the next 45 days and decide to buy the XYZ $100/$105/$110 put butterfly:

Buy 1 XYZ $100 Put for ($4)

Sell 2 XYZ $105 Put for $6.35 x 2 = $12.70

Buy 1 XYZ $110 Put for ($9.40)

The theoretical max gain is $4.30 per share, or $430 total. Max gain occurs if XYZ closes exactly at $105 at expiration. In this scenario, both the put debit spread ($110/$105) and the put credit spread ($105/$100) would expire at max gain. However, max gain is only achieved if one of your $105 puts is assigned, which isn't guaranteed.

The theoretical max loss is $0.70 per share, or $70 total. Max loss occurs if XYZ is trading above $110, or below $100 at expiration. If the underlying expires below $100 the 2 put spreads would cancel each other out. If the underlying expires above $110, all 4 options would expire worthless. In both scenarios, you would lose the entire premium paid for the strategy.

The breakeven points at expiration are $100.70 and $109.30. The lower breakeven is calculated by adding the total premium paid ($0.70) to the lower long put strike price ($100). The higher breakeven is calculated by subtracting the total premium paid ($0.70) from the higher long put strike price ($110).

A long put butterfly benefits if the underlying stock price remains stable and range bound, ideally right around the short strike price. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your long put butterfly depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to the short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your long put butterfly, or hold it to expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the put butterfly and how many days are left until expiration. If the position is profitable, you can try to sell it before expiration. If the position is worth less than your original sale price you can attempt to cut your losses by doing the same.

Generally speaking, most traders close out a long butterfly to avoid the risk of exercise and assignment. As expiration nears, if the underlying stock is trading within the wings of the butterfly, this can result in a potential assignment of your short puts or an exercise of the higher strike long put, resulting in a long or short stock position. It’s important to monitor this going into expiration and you may need to manage your position accordingly.

Keep in mind : Any time there’s a short put option in the position, there’s a possibility of an early assignment, which exposes you to certain risks.

A long put butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the long put butterfly is delta and rho neutral . It has a positive theta and a negative gamma and vega . Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises slightly, the long put spread’s deltas will increase and the short put spread’s deltas will decrease, leaning negative. Conversely, if the stock drops, the long put spread’s deltas will decrease and the short put spread’s deltas will increase, leaning positive. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long put butterfly you can do the following:

Sell to close the long put butterfly

To close your position, take the opposite actions that you took to open it. For a long put butterfly, this involves simultaneously buying-to-close the 2 short options and selling-to-close the 2 long options. Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your long put butterfly for more than your purchase price, you’ll realize a gain. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Some traders prefer to leg out of a long put butterfly. You can do this by closing each of the options individually rather than as spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the theoretical max gain or loss of the original long put butterfly.

Note : At Robinhood, to leg out of a put butterfly, if you don't have the necessary collateral, you must buy to close a short put option before you can sell to close a long put option. Once you’ve closed one short and one long option, you must once again close the remaining short put option before you close the last long put option.

You can also decide to close one side of the long put butterfly. This involves buying to close the lower strike put credit spread or selling to close the higher strike put debit spread individually, allowing you to take profits or cut losses on one-half of the strategy. This resulting position will either be a put credit spread or debit spread. This approach can potentially result in a greater max loss than that of the long put butterfly.

If the underlying’s price is below the lower long put strike price, all 4 options will expire in-the-money . You’ll most likely be assigned on your short puts and your long puts will be automatically exercised, offsetting each other. You’ll lose the entire premium paid, and you’ll realize a max loss on the position.

If the underlying’s price closes below the short puts’ strike price but above the strike price of the lower strike long put, the 3 higher strike options will be in-the-money and the lower strike long put will be out-of-the-money . Be cautious of this scenario as both short puts are likely to be assigned. While the higher strike long put will be exercised and offset one of the assignments, the lower strike long put will expire worthless. This will result in a long stock position and may potentially result in losses greater than the theoretical max loss of the long put butterfly. Your individual investing account may temporarily display a reduced buying power or account deficit as a result. If you don't have the necessary buying power , Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf

If the underlying’s price closes below the higher strike long put and at or after the strike price of the short puts, the higher strike long put will be in-the-money and the other 3 options will be out-of-the-money . Be cautious of this scenario. Your higher strike long put will be exercised while your short puts will no longer exist to offset the exercise. You’ll be left with a short stock position (which carries undefined risk) at the higher strike price and your brokerage account may temporarily display a reduced buying power or account deficit as a result. This may potentially result in losses greater than the theoretical max loss of the long put butterfly. Meanwhile, all 3 lower strike put options should expire worthless. Although theoretical max gain occurs if the underlying stock closes exactly at the short strike of the butterfly on expiration, you would need the long holder of one of your short puts to exercise their option in order to realize a max gain. This is not guaranteed to happen.

If the underlying’s price is above the strike price of the higher strike long put, all 4 options will expire out-of-the-money . The options will expire worthless, be removed from your account, and you’ll realize a max loss on the position.

For long put butterflies, be cautious of an early assignment .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short put, you can take one of the following actions by the end of the following trading day:

• Exercise your long put (thereby selling the shares at the long strike price)

In either circumstance, your individual investing account may temporarily display a reduced buying power or account deficit as a result of the early assignment. An exercise of the long put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Short put butterfly

What’s a short put butterfly.

A short put butterfly is a volatility strategy with 3 legs (4 options total) that involves simultaneously selling 1 put, buying 2 lower strike puts, and selling an even lower strike put. All 4 options have the same expiration date and are on the same underlying stock or ETF. The 2 long puts are identical. It’s called a butterfly because of its structure of short 1, long 2, short 1. The 2 long puts are the body of the butterfly, and the 2 short puts are the wings. Typically, the distance between the long and short options are the same and the long strikes are at-the-money.

A short put butterfly is a premium selling strategy and typically you’ll collect a net credit to open the position. The goal of selling a put butterfly is to buy it back later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction). Ideally, the underlying moves sharply in either direction and stays there until expiration.

A short put butterfly is essentially a combination of 2 vertical spreads—a put credit spread and a lower strike put debit spread and each vertical spread shares the same long strike. It also has a similar risk profile as a long iron butterfly, but only uses puts. Although a short put butterfly is typically sold for a credit, the goal of both strategies is the same—for the underlying stock to rise or fall sharply.

A short put butterfly is a volatility strategy. You might use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down, past the wings of the butterfly. In addition, a short put butterfly may benefit from an increase in implied volatility. Although this strategy is designed for volatility, it does involve selling an in-the-money put, which increases your chances of early assignment. For that reason, you might consider buying a straddle, strangle, or iron butterfly instead.

To sell a put butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. Typically, short put butterflies are built by buying 2 at-the-money puts and selling one in-the-money put option and another out-of-the-money put option. The short puts are equidistant from the 2 long puts. This creates a ratio of short 1, long 2, short 1.

For example, if the underlying stock is trading at $100, an example short put butterfly would be selling the $90/$100/$110 put butterfly. The 2 long puts are at-the-money ($100) and the short puts are the $90 and $110 strikes, which are equidistant from the long put strike ($10). After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, short put butterflies are traded simultaneously using a spread order.

A spread order is a combination of individual orders, known as legs . The combined order is sent and all 3 legs (4 total options) must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the short put butterfly first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving up or down you could also skew your short put butterfly, meaning your long strike is in or out-of-the-money and/or the credit and debit spreads aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard short put butterfly.

Next, specify your price. The net credit is a combination of the 4 individual options. As such, a short put butterfly will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

A short put butterfly is a volatility strategy typically used to generate income . You want the underlying stock or ETF to make a large move up or down (ideally past either short strike). This type of move creates potential opportunities to close the put butterfly for a profit before expiration. Theoretically, if the underlying is trading above the higher short strike or below the lower short strike at expiration, you could realize a max gain.

When you sell a put butterfly, you’re essentially selling a more expensive, higher strike put credit spread and buying a cheaper, lower strike put debit spread. As a result, you’ll collect one combined net credit for the short put butterfly. Although you collect a credit, you must put up collateral for the credit spread since there’s no way for the debit spread to be in-the-money unless the credit spread is trading in an area of max loss.

For example, let’s say you sell a put butterfly where both sides are 10-points wide. Imagine the put credit spread is trading for $7.25 and the put debit spread is trading for a net debit of $2.50. You’d collect $4.75 to sell the put butterfly. And since each option typically controls 100 shares of the underlying asset, your credit would be $475 for each put butterfly you sell. Meanwhile, the collateral required will be $1,000, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $4,750, but the required collateral would be $10,000, and so on.

Look for an underlying stock or ETF that you think is likely to break out of its range and make a large move in either direction before the expiration date of the options you’ve chosen. Consider one on the lower end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Short put butterflies are typically created using a short 1, long 2, short 1 ratio where the long strike is at-the-money . One short put will be below the current underlying price and the other short put will be above the current underlying strike price, creating the wings of the butterfly. The 2 at-the-money long puts create the body. The closer the short strikes are to the long strike price, the less risk in the trade, but also a lower profit potential. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will have a greater potential max loss.

How is a short put butterfly different from a long iron butterfly?

Although a short put butterfly and a long iron butterfly are both volatility strategies, there are differences between the 2.

A long iron butterfly consists of a put debit spread and a call debit spread. A short put butterfly consists of a put debit spread and a put credit spread.

Although the risk profiles are very similar, a short put butterfly is done for a net credit , but a long iron butterfly is done for a net debit .

A short put butterfly will carry a collateral requirement equal to the max loss of the strategy’s credit spread minus the credit collected whereas a long iron butterfly will only require the premium paid for the strategy.

A short put butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to the credit you receive for selling the put butterfly. Assuming equal width of the spreads, max gain occurs if the underlying stock is trading outside of the wings of the butterfly (above or below the short put strikes). Either scenario will result in a max gain on the trade.

The theoretical max loss is equal to the width of the put credit spread of the short put butterfly, minus the net credit collected. To realize a max loss, the underlying stock price must close exactly at the strike price of the long puts, causing both the put debit spread and put credit spread to expire at max loss.

At expiration, a short put butterfly has 2 breakeven points—one above the long puts’ strike and one below the long puts’ strike. To calculate the upside breakeven, subtract the total premium collected from the strike price of the higher short put. To calculate the downside breakeven, add the total premium paid to the lower short put strike price.

You believe XYZ will make a big move in either direction and decide to sell the XYZ $100/$105/$110 put butterfly:

Sell 1 XYZ $100 Put for $4.00 Buy 2 XYZ $105 Put for ($6.35) x 2 = $12.70 Sell 1 XYZ $110 Put for $9.40 = Total net credit is $0.70

The theoretical max gain is $0.70 per share, or $70 total. Max gain occurs if XYZ is trading above $110, or below $100 at expiration. If the underlying expires above $110, all 4 options would expire worthless. If the underlying expires below $100, the 2 put spreads would offset each other. In both scenarios, you would realize a max gain for the strategy.

The theoretical max loss is $4.30 per share, or $430 total. Max loss occurs if XYZ closes exactly at $105 at expiration. In this scenario, both the put debit spread ($100/$105) and the put credit spread ($105/$110) would expire at max loss. At expiration, to lock in the theoretical max loss, you must exercise one of your long puts, otherwise, you may be exposed to a long stock position.

The breakeven points at expiration are $100.70 and $109.30. The lower breakeven is calculated by adding the total premium collected ($0.70) to the lower short put strike price ($100). The higher breakeven is calculated by subtracting the total premium collected ($0.70) from the higher short put strike price ($110).

A short put butterfly benefits if the underlying stock price rises or falls sharply and quickly, ideally above the higher short strike or below the lower short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your short put butterfly depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your short put butterfly, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the short butterfly and how many days are left until expiration. If the position is profitable, you can try to buy to close it before expiration. If the position is worth more than your original sale price you can attempt to cut your losses by doing the same.

Generally speaking, most traders close out a short butterfly to avoid the risk of exercise and assignment. As expiration nears, if the underlying stock is trading within the wings of the butterfly, this can result in a potential assignment of one of your short puts or an exercise of the long puts, resulting in a long or short stock position. It’s important to monitor this going into expiration and you may need to manage your position accordingly.

Keep in mind : Any time there’s a short put option in the position, there’s a possibility of an early assignment, which exposes you to certain risks, like long stock.

A short put butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the short put butterfly is delta and rho neutral . It has a positive gamma and a negative theta . Over time, delta, theta, vega and gamma can change as the underlying stock moves up or down.

If the stock rises slightly, the short put spread’s deltas will decrease and the long put spread’s deltas will increase. Conversely, if the stock drops, the short put spread’s deltas will increase and the long put spread’s deltas will decrease. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short put butterfly you can do the following:

• Buy to close the long put butterfly

Buy to close the short put butterfly

To close your position, take the opposite actions that you took to open it. For a short put butterfly, this involves simultaneously buying-to-close short options and selling-to-close the long options. Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your short put butterfly for more than your sale price, you’ll realize a loss. If you buy it for less than your sale price, you’ll realize a gain. And if you buy it at the same price as your sale price, you’ll break even.

Some traders prefer to leg out of a short put butterfly. You can do this by closing each of the options individually rather than as spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the theoretical max gain or loss of the original short put butterfly.

You can also decide to close one side of the short put butterfly. This involves buying to close the higher strike put credit spread or selling to close the lower strike put debit spread individually, allowing you to take profits or cut losses on one-half of the strategy. This resulting position will either be a put credit spread or debit spread. This approach can potentially result in a greater max gain than that of the short put butterfly.

If the underlying’s price is below the lower short put strike price, all 4 options will expire in-the-money . You’ll most likely be assigned on your short puts and your long puts will be automatically exercised, offsetting each other. You’ll keep the entire premium collected, and you’ll realize a max gain on the position.

If the underlying’s price closes below the long puts’ strike price but above the strike price of the lower strike short put, the 3 higher strike options will be in-the-money and the lower strike long put will be out-of-the-money . Be cautious of this scenario as both long puts are likely to be exercised. While the higher strike short put will likely be assigned and offset one of the exercises, the lower strike short put will expire worthless. This will result in a short stock position which carries unlimited risk and may potentially result in losses greater than the theoretical max loss of the long put butterfly. Your individual investing account may temporarily display a reduced buying power or account deficit as a result. Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price closes at or above the long puts’ strike price but below the strike price of the higher strike short put, the 3 lower strike options will be out-of-the-money and the higher strike short put will be in-the-money . Be cautious of this scenario. Your higher strike short put will likely be assigned while your other 3 puts will expire worthless. You’ll be left with a long stock position at the highest strike price of the butterfly and your individual investing account may temporarily display a reduced buying power or account deficit as a result. This may potentially result in losses greater than the theoretical max loss of the short put butterfly. In this scenario, Robinhood may attempt to close the position.

If the underlying’s price is above the strike price of the higher strike short put, all 4 options will expire out-of-the-money . The options will expire worthless, be removed from your account, and you’ll realize a max gain on the position.

For short put butterflies, be cautious of an early assignment .

ometimes, the option’s underlying stock can undergo a corporate action , such as a stock split, a reverse stock split, a merger, or an acquisition. A corporate action can impact the option you hold, such as changes to the option’s structure, price, or deliverable.

Long iron butterfly

What’s a long iron butterfly.

A long iron butterfly is a four-legged, volatility strategy that involves simultaneously buying both an at-the-money call debit spread and at-the-money put debit spread . All 4 options have the same expiration date and are on the same underlying stock or ETF. Typically, the long option strikes are at-the-money, and the short strikes are the same distance from their respective long strikes.

A long iron butterfly is a premium buying strategy. Since you’re buying 2 vertical spreads, you’ll pay a net debit to open the position. Like most long premium strategies, the goal of buying an iron butterfly is to sell it later, hopefully for a profit. In order to profit, you’ll need a substantial move in the underlying’s price (in either direction).

A long iron butterfly isn't commonly used by retail traders. It’s costly and only one side of your iron butterfly can be profitable at expiration. Therefore, you’re paying double the premium for no added reward. Lastly, if the underlying stock or ETF doesn’t move far enough, it’s possible you’ll lose a substantial amount of the premium you paid for both spreads.

A long iron butterfly is a volatility strategy. You might use it when you’re unsure which direction the underlying stock will move, but you think it’s going to make a large move up or down. In addition, a long iron butterfly may benefit from an increase in implied volatility and is a cheaper alternative to buying a straddle (assuming the same long strike). However, a straddle has greater profit potential, among other tradeoffs.

To buy an iron butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike price. Almost always, iron butterflies are built by buying an at-the-money put spread and an at-the-money call spread . Typically, both spreads have the same width between their respective strike prices, and the long strike of each debit spread is near the underlying stock price.

For example, if the underlying stock is trading at $100, an example long iron butterfly would be buying the $90/$100 put spread and simultaneously buying the $100/$110 call spread. Both spreads have the same width between the strikes ($10), and both long options ($100 put and call) are the same strike.

After you’ve selected your strikes, choose a quantity, and select your order type. Like other spreads, iron butterflies are traded simultaneously using a spread order. A spread order is a combination of individual orders, known as legs . The combined order is sent and all 4 legs must be executed simultaneously on one exchange . You can also leg into the strategy by opening one side of the iron butterfly first and the other later using different spread orders. This is a more complicated approach and carries certain risks.

If you have a stronger feeling about the stock moving up or down you could also skew your iron butterfly, meaning your spreads aren't centered around the at-the-money strike or aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard iron butterfly.

Next, specify your price. The net price of the spread is a combination of the 4 individual options (the ones you’re buying and the one you’re selling in each debit spread). As such, an iron butterfly will have its own bid/ask spread . When buying a spread, the closer your order price is to the natural ask price , the more likely your order will be filled.

A long iron butterfly is typically used to speculate on the future volatility of the underlying stock and typically has no directional bias. Instead, you want the underlying stock or ETF to make a large move up or down (ideally past either short strike). If this happens, one debit spread will likely increase in value, while the other typically decreases. This creates potential opportunities to sell the entire iron butterfly for a profit before expiration. While this may seem like a foolproof strategy, it’s not that simple.

If the market anticipates higher volatility, the cost of options will be higher, and vice versa. Essentially, you’ll need the underlying stock to move far enough to offset the total cost of the iron butterfly. Put another way, the underlying stock must be more volatile than what the market was expecting. And since an iron butterfly can be expensive, its breakeven prices at expiration may be quite far from the current stock price. As such, the magnitude of the move may need to be substantial.

When you buy an iron butterfly you’re buying 2 debit spreads—a call debit spread and a put debit spread. As a result, you’ll pay one combined net debit for the iron butterfly. For example, imagine a call spread is trading for a net debit of $3.40 and a put spread for $2.90. You’d pay $6.30 to buy the iron butterfly. And since each option typically controls 100 shares of the underlying asset, your out-of-pocket cost would be $630 for each iron butterfly you purchase.

Choose an expiration date that aligns with your expectation for when the underlying price will move. Shorter-dated iron butterflies are cheaper, but will be more impacted by time decay. Longer-dated iron butterflies are more expensive and more sensitive to changes in implied volatility. Meanwhile options expiring in 60-90 days provide a window for the underlying stock to move while balancing costs and mitigating losses from time decay, which accelerate as expiration approaches.

Long iron butterflies are typically created using at-the-money strike prices for the long call and put, or the “body” of the butterfly. This means the short put strike price will be below the current underlying price and the short call will be above the current underlying strike price, creating the “wings” of the butterfly. The closer the short strikes are to the current underlying price, the cheaper the long iron butterfly strategy will be but the lower potential for profit. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will be more expensive.

The total premium paid (and how many iron butterflies you purchase) determines your risk. Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Remember that long iron butterflies are costly, and typically have less than a 50% chance of success. Manage your risk accordingly.

How is buying an iron butterfly different from buying a straddle?

Although long iron butterflies and long straddles are both volatility strategies, there are many differences between them.

Iron butterflies consist of a call debit spread and put debit spread. Straddles consist of a single call and a single put.

The value of an iron butterfly is less reactive to price changes of the underlying compared to straddle. This means the same price change of the underlying will typically cause the straddle to gain or lose more value than an iron butterfly.

A long iron butterfly is typically cheaper than buying a straddle (assuming the same long strike) but has a lower theoretical max gain and loss.

A straddle is more sensitive to time decay and changes in implied volatility. Because an iron butterfly contains long and short options these factors are lessened.

A straddle consists of 2 long options whereas an iron butterfly is 4 options—2 long and 2 short. As a result, an iron butterfly exposes you to assignment risk.

A long iron butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading above the upper breakeven price, or below the lower breakeven price.

The theoretical max gain is limited to the width of the widest spread in the iron butterfly minus the total net debit paid. Max gain occurs if the underlying stock is trading below the short strike of the put spread, or above the short strike of the call spread at expiration (assuming both spreads are the same width).

The theoretical max loss is limited to the total premium paid for the iron butterfly. If the underlying stock is trading at the long strike of your iron butterfly at expiration, both option spreads will be out-of-the-money and all 4 options should expire worthless. Although this is possible, it may be unlikely. It’s common for an iron butterfly to expire with some value.

At expiration, an iron butterfly has 2 breakeven points—one above the long call strike and one below the long put strike. To calculate the upside breakeven, add the total premium paid to the strike price of the long call. To calculate the downside breakeven, subtract the total premium paid from the long put’s strike price.

Yes. If either your long call or long put is exercised, you’ll purchase or sell 100 shares of the underlying stock. In this scenario, you’ll either own stock or possibly be short stock. With either of these positions, it’s possible to experience losses greater than the total premium paid for the iron butterfly.

Imagine XYZ stock is trading for $99.88. The following lists the options chain for an expiration date 75 days in the future. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money. The strike prices are in the middle.

You decide to buy the XYZ $90/$100/$100/$110 iron butterfly that expires in 75 days:

Sell 1 XYZ $90 Put for $1.65

Buy 1 XYZ $100 Put for ($4.55)

Buy 1 XYZ $100 Call for ($4.35)

Sell 1 XYZ $110 Call for $0.95

= Total net debit is ($6.30)

The theoretical max gain is $3.70 per share, or $370 total. This is calculated by taking the width of the widest debit spread ($10) and subtracting the amount paid for the iron butterfly ($6.30). Max gain occurs if XYZ is trading above $110, or below $90 at expiration.

The theoretical max loss is $6.30, or $630 total. Max loss occurs if XYZ closes exactly at $100 on expiration. In this scenario, both debit spreads would be out-of-the-money, and all 4 options should expire worthless.

The breakeven points at expiration are $93.70 and $106.30. The lower breakeven is calculated by subtracting the total premium paid ($6.30) from the long put strike price ($100). The higher breakeven is calculated by adding the total premium paid ($6.30) to the long call strike price ($100).

A long iron butterfly benefits if the underlying stock price rises or falls sharply and quickly, ideally above or below either short strike price. Meanwhile, a stable, sideways moving stock price will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help, or hurt the value of your iron butterfly depending on where the underlying is trading. If the underlying is trading near the long strike, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to sell your iron butterfly, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the iron butterfly and how many days are left until expiration. If the position is profitable, you can try to sell it (or leg out) before expiration. If the position is worth less than your original purchase price you can attempt to cut your losses by selling the iron butterfly.

One more thing. As expiration nears, keep an eye out if the underlying stock price is trading between the long and short strikes of either debit spread. This can result in a potential exercise of the long call or put and you may need to proactively manage your position prior to expiration.

A long iron butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the iron butterfly is delta and rho neutral . It has a negative theta and a positive gamma and vega . Over time, delta, theta, vega, and gamma can change as the underlying stock moves up or down.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a long iron butterfly, you can do the following that's described in this section:

Sell to close the iron butterfly

To close your position, take the opposite actions that you took to open it. For a long iron butterfly, this involves simultaneously selling-to-close both debit spreads (the ones you initially bought to open). Typically, you’ll receive a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you sell your iron butterfly for more than your purchase price, you’ll profit. If you sell it for less than your purchase price, you’ll realize a loss. And if you sell it at the same price as your purchase price, you’ll break even.

Keep on mind : Prior to expiration, it’s not likely that you’ll be able to close the position for a max gain or max loss. In many cases you may have to collect slightly less than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of an iron butterfly. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the max theoretical gain or loss of the original strategy.

Note : At Robinhood, to leg out of an iron butterfly, you must buy to close the short call option first, before you can sell to close your long call option. If you sell to close the long put option first, you’ll need to have enough buying power to purchase 100 shares of the underlying asset for each remaining short put.

You can also decide to close one side of the iron butterfly. This involves selling to close the put spread or the call spread individually, allowing you to take profits or cut losses on one-half of the spread. This resulting position will either be a call debit spread or put debit spread. This approach can potentially result in a greater max gain than that of the iron butterfly.

When you own an iron butterfly, you have the right to buy (sell) 100 shares of the underlying asset at the long call (long put) strike price by expiration (assuming you have the required buying power to exercise the call or necessary shares to exercise the put). Typically, you’d only consider doing this if one of your options is in-the-money at expiration . However, if you exercise before expiration, you’ll forfeit any extrinsic value (also known as time value ) remaining in the option.

For this reason, it rarely makes sense to exercise a call or put option prior to expiration. However, there are some scenarios where exercising early does make sense, including:

To capture an upcoming dividend payment . Remember, shareholders receive dividends, options holders do not. If your call option is in-the-money, and the remaining extrinsic value is less than the upcoming dividend, it could make sense to exercise the call of your iron butterfly prior to the ex-dividend date.

If the underlying stock price is trading exactly at the strike of the long put and long call , all four options should expire worthless . The options will be removed from your account and you’ll realize a max loss on the position.

If the underlying’s price closes above the long call’s strike price but below the short call’s strike price , the long call will be exercised and the short call should expire worthless . Be cautious of this scenario. You’ll buy 100 shares of the underlying for each contract that’s exercised. Meanwhile, the short call will no longer be available to offset the exercise. As a result, you might experience an overall gain or loss that is greater than theoretical max gain or loss. If you don’t have the available funds to purchase the necessary shares, your account will be in a deficit, and Robinhood may attempt to place a DNE request on your behalf. Meanwhile, both put options should expire worthless.

Note : If you don’t want your options to be exercised, you can submit a DNE request by contacting our Support team. To implement a DNE request, you can submit it after 4 PM ET, and we must receive it by no later than 5 PM ET on the expiration date .

For iron butterflies, be cautious of an early assignment , an upcoming dividend , and automatic exercise .

In either circumstance, your brokerage account may temporarily show a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call or put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Short iron butterfly

What’s a short iron butterfly.

A short iron butterfly is a four-legged, neutral strategy that involves simultaneously selling both an at-the-money call credit spread and at-the-money put credit spread . All options have the same expiration date and are on the same underlying stock or ETF. Typically, the width of both spreads are the same, and the short strikes are identical and closest to the current price of the underlying stock.

A short iron butterfly is a premium selling strategy. Since you’re selling 2 vertical spreads, you’ll collect a net credit to open the position. Like most premium selling strategies, the goal of selling an iron butterfly is to buy it back later, hopefully for a profit or allow it to expire worthless. In order to profit, you’ll need a steady, sideways moving underlying. Ideally, the underlying stock trades exactly at your short strike at expiration and you will get to keep all the premium collected from the sale. Although this is possible, it’s unlikely. It’s common for a short iron butterfly to expire with some value.

Remember, only one of your spreads can be in the money at expiration, yet you’re collecting the premium from 2 credit spreads. Therefore, you’re collecting double the premium for no added risk. It’s this favorable risk and reward ratio that makes a short iron butterfly a popular strategy with some retail traders.

A short iron butterfly is a neutral strategy. You might use it when you expect the underlying stock price will be range bound for a period of time. In addition, a short iron butterfly may benefit from a decrease in implied volatility and requires less collateral than selling a strangle. However, a strangle has greater profit potential.

To sell an iron butterfly, pick an underlying stock or ETF, select an expiration date, and choose your strike prices. Almost always, iron butterflies are built by selling an at-the-money put spread and an at-the-money call spread . Typically, both spreads have the same width between their respective strike prices and the shared short strike of the credit spreads are near underlying stock price.

For example, if the underlying stock is trading at $100, an example short iron butterfly would be selling the $90/$100 put spread and simultaneously selling the $100/$110 call spread. Both spreads have the same width between the strikes ($10), both short options share the same strike price ($100) which is the strike closest to the underlying price.

If you have a stronger feeling about the stock moving up or down you could also skew your iron butterfly, meaning your short spreads aren't centered at underlying stock price or aren't of equal width. This is a more complex approach to the strategy that would be considered a variation of a standard iron butterfly.

Next, specify your price. The net credit is a combination of the four individual options (the ones you’re buying and the one you’re selling in each credit spread). As such, an iron butterfly will have its own bid/ask spread . When selling a spread, the closer your order price is to the natural bid price, the more likely your order will be filled.

A short iron butterfly is typically used to generate income . Ideally, the underlying stock or ETF stays in a range near your short strike, or even better, doesn’t move at all, and implied volatility drops. If this happens, over time both spreads will eventually decrease in value. This creates potential opportunities to close the iron butterfly for a profit before expiration. If you hold the position through expiration and the underlying stock is trading exactly at the short strike, both option spreads should expire worthless and you’ll keep the full premium. Although this is possible, it’s unlikely. It’s common for an iron butterfly to expire with some value.

Although you collect a credit, you’re required to put up enough cash collateral to cover the potential max loss of the iron butterfly. This collateral is netted against the amount of the total credit you receive and is calculated by taking the width of the widest spread, subtracting the total premium collected, and then multiplying that number by 100.

For example, let’s say you sell an iron butterfly where both sides are 10-points wide. Imagine the call spread is trading for a net credit of $2.90 and the put spread for $3.40. You’d collect $6.30 to sell the iron butterfly. And since each option typically controls 100 shares of the underlying asset, your credit would be $630 for each iron butterfly you sell. Meanwhile, the collateral required will be $1,000, which is the width of the spread multiplied by 100. If you sold 10 spreads, you’d collect $6,300, but the required collateral would be $10,000, and so on.

Choose an expiration date that optimizes your window for success. Options expiring in 30-45 days tend to provide the best window to sell an iron butterfly. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll collect more premium but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, if you choose a shorter-dated expiration, you might not receive enough premium to make the trade worthwhile.

Short iron butterflies are typically created using at-the-money credit spreads that share an identical short strike. This means the long put strike price will be below the current underlying price and the long call will be above the current underlying strike price. The closer the long strikes are to the current underlying price, the lower potential for profit but they will have a lower max loss. Alternatively, the wider the strikes are, the greater potential for profit, but the strategy will have a greater max loss.

The amount of premium you collect determines the risk and reward ratio of the trade. Many traders look to collect roughly ½ the width of the spreads. For example, if you’re selling a 5-point wide iron butterfly, you’d look to collect around $2.50. A 10-point wide spread, $5 in premium, and so on. If the potential premium collected is less than this, the reward may not be worth the risk for some. If it’s more than this ratio, it may signal that the market is pricing in more implied volatility, which is worth investigating before placing the trade. While this isn’t an absolute rule to be followed, it’s a helpful guideline.

How is an iron butterfly different from a strangle?

Although short iron butterflies and short straddles are both neutral strategies, there are many differences between them.

Iron butterflies consist of a call credit spread and put credit spread. Straddles consist of a single call and a single put.

The value of an iron butterfly is less reactive to price changes of the underlying compared to a straddle. This means the same price change of the underlying will typically cause a straddle to gain or lose more value than an iron butterfly.

A short iron butterfly typically brings in less premium than a straddle (assuming the same short strike) but has a lower theoretical max gain and loss.

A straddle is more sensitive to time decay and changes in implied volatility. Because an iron butterfly contains long and short options, these factors are lessened.

A short iron butterfly has a limited theoretical max gain and loss. At expiration, it profits if the underlying stock is trading between the 2 breakeven prices.

The theoretical max gain is limited to the credit you receive for selling the iron butterfly. To realize a max gain, the underlying stock price must close exactly at the short strike of the short put and short call, and all 4 options must expire worthless.

The theoretical max loss is equal to the width of the widest spread of the iron butterfly, minus the net credit collected. If the underlying stock price closes below the strike price of the long put (the one with the lowest strike price) on the expiration date, the short put will likely be assigned, and your long option will be automatically exercised. Alternatively, if the underlying stock price closes above the strike price of the long call (the one with the highest strike price) on the expiration date, the short call will likely be assigned, and your long option will be automatically exercised. Either scenario will result in a max loss on the trade.

At expiration, an iron butterfly has 2 breakeven points—one above the short call strike and one below the short put strike. To calculate the upside breakeven, add the total premium collected to the strike price of the short call. To calculate the downside breakeven, subtract the total premium collected from the short put’s strike price.

Yes. If either the short call or short put is assigned, you’ll sell (call assignment) or purchase (put assignment) 100 shares of the underlying stock. In this scenario, you’ll either own stock or possibly be short stock. With either of these positions, it’s possible to experience losses greater than the theoretical max loss of the short iron butterfly.

Imagine XYZ stock is trading for $99.88. The following lists the options chain for an expiration date of 35 days in the future. The options shaded in green are in-the-money and the ones shaded in white are out-of-the-money. The strike prices are in the middle.

You decide to sell the XYZ $90/$100/$100/$110 iron butterfly that expires in 45 days:

Buy 1 XYZ $90 Put for ($1.65)

Sell 1 XYZ $100 Put for $4.55

Sell 1 XYZ $100 Call for $4.35

Buy 1 XYZ $110 Call for ($0.95)

= Total net credit is $6.30

The theoretical max gain is $6.30 or $630 total. Max gain occurs if XYZ closes exactly at $100 at expiration. In this scenario, both credit spreads would be out-of-the-money, and all 4 options would expire worthless. Albeit unlikely, this is a possibility.

The theoretical max loss is $3.70 per share or $370 total. To calculate max loss, take the width of the widest credit spread ($10) and subtract the amount of the credit collected for selling the iron butterfly ($6.30). Max loss occurs if XYZ is trading above $110 or below $90 at expiration.

The breakeven points at expiration are $93.70 and $106.30. The lower breakeven is calculated by subtracting the total premium collected ($6.30) from the short put strike price ($100). The higher breakeven is calculated by adding the total premium collected ($6.30) to the short call strike price ($100).

A short iron butterfly benefits if the underlying stock price remains stable and range bound, ideally right around the short strike price. Meanwhile, a volatile and trending stock price (up or down) will hurt the position. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

Around 30-45 days to expiration, time decay begins to accelerate. This could help or hurt the value of your iron butterfly depending on where the underlying is trading. If the underlying is trading near one of the long strikes, time decay will hurt the position. If the underlying is trading closer to a short strike, it will help your position. Of course, gains or losses from time decay may be offset by movement in the underlying stock price.

At some point, you must decide whether or not to close your iron butterfly, or hold it into expiration. Ultimately, the decision depends on where the underlying stock is trading relative to the strike prices of the iron butterfly and how many days are left until expiration. If the position is profitable, you can try to buy to close it before expiration. If the position is worth more than your original sale price you can attempt to cut your losses by doing the same.

Also, as expiration nears, keep an eye out if the underlying stock price is trading between the long and short strikes of either credit spread. This can result in a potential assignment of the short call or put and may need to be managed as the position approaches expiration.

A short iron butterfly involves 4 options. The Greeks are netted to arrive at a net delta, gamma, theta, vega, and rho for the combined position. When the trade is established, the iron butterfly is delta and rho neutral . It has a positive theta and a negative gamma and vega . Over time, delta, theta, vega, and gamma can change as the underlying stock moves up or down.

If the stock rises, the put spread’s deltas will increase and the call spread’s deltas will decrease. Conversely, if the stock drops, the long put spread’s deltas will decrease and the long call spread’s deltas will increase. If implied volatility increases, vega will likely increase the value of all 4 options. As time goes by, theta will reduce the extrinsic value of all 4 options.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a short iron butterfly you can do the following that's described in this section:

Buy to close the iron butterfly

To close your position, take the opposite actions that you took to open it. For a short iron butterfly, this involves simultaneously buying-to-close both credit spreads (the ones you initially sold to open). Typically, you’ll pay a net debit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you buy your iron butterfly for more than your sale price, you’ll realize a loss. If you buy it for less than your sale price, you’ll realize a gain. And if you buy it at the same price as your sale price, you’ll break even.

Some traders prefer to leg out of an iron butterfly. You can do this by closing each of the options individually rather than as a spread. To leg out, you can buy to close the options you originally sold and sell to close the options you originally bought using separate individual orders. This approach includes both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater gain or loss than the theoretical max gain or loss of the original iron butterfly.

Note : At Robinhood, to leg out of an iron butterfly, you must buy to close the short call option first before you can sell to close your long call option. If you sell to close the long put option first, you’ll need to have enough buying power to purchase 100 shares of the underlying asset for each remaining short put.

You can also decide to close one side of the iron butterfly. This involves buying to close the put spread or the call spread individually, allowing you to take profits or cut losses on one-half of the strategy. This resulting position will either be a call credit spread or put credit spread. This approach can potentially result in a greater max loss than that of the iron butterfly.

If the underlying’s price is below the long put strike price, both options of the put spread will expire in-the-money . You’ll most likely be assigned on your short put and your long put will be automatically exercised. You’ll keep the credit received for the iron butterfly, but you’ll realize a max loss on the position. Meanwhile, both call options should expire worthless.

If the underlying’s price closes below the short put strike but above the put long strike, your short put will likely be assigned and your long put will expire worthless . Be cautious of this scenario. If your short put is assigned, you’ll be left with a long stock position. Your individual investing account may temporarily show a reduced buying power or account deficit as a result. Meanwhile, your long put will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the short iron butterfly. Meanwhile, both call options should expire worthless.

If the underlying stock price is trading exactly at the strike of the short put and short call, all 4 options should expire worthless . The options will be removed from your account and you’ll realize a max gain on the position.

If the underlying’s price closes above the short call strike but below the long call strike, your short call will likely be assigned and your long call will expire worthless . Be cautious of this scenario. If your short call is assigned, you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your long call will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the short iron butterfly. Meanwhile, both put options should expire worthless.

If the underlying’s price is above the long call strike price, both options of the call spread will expire in-the-money . You’ll most likely be assigned on your short call and your long call will be automatically exercised. You’ll keep the credit received for the iron butterfly, but you’ll realize a max loss on the position. Meanwhile, both put options should expire worthless.

For iron butterflies, be cautious of an early assignment and an upcoming dividend .

In either circumstance, your individual investing account may temporarily show a reduced buying power or account deficit as a result of the early assignment. An exercise of the long call or put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Put front ratio

What’s a put front ratio.

A put front ratio is a type of ratio spread . It’s a bearish options strategy with 2 legs that involves simultaneously buying 1 put option and selling 2 more at an identical lower strike price. All 3 options have the same expiration date and underlying stock or ETF. This strategy is also known as a short ratio put spread, front spread with puts, or ratio vertical spread. It’s called a ratio spread because the ratio of long to short calls varies from the standard 1 to 1 ratio, which is more commonly used in other strategies.

The strikes you choose and their prices determine whether the position will be opened for a net debit or net credit , the profit and loss areas, and whether or not there are 1 or 2 breakeven prices. Essentially, a put front ratio is a combination of a put debit spread and a short put that shares the same short strike price as the debit spread. By selling the extra lower strike put, you’re reducing or possibly eliminating the cost of the put debit spread. In exchange, you’re taking on more downside risk.

To trade this strategy with your Robinhood account, you must have enough buying power to purchase 100 shares of the underlying stock at the short put strike price for each ratio spread you open. Since the strategy contains an extra short put, the potential purchase of shares must be secured by cash in your account.

A put front ratio spread is a bearish strategy because ideally you want the price of the underlying to fall. In addition, this strategy benefits from a decrease in implied volatility. However, the underlying stock price can only fall moderately by expiration. If it drops below the short strike price by expiration, it’s possible to lose on the trade. And since the strategy involves a short put, the amount of the potential loss can be large. Generally, a front ratio spread could be an ideal strategy when you think the stock is going to fall, but only moderately.

To create a put front ratio, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Front ratios are typically constructed by simultaneously buying the at-the-money put option and selling 2 identical out-of-the-money put options using a spread order. The width of the spread is a key detail. A narrower spread between the strikes will typically result in collecting a credit, while a wider spread has a higher potential for paying a debit.

After you’ve built the spread, choose a quantity. A standard put front ratio consists of 1 long put and 2 short puts. This means your quantity could be long 1, short 2; long 2, short 4; long 4 short 8, and so on. You could also vary the ratio. For example, long 1 at-the-money put and short 3 out-of-the-money puts, which is a variation of the strategy.

Next, select your order type, and specify your price. Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A put front ratio is commonly used to speculate on the future direction of the underlying stock. When opening a put front ratio, you want the underlying stock to drop moderately, ideally to the short strike of the ratio spread. Remember, this position is essentially 2 positions in 1—a put debit spread and an additional short put at the short strike of the put spread. If the underlying stock falls to the short strike, the embedded long put spread will reach max value and the additional short put should expire worthless. Meanwhile, if the position is opened for a credit, there’s no upside risk above the long put strike at expiration.

To trade a put front ratio, you’ll be required to put up enough cash collateral to cover the potential purchase of 100 shares for every spread opened. The total collateral per spread depends on the strike price of the short put. For example, if you trade the $90/$100 put front ratio, you’re buying a $100 strike put and selling 2 $90 puts. The collateral required would be $9,000, which is the $90 put strike multiplied by 100.

Meanwhile, the net cost of the trade depends on whether it’s opened for a net credit or debit. Assuming the spread is opened for a net credit, the amount of premium you collect will offset some of the collateral required for selling the extra short put. For example, if the $90/$100 put front ratio can be opened for a $1 credit, the net cost of the trade would be $8,900 ($9,000 collateral - $100 credit collected).

If the spread is opened for a net debit, that amount will be in addition to the collateral required to establish the position. For example, if the $90/$100 put front ratio is opened for a $2 debit, the net cost of the trade would be $9,200 ($9,000 collateral + $200 premium paid).

Look for an underlying stock or ETF that you think will make a moderate move down in the timeframe of the options you’ve chosen. Consider choosing an underlying that’s on the higher end of its implied volatility range, with potential to decrease over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Front ratio spreads benefit from time decay and choosing an expiration date 30-45 days out tends to provide the best window for the strategy. This is when time decay begins to accelerate. If you choose a further-dated expiration, you’ll collect more premium but your capital will be tied up longer while you’re waiting for the options to decay. Meanwhile, if you choose a shorter-dated expiration, you might not receive enough premium to make the trade worthwhile, or possibly pay a net debit.

When selecting strike prices , the most common approach is to buy the at-the-money put and sell 2 out-of-the-money puts. The width between the 2 strikes will ultimately determine whether the spread is opened for a net debit or credit. The narrower the spread, the more likely you’ll open the ratio spread for a net credit. The wider the spread, the more likely you’ll open it for a net debit.

Important : It’s best to avoid trading a put front ratio spread that includes a deep in-the-money put spread. In-the-money put options are when the strike price is above the underlying stock price. Although you’ll collect more premium upfront, it might lead to an early assignment.

While a put front ratio spread is often opened for a net credit, it can require a significant cash collateral (depending on the strikes chosen). In many ways, the cost of the strategy can be compared to selling a put option. Often, traders will decide how much premium to collect by using a measurement called return on capital . Return on capital is calculated by taking the premium you collect and dividing it by the amount of collateral required to place the trade. It’s a way to assess the potential return over the time period of the trade. Ultimately, it’s up to you to decide your optimal return on capital. Remember, put front ratios can be a capital intensive strategy and smaller account sizes may not be able to use it.

How is a put front spread different from buying a put butterfly?

A put front ratio is essentially the body and upper wing of a long put butterfly . It includes buying 1 put and selling 2 identical puts at a lower strike price. Meanwhile a long put butterfly is 1 long put, 2 short puts at a lower strike price, and 1 long put at an even lower strike price. A long put butterfly is typically bought for a net debit, while a put front ratio might be opened for a net debit or credit. Meanwhile, the losses of a long put butterfly is theoretically limited to the net debit paid, whereas the theoretical losses of a put front ratio can be similar to that of owning the underlying stock.

A put front spread has a defined theoretical profit and loss. If the spread is opened for a net credit, at expiration it profits if the underlying stock is trading above the breakeven price.

If the spread is opened for a net debit at expiration, it profits if the underlying stock is trading below the upper breakeven price or above the lower breakeven price.

If established for a net credit, the theoretical max gain is limited to the width of the ratio spread, plus the credit received. This occurs if the underlying stock closes at the short strike of the ratio spread at expiration.

Meanwhile, you’ll keep the entire credit if the underlying stock closes at or above the strike price of the long put at expiration. While this isn’t the max gain of the strategy, it’s the max theoretical gain on the upside.

If the spread is opened for a net debit, the theoretical max gain is limited to the width of the ratio spread, minus the net debit paid. This also occurs if the underlying stock closes at the short strike at expiration. Meanwhile, there is no upside profit potential at expiration.

If the ratio spread is opened for a net debit, the theoretical max loss is equal to the strike price of the short put, minus the max profit of the put debit spread. Meanwhile, if the stock closes above the long put strike at expiration, the theoretical max loss is limited to the net debit paid.

If the ratio spread is opened for a net credit the theoretical max loss is equal to the short strike price of the put, minus the net credit collected. In either scenario, theoretical max loss occurs if the underlying stock falls to $0 by expiration. While this may not be likely, it’s always possible.

If the position is opened for a net credit, there’s 1 breakeven point at expiration. It’s calculated by subtracting the theoretical max profit from the short put strike price.

If the position is opened for a net debit, there are 2 breakeven points at expiration. The lower breakeven point is calculated by subtracting the theoretical max profit from the short put strike price. The upper breakeven is calculated by subtracting the net debit from the long put strike.

Yes. If your long put is exercised, and both short puts expire worthless, you could end up with a short stock position and potentially be exposed to undefined risk.

You’re moderately bearish and expect XYZ stock to make a limited move down over the next 30 days. You decide to trade the $95/$100 put front ratio spread which is trading for a credit:

Buy 1 XYZ $100 put for ($4)

Sell 2 XYZ $95 put for $2.50 x 2 = $5

The theoretical max gain is $6.00 per share, or $600 total. It’s calculated by taking the width of the spread ($5) and adding the net credit collected ($1). Max gain occurs if XYZ closes exactly at $95 at expiration.

The theoretical max loss is $89 per share or $8,900. This occurs if XYZ is trading at $0 at expiration. It’s calculated by taking the max gain of the debit spread ($5) and adding the net credit collected ($1). That amount is subtracted from the strike price of the short put ($95).

The breakeven point at expiration is $89.00. It’s calculated by taking the max gain of the debit spread ($5), adding the net debit credit collected ($1.00) and subtracting that total from the strike price of the short puts ($95). ($95 - ($5+$1))

Let’s imagine the same trade, but this time, the prices of each option are slightly different, and the 95/100 put front ratio is trading for a net debit.

Sell 2 XYZ $95 Put for $2.60 x 2 = $5.20

= Total net debit is ($0.20)

The theoretical max gain is $4.80 per share, or $480 total. It’s calculated by taking the width of the spread ($5) and subtracting the net debit paid ($0.20). Max gain occurs if XYZ closes exactly at $95 at expiration.

The theoretical max loss to the downside is $90.20 per share, or $9,020 per spread. This occurs if XYZ is trading at $0 at expiration. The theoretical max loss to the upside is $0.20 per share, or $20 total per spread. This occurs if XYZ is trading at or above $100 at expiration, and all 3 options expire worthless.

The breakeven points at expiration are $90.20 and $99.80. The upper breakeven is calculated by taking the strike price of the long put ($100) and subtracting the net debit paid ($0.20). The lower breakeven is calculated by taking the max gain of the debit spread ($4.80) and subtracting it from the strike price of the short puts ($95).

These are theoretical examples. Actual gains and losses will depend on a number of factors, such as the actual prices and number of contracts involved.

A put front spread benefits if the underlying stock price falls moderately and implied volatility decreases. Ideally, the underlying stock trades between the 2 strike prices, and in a best case scenario, pins the short strike of the ratio spread by expiration. However, If the underlying stock makes a big move down, and trades below the short strike, the position will begin to act more and more like long stock, and will take on losses.

If the underlying stock doesn’t move, or rises, eventually the position will take on losses. If the spread is opened for a net debit, there’s limited risk to the upside. Meanwhile, whether the position is opened for a net debit or credit, there’s large risk to the downside. However, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

As expiration nears, you may need to proactively manage your position. If the underlying stock is trading between the 2 strikes, and no action is taken, at expiration your long put will automatically be exercised. This will result in selling 100 shares of the underlying stock at the long strike price. If you don't already own the shares, you’ll be left with a short stock position. To help mitigate this risk, Robinhood may close your position prior to market close on the expiration date, which is done on a best-effort basis. Ultimately, you are fully responsible for managing the risk within your account.

At the outset, the net delta of a call front ratio depends on the strikes selected. Over time, the net delta will become positive or negative depending on where the underlying stock is trading. If the underlying stock price falls, the Greeks of the call debit spread will eventually become flat and the net Greeks will resemble that of a single short put. If the underlying stock continues to fall, the net delta will approach 1.00. If the underlying stock rises, the delta of all 3 options will begin to increase and eventually approach zero.

Depending on which strikes are chosen, the net gamma is often slightly negative and will remain negative if the underlying stock trades near the short strike. If the underlying trades near the long strike, the net gamma will eventually switch to positive as time passes. Meanwhile, typically theta is positive and vega is negative . Time passing and a decrease in implied volatility will benefit the value of the overall position. Finally, rho is essentially neutral , and doesn’t impact the position much.

Bottom line, this strategy is about moderate directional movement—you want the underlying stock price to fall to the short strike and stay there while time passes.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a put ratio spread, you can do the following that's described in this section:

To close your position, take the opposite actions that you took to open it. For a put front spread, this involves simultaneously buying-to-close the 2 short put options (the ones you initially sold to open) and selling-to-close the long put option (the one you initially bought to open).

Keep in mind : Prior to expiration, you’ll unlikely be able to close the position for a max gain or max loss. In many cases, you may have to collect slightly less than the theoretical value or pay more than the theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a put front spread. You can do this by buying to close the short put options, and then selling to close the long option later, using separate orders. You could also close 1 short put first and then leg out of the put debit spread or vice versa. These approaches include both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater loss or gain than that of the original strategy.

Note : With your Robinhood account, if you sell to close the long put first, you must have enough buying power to purchase 100 shares of the underlying stock for each remaining short put.

A put front spread involves owning a put option. Although it’s not typical to exercise a long put as a part of a ratio spread, when you own a put, you have the right to sell 100 shares of the underlying stock or ETF at the strike price by expiration (assuming you have the necessary shares to do so). Typically, you’d only consider doing this if your option is in-the-money at expiration and you want to sell any underlying shares you might own. However, if you decide to exercise early, you’ll forfeit any extrinsic value ( time value ) remaining in the option. For this reason, it rarely makes sense to exercise early.

However, exercising early makes sense for some scenarios, including:

To reduce your margin interest . Interest rates are an important factor in determining whether or not to exercise a put option early. While there is no hard or fast rule, you may choose to exercise a deep in-the-money put to reduce your margin interest (assuming you bought the stock or ETF on margin). When you sell shares, you reduce your margin balance.

To ensure you’re capturing the intrinsic value of the option . If you cannot sell your put option for at least its intrinsic value, you can exercise the option and offset it with the necessary purchase of shares to close the resulting short stock position.

Finally, don't exercise an out-of-the-money put option . If you do this, you’re simply selling your shares at a lower price than what they’re currently priced in the open market. If you want to sell any existing shares, it’s usually better to sell your long put, and then sell your existing shares in a separate transaction.

If the underlying’s price is above the long put strike price , then all 3 options should expire worthless . If the spread is opened for a net debit, your loss will be limited to the net debit paid. If the spread is opened for a credit, you’ll keep the credit collected. All 3 options will be removed from your account.

If the underlying’s price is below the long strike price and at or above the short strike price , the long put will expire in-the-money and the short puts will expire out-of-the-money . Be cautious of this scenario. Your long put will automatically be exercised and your short puts will likely expire worthless. If you don’t already own the underlying shares, you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your short puts will no longer exist to offset the exercise. This may potentially result in losses greater than the theoretical max loss of the ratio spread. If you don't have the necessary shares, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

If the underlying’s price closes below the short strike all 3 options will expire in-the-money . The short puts will likely be assigned and the long put will be automatically exercised. The exercise will offset one of the assignments and the put debit spread will realize a max gain. The other assignment will result in buying 100 shares of the underlying at the short strike price. You’ll be left with a long stock position.

For put front spreads, be cautious of an early assignment .

An early assignment occurs when an option that was sold is exercised by the long holder before its expiration date. If you’re assigned on your short put, you can take 1 of the following actions by the end of the following trading day:

In either circumstance, your brokerage account may temporarily show a reduced buying power or an account deficit because of the early assignment. An exercise of the long put is typically settled within 1-2 trading days, which will restore buying power partially or fully. To learn more, see Early assignments .

Call back ratio

What’s a call back ratio.

A call back ratio is a type of ratio spread . It’s a bullish strategy with 2 legs that involves simultaneously selling a call option and buying 2 more at an identical higher strike price. All options have the same expiration date and underlying stock or ETF. This strategy is also known as a long ratio call spread, back spread with calls, or volatility ratio spread. It’s called a ratio spread because the ratio of long to short calls varies from the standard 1 to 1 ratio more commonly used in other strategies.

The strikes you choose and their prices determine whether the position will be opened for a net debit or net credit , the profit and loss areas, and whether or not there are 1or 2 breakeven prices. Essentially, a call back ratio is a combination of a call credit spread and a long call that share the same long strike price as the credit spread. By selling the lower strike call spread, you’re reducing or possibly eliminating the cost of the additional higher strike call option. In exchange, you’re taking on more risk from a loss on the credit spread.

A call back ratio spread is a bullish strategy because ideally you want the price of the underlying to rise. Additionally, this strategy benefits from an increase in implied volatility. However, the underlying stock price must rise substantially by expiration. If it only rises slightly, it’s still possible to lose on the trade. Generally, a back ratio spread can be an ideal strategy when you think something big is about to happen—a surprise beat on earnings, a potential merger or acquisition, or possibly a favorable legal or regulatory ruling for the company, for example.

To create a call back ratio, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Back ratios are typically constructed by simultaneously selling the at-the-money call option and buying 2 identical out-of-the-money call options using a spread order. The width of the spread is a key detail. A narrower spread between strikes will typically result in paying a debit, while a wider spread has a higher potential for collecting a credit.

After you’ve built the spread, choose a quantity. A standard call back ratio consists of 1 short call and 2 long calls. This means your quantity could be short 1, long 2; short 2, long 4; short 4 long 8, and so on. You can also vary the ratio. For example, short 1 at-the-money call and long 3 out-of-the-money calls, which is a variation of the strategy.

Next, select your order type, and specify your price. The net price of the spread is a combination of the individual option prices. As such, the ratio spread will have its own bid/ask spread . Once you’ve selected a price, confirm your order details, and when you’re ready, submit the order.

A call back ratio is commonly used to speculate on the future direction of the underlying stock. When trading a call back ratio, you want the underlying stock to move as high as possible. Remember, this position is essentially 2 positions in 1—a short call spread and an additional long call at the long strike of the call spread.

If the underlying stock rises enough, the embedded short call spread will reach max value, resulting in a defined loss. However, the additional long call will continue to gain value, eventually turning the overall position profitable. And since a long call has unlimited profit potential, a call back ratio has unlimited profit potential as well. Meanwhile, if the position is opened for a credit there is no downside risk at expiration below the short call strike.

Assuming the spread is opened for a debit, the cost is equal to the debit paid plus the width of the spread. Once again, a ratio spread is a combination of a call credit spread (which has a collateral requirement) and the extra long call option (which requires a debit to be paid). Let’s say, you're trading a 5-point wide ratio spread and the net debit is $1.50 per share. The cost of the trade would be $6.50 per share or $650 per spread. This is calculated by taking the width of the ratio spread (5 points) and adding the debit paid ($1.50).

If you open a ratio spread for a credit, you’ll be required to put up enough cash collateral to cover the potential max loss of the call credit spread. This collateral is netted against the credit you receive. It’s calculated by taking the width of the ratio spread, subtracting the total premium collected, and then multiplying that number by 100. Let’s say, you open a 10-point wide ratio spread for a credit of $1.75. You’ll collect $175, but the collateral required will be $1,000, which is the width of the spread multiplied by 100. The net collateral of the trade would be $8.25 per share, or $825 per spread.

Look for an underlying stock or ETF that you think will make a substantial move up in the timeframe of the options you’ve chosen. Consider choosing an underlying that’s on the higher end of its implied volatility range, with potential to increase over the life of the trade. Traders typically look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that provides enough of a window for the underlying stock to move the required amount. If you choose a shorter-dated expiration, the cost might drop, but the window for the underlying to move will be less. If you choose a further-dated expiration, you’ll likely pay more, but the underlying stock will have more time to move.

When selecting strike prices , the most common approach is to sell the at-the-money call and buy 2 out-of-the-money calls. The width between the 2 strikes will ultimately determine whether the spread is opened for a net debit or credit. The wider the spread, the more likely you’ll open the ratio spread for a net credit. The narrower the spread, the more likely you’ll pay a net debit.

Important : It’s best to avoid buying a call back ratio spread that includes a deep in-the-money call spread. In-the-money options are when the strike price is below the underlying stock price. Although you’ll collect more premium upfront, it might lead to an early assignment and/or dividend risk.

While a call back ratio spread is generally considered a low cost strategy, it can require significant collateral (depending on the strikes chosen). Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is a call back spread different from selling a call butterfly?

A call back ratio is essentially the body and lower wing of a short call butterfly . It includes selling 1 call and buying 2 identical calls at a higher strike price. Meanwhile, a short call butterfly is short 1 call, long 2 calls at a higher strike price, and short another call at an even higher strike price. A short call butterfly typically collects a net credit, while a call back ratio might be opened for a net debit or credit, and has unlimited profit potential to the upside. However, a short call butterfly has a limited profit potential in either direction.

A call back spread has unlimited theoretical profit and defined theoretical loss. If the spread is opened for a net debit, at expiration it profits if the underlying stock is trading above the breakeven price.

If the spread is opened for a net credit, at expiration it profits if the underlying stock is trading above the upper breakeven price or below the lower breakeven price.

The theoretical max gain is unlimited to the upside. Since a call back ratio contains a long call option that is not a part of a spread, it has unlimited profit potential. If the ratio spread is opened for a net credit, you’ll keep the entire credit if the underlying stock is trading below the strike price of the short call at expiration and all 3 options expire worthless. While this isn’t the max gain of the strategy, it’s the max gain on the downside. However, if the spread is opened for a net debit, there is no profit potential on the downside.

If the ratio spread is opened for a net debit, the theoretical max loss is equal to the width of the call credit spread, plus the net debit paid. Max loss occurs if the underlying stock price closes exactly at the strike price of the long call (the one with a higher strike price) on the expiration date. In this scenario, the call credit spread will be at max loss and the extra long call will expire worthless. If the ratio spread is bought for a net credit, the theoretical max loss is limited to the width of the ratio spread minus the credit collected. Max loss also occurs in this scenario if the underlying stock price closes exactly at the strike price of the long call on the expiration date.

If the position is opened for a net debit there’s 1 breakeven point at expiration. It’s calculated by adding the width of the credit spread and the net debit paid, then adding that total amount to the long call strike.

If the ratio spread is opened for a net credit, there are 2 breakeven points at expiration. The upper breakeven is calculated by taking the width of the spread and subtracting the credit received. That total amount is then added to the long call strike price. The lower breakeven point is calculated by adding the net credit collected to the short call strike price.

Yes. If your short call is assigned, and both long calls expire worthless, you could end up with a short stock position and potentially realize a greater max loss on the trade. Furthermore, if both long calls are exercised and the short is assigned, you’ll end up with a long stock position and could realize a loss greater than that of the call back ratio.

You’re extremely bullish and expect XYZ stock to make a large move up over the next 30 days. You decide to open the $100/$105 call back ratio spread which is trading for a credit:

Sell 1 XYZ $100 Call for $3.70 <u> Buy 2 XYZ $105 Call for ($1.75) x 2 = ($3.50) </u> Total net credit is $0.20

The theoretical max gain is unlimited to the upside and occurs if XYZ is trading above the upper breakeven at expiration. The amount is undefined because there’s no limit to how high XYZ can go. Meanwhile, the theoretical max gain on the downside is $0.20 per share, or $20 total. This occurs if XYZ is trading at or below $100 at expiration, and all 3 options expire worthless.

The theoretical max loss is $4.80 per share, or $480 total. It’s calculated by taking the width of the spread ($5) and subtracting the net credit received ($0.20). Max loss occurs if XYZ closes exactly at $105 at expiration.

The breakeven points at expiration are $100.20 and $109.80. The lower breakeven is calculated by taking the strike price of the short call ($100) and adding the net credit collected ($0.20). The upper breakeven is calculated by taking the max loss of the credit spread ($4.80) and adding it to the strike price of the long calls ($105).

Let’s imagine the same trade, but this time, the prices of each option are different, and the 100/105 call back ratio is trading for a net debit.

Sell 1 XYZ $100 Call for $4

Buy 2 XYZ $105 Call for ($2.50) x 2 = ($5)

The theoretical max gain is unlimited to the upside and occurs if XYZ is trading above the upper breakeven at expiration. The amount is undefined because there’s no limit to how high XYZ can go.

The theoretical max loss is $6 per share, or $600 total. It’s calculated by taking the width of the spread ($5) and adding the net debit paid ($1). Max loss occurs if XYZ closes exactly at $105 at expiration.

The breakeven point at expiration is $111. It’s calculated by taking the max loss of the credit spread ($5), adding the net debit paid ($1) and adding that total to the strike price of the long calls ($105).

A call back spread benefits if the underlying stock price rises and implied volatility increases. The embedded call credit spread will increase in value but those losses will eventually be capped. Meanwhile, the extra long call option will continue to gain in value as the underlying stock climbs. The higher the underlying stock goes, the more the overall position will begin to act like a long stock position.

Conversely, if the underlying stock doesn't move, or only moves up slightly, eventually your position will take on losses. If you’ve opened the spread for a debit, there’s also downside risk, but less than the theoretical max loss. Whether you’ve opened the spread for a net debit or credit, the area between the short and long strikes is the most reactive. Although the position can profit within this range prior to expiration, time decay will eventually reduce the extrinsic value of all 3 options. This isn't ideal and could turn a profitable position into a losing one quickly.

If you’ve opened the spread for a credit, and the underlying is below the short call strike at expiration, you can earn a profit if all 3 options expire worthless. If you’ve opened the position for a net debit and hold it into expiration, you’ll incur a loss below the short strike, but it will be limited to the net debit paid. That being said, the strategy will not approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

As expiration nears, you may need to proactively manage your position. If the underlying stock is trading between the 2 strikes, and no action is taken, at expiration your short call will likely be assigned. This may result in a short stock position. If the underlying stock is trading above the strike price of the long calls, your long options will automatically be exercised. This may result in a long stock position. With either scenario, it may result in a potential max loss that is greater than max loss of the back spread. To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date, which is done on a best-effort basis.

Keep in mind : Any time you have a short call option in your position, there’s a possibility of an early assignment, which exposes you to certain risks, like a short stock position or a dividend risk.

At the outset, the net delta of a call back ratio depends on the strikes you’ve selected. A general rule for some traders is to build the trade to be delta neutral, or close to it. For example, if you sold an at-the-money call with a .50 delta, you’d look to buy 2 calls around a .25 delta. The combined position would be delta neutral. Over time, the net delta will change. Ideally, you want the underlying stock to make a strong move up, and the net deltas of the spread to become positive .

Once again, depending on the strikes you choose, the net gamma and vega are typically positive . The position benefits from the stock moving up and an increase in implied volatility. Rho is essentially neutral and does not impact the position much, if at all. Conversely, the net theta will typically be negative . Time passing will negatively affect the value of the overall position.

If the underlying stock price rises, the Greeks of the call credit spread will eventually become flat and the Greeks of the overall position will resemble that of a single long call. If the underlying stock continues to climb, the net delta will increase and the position will act more and more like 100 shares of stock. If the underlying stock falls, the net delta of all 3 options will begin to decrease and eventually approach 0.

Bottom line, this strategy is about directional movement—you want the underlying stock price to rise sharply as quickly as possible and continue moving up. If you’ve opened it for a credit, you have no downside risk and would also profit if the options expire worthless, albeit much less than if the underlying stock price rises dramatically.

Although the strategy is designed to reach max profit at expiration, you might consider closing it before then in order to free up capital and avoid the risk of going through exercise and assignment. Whichever you choose, it’s best to establish an exit strategy for your trade before you enter it. To close a call ratio spread, you can do the following that's described in this section:

To close your position, take the opposite actions that you took to open it. For a call back spread, this involves simultaneously buying-to-close the short call option (the one you initially sold to open) and selling-to-close the 2 long call options (the ones you initially bought to open).

Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you close your spread for less than you opened it for, you’ll realize a loss. If you close it for more than you opened it for, you’ll profit. And if you close it at the same price as your opening price, you’ll break even.

Keep in mind : If you’ve opened the spread for a credit, prior to expiration, you’ll unlikely be able to close the position for a max gain on the downside. In many cases, you may have to pay more than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a call back spread. You can do this by buying to close the short call option, and then selling to close the long options later, using separate orders. You could also close 1 long call first and then leg out of the call credit spread or vice versa. These approaches include both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. That being said, by doing this you could create a greater loss or gain than that of the original strategy.

Note : With your Robinhood account, to leg out of a call credit spread, you must buy to close the short call option first before you can sell to close your long option.

A call back spread involves owning a call option. Although it’s not typical to exercise a long call as a part of a ratio spread, when you own a call, you have the right to buy 100 shares of the underlying stock or ETF at the strike price by expiration (assuming you have the required buying power). Typically, you’d only consider doing this if your option is in-the-money at expiration and you want to own the underlying shares. However, if you decide to exercise early, you’ll forfeit any extrinsic value ( time value ) remaining in the option. For this reason, it rarely makes sense to exercise early.

However, exercising early can make sense for some scenarios, including:

To capture an upcoming dividend payment . Remember, shareholders receive dividends, option holders do not. Furthermore, you’ll have a short option that will likely get assigned, causing you to have an obligation to pay the dividend. If your long options are in-the-money, and the remaining extrinsic value in the short long call is less than the upcoming dividend, it could make sense to exercise prior to the ex-dividend date to mitigate dividend risk or collect the dividend.

To ensure you’re capturing the intrinsic value of the option . If you can't sell your call option for at least its intrinsic value, you can exercise the option and offset it with the necessary sale of shares to close the resulting long stock position.

Finally, don't exercise an out-of-the-money call option . By doing so, you’re simply paying a higher price for the shares than what they’re currently priced in the open market. If you want to own the underlying shares, it’s usually better to sell your long call, and then buy the shares in a separate transaction.

If the underlying’s price is below the short call strike price , then all 3 options should expire worthless . If the spread is opened for a net debit, your loss will be limited to the net debit paid. If the spread is opened for a net credit, you’ll keep the credit collected. All 3 options will be removed from your account.

If the underlying’s price is above the short strike price and at or below the long strike price , the short call will expire in-the-money and the long calls will expire out-of-the-money . Be cautious of this scenario. You’ll most likely be assigned on your short call and your long calls will expire worthless. If your short call is assigned you’ll be left with a short stock position, which carries undefined risk. Meanwhile, your long calls will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the ratio spread.

If the underlying’s price closes above the long strike , all 3 options will expire in-the-money . The short call will likely be assigned and both long calls will be automatically exercised. The 1 exercise will offset the assignment and the call credit spread will realize a max loss. The other exercise will result in purchasing 100 shares of the underlying at the long strike price. If you don't have the necessary buying power for this purchase, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date, which is done on a best-effort basis. Ultimately, you're fully responsible for managing the risk within your account.

For call back spreads, be cautious of an early assignment or an upcoming dividend.

Put back ratio

What’s a put back ratio.

A put back ratio is a type of ratio spread . It’s a bearish options strategy with 2 legs that involves simultaneously selling a put option and buying 2 more at an identical lower strike price. All 3 options have the same expiration date and underlying stock or ETF. This strategy is also known as a long ratio put spread, back spread with puts, or volatility ratio spread. It’s called a ratio spread because the ratio of long to short puts varies from the standard 1 to 1 ratio more commonly used in other strategies.

The strikes you choose, and their prices, determines whether the position will be opened for a net debit or net credit , the profit and loss areas, and whether or not there are 1 or 2 breakeven prices. Essentially, a put back ratio is a combination of a put credit spread and a long put that shares the same long strike price as the credit spread. By selling the higher strike put spread, you’re reducing, or possibly, eliminating the cost of the additional lower strike put option. In exchange, you’re taking on more risk from a loss on the credit spread.

A put back ratio spread is a bearish strategy because ideally you want the price of the underlying to fall. Additionally, this strategy benefits from an increase in implied volatility. However, the underlying stock price must fall substantially by expiration. If it only drops slightly, it’s still possible to lose on the trade. Generally, a back ratio spread could be an ideal strategy when you think something big is about to happen—a surprise miss on earnings, or possibly an unfavorable legal or regulatory ruling for the company, for example.

To create a put back ratio, pick an underlying stock or ETF, select an expiration date, and choose the strike prices. Back ratios are typically constructed by simultaneously selling the at-the-money put option and buying 2 identical out-of-the-money put options using a spread order. The width of the spread is a key detail. A narrower spread between the strikes will typically result in paying a net debit, while a wider spread has a higher potential for collecting a net credit.

After you’ve built the spread, choose a quantity. A standard put back ratio consists of 1 short put and 2 long puts. This means your quantity could be short 1, long 2; short 2, long 4; short 4 long 8, and so on. You could also vary the ratio. For example, short 1 at-the-money put, long 3 out-of-the-money puts, which is a variation of the strategy.

A put back ratio is commonly used to speculate on the future direction of the underlying stock. When trading a put back ratio, you want the underlying stock to drop as low as possible. Remember, this position is essentially 2 positions in 1—a put credit spread and an additional long put at the long strike of the put spread. If the underlying stock drops enough, the embedded short put spread will reach max value, resulting in a defined loss. However, the additional long put will continue to gain value, eventually turning the overall position profitable. Meanwhile, if the position is opened for a credit there is no upside risk above the short put strike at expiration.

Assuming the spread is opened for a net debit, the cost is equal to the net debit paid plus the width of the spread. Once again, a ratio spread is a combination of a put credit spread (which has a collateral requirement) and an extra long put option (which requires a debit to be paid).

Let’s say, you're trading a 5-point wide ratio spread and the net debit is $1.50 per share. The cost of the trade would be $6.50 per share, or $650 per spread. This is calculated by taking the width of the ratio spread (5 points) and adding the debit paid ($1.50).

If you open a ratio spread for a net credit, you’ll be required to put up enough cash collateral to cover the potential max loss of the put credit spread. This collateral is netted against the amount of the credit you receive and is calculated by taking the width of the ratio spread, subtracting the total premium collected, and then multiplying that number by 100.

Let’s say, you open a 10-point wide ratio spread for a credit of $1.75. You’ll collect $175, but the collateral required will be $1,000, which is the width of the spread multiplied by 100. The net collateral of the trade would be $8.25 per share, or $825 per spread.

Look for an underlying stock or ETF that you think will make a substantial move down in the timeframe of the options you’ve chosen. Consider choosing an underlying that’s on the higher end of its implied volatility range, with potential to increase over the life of the trade. It may be advisable to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

Choose an expiration date that provides enough of a window for the underlying stock to move the required amount. If you choose a shorter-dated expiration, your potential cost may drop, but the window for the underlying to move will be less. If you choose a further-dated expiration, you’ll likely pay more, but the underlying stock will have more time to move.

When selecting strike prices , the most common approach is to sell the at-the-money put and buy 2 out-of-the-money puts. The width between the 2 strikes will ultimately determine whether the spread is opened for a net debit or credit. The wider the spread, the more likely you’ll open the ratio spread for a net credit. The narrower the spread, the more likely you’ll pay a net debit.

Important : It’s best to avoid buying a put back ratio spread that includes a deep in-the-money put spread. In-the-money options are when the strike price is above the underlying stock price. Although you’ll collect more premium upfront, it might lead to an early assignment.

While a put back ratio spread is generally considered a low cost strategy, it can require significant collateral (depending on the strikes chosen). Many traders adhere to the general guideline of not risking more than 2-5% of their total account value on a single trade. For example, if your account value was $10,000, you’d risk no more than $200-$500 on a single trade. Ultimately, it’s up to you to decide. Manage your risk accordingly.

How is a put back spread different from selling a put butterfly?

A put back ratio is essentially the body and upper wing of a short put butterfly . It includes selling 1 put and buying 2 identical puts at a lower strike price. Meanwhile a short put butterfly is short 1 put, long 2 puts at a lower strike price, and short another put at an even lower strike price. A short put butterfly typically collects a credit, while a put back ratio might be opened for a net debit or credit and can have a large, but limited profit potential to the downside. However, a short put butterfly has a smaller, limited profit potential in either direction.

A put back spread has a defined theoretical profit and loss. If the spread is opened for a net debit, at expiration it profits if the underlying stock is trading below the breakeven price.

The theoretical max gain on the downside is equal to the strike price of the long put minus the sum of the net debit paid and the max loss of the credit spread, multiplied by 100. If the spread is opened for a net credit, the max gain is equal to the strike price of the long put minus the max loss of the credit spread. Theoretical max gain on the downside occurs if the underlying stock goes to $0. Although this is possible, it may not be likely.

If the ratio spread is opened for a net credit, you’ll keep the entire credit if the underlying stock is trading above the strike price of the short put at expiration and all 3 options expire worthless. While this isn't the max gain of the strategy, it’s the max gain on the upside. However, if the spread is opened for a net debit, there is no profit potential on the upside.

If the ratio spread is opened for a net debit, the theoretical max loss is equal to the width of the put credit spread, plus the net debit paid. This occurs if the underlying stock price closes exactly at the strike price of the long put (the one with a lower strike price) on the expiration date. In this scenario, the put credit spread will be at max loss and the extra long put will expire worthless.

If the ratio spread is opened for a net credit, the theoretical max loss is limited to the width of the ratio spread minus the credit collected. This occurs if the underlying stock price closes exactly at the strike price of the long put on the expiration date.

If the position is opened for a net debit there’s 1 breakeven point at expiration. It’s calculated by adding the width of the credit spread and the net debit paid, then subtracting that total amount from the long put strike.

If the ratio spread is opened for a net credit, there are 2 breakeven points at expiration. The lower breakeven is calculated by taking the width of the spread and subtracting the credit received. That total amount is then subtracted from the long put strike price. The upper breakeven point is calculated by subtracting the net credit collected from the short put strike price.

Yes. If your short put is assigned, and both long puts expire worthless, you could end up with a long stock position and potentially realize a greater max loss on the trade. If the extra long put is exercised, you could end with a short stock position which carries undefined risk.

You’re extremely bearish and expect XYZ stock to make a large move down over the next 30 days. You decide to open the $100/$95 put back ratio spread which is trading for a net credit:

Sell 1 XYZ $100 Put for $5.40

Buy 2 XYZ $95 Put for ($2.60) x 2 = ($5.20)

= Total net credit is $0.20

The theoretical max gain to the downside is $90.20 per share, or $9,020 per spread. This occurs if XYZ is trading at $0 at expiration. The theoretical max gain to the upside is $0.20 per share, or $20 total per spread. This occurs if XYZ is trading at or above $100 at expiration, and all 3 options expire worthless.

The theoretical max loss is $4.80 per share, or $480 total. It’s calculated by taking the width of the spread ($5) and subtracting the net credit received ($0.20). Max loss occurs if XYZ closes exactly at $95 at expiration.

The breakeven points at expiration are $90.20 and $99.80. The upper breakeven is calculated by taking the strike price of the short put ($100) and subtracting the net credit collected ($0.20). The lower breakeven is calculated by taking the max loss of the credit spread ($4.80) and subtracting it from the strike price of the long puts ($95).

Let’s imagine the same trade, but this time, the prices of each option are different, and the 95/100 put back ratio is trading for a net debit.

Sell 1 XYZ $100 put for $4 Buy 2 XYZ $95 put for ($2.50) x 2 = ($5) = Total net debit is ($1)

The theoretical max gain is $89 per share or $8,900. This occurs if XYZ is trading at $0 at expiration. It’s calculated by taking the max loss of the credit ($5) spread and adding the net debit paid ($1). That amount is subtracted from the strike price of the long put ($95).

The theoretical max loss is $6 per share, or $600 total. It’s calculated by taking the width of the spread ($5) and adding the net debit paid ($1). Max loss occurs if XYZ closes exactly at $95 at expiration.

The breakeven point at expiration is $89. It’s calculated by taking the max loss of the credit spread ($5), adding the net debit paid ($1) and subtracting that total from the strike price of the long puts ($95), ($95-($5+$1)).

A put back spread benefits if the underlying stock price falls and implied volatility increases. The embedded put credit spread will increase in value but those losses will eventually be capped. Meanwhile, the extra long put option will continue to gain in value as the underlying stock drops. The lower the underlying stock goes, the more the overall position will begin to act like a short stock position.

Conversely, if the underlying stock doesn’t move, or only drops slightly, eventually your position will take on losses. If you’ve opened the spread for a net debit, there’s also upside risk, but less than the theoretical max loss. Whether you opened the spread for a net debit or credit, the area between the short and long strikes is the most reactive. Although the position can profit within this range prior to expiration, time decay will eventually reduce the extrinsic value of all 3 options. This isn't ideal and could turn a profitable position into a losing one quickly.

If you’ve opened the spread for a net credit, and the underlying is above the short put strike at expiration, you can earn a profit if all 3 options expire worthless. If you open the position for a net debit and hold it into expiration, you’ll incur a loss above the short strike, but it will be limited to the net debit paid. That being said, the strategy won't approach its maximum gain or loss until it’s near expiration and the time value of all options is greatly reduced.

As expiration nears, you may need to proactively manage your position. If the underlying stock is trading between the 2 strikes, and no action is taken, at expiration your short put will likely be assigned. This may result in a long stock position. If the underlying stock is trading below the strike price of the long puts, your long options will automatically be exercised. This may result in a short stock position. With either scenario, it may result in a potential max loss that is greater than max loss of the back spread. To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date, which is done on a best-effort basis.

At the outset, the net delta of a put back ratio depends on the strikes you’ve selected. A general rule for traders is to build the trade as delta neutral, or close to it. For example, if you sold an at-the-money put with a .50 delta, you’d look to buy 2 out-of-the-money puts around a .25 delta. The combined position would be delta neutral. Over time, the net delta will change. Ideally, you want the underlying stock to make a strong move down, and the net deltas of the spread to become negative .

Once again, depending on the strikes you choose, the net gamma and vega are typically positive . The position benefits from the stock moving down and an increase in implied volatility. Rho is essentially neutral and doesn’t impact the position much, if at all. Conversely, the net theta will typically be negative . Time passing will negatively affect the value of the overall position.

If the underlying stock price drops, the Greeks of the put credit spread will eventually become flat and the Greeks of the overall position will resemble that of a single long put. If the underlying stock continues to fall, the net delta will decrease and the position will act more like being short 100 shares of stock. If the underlying stock rises, the net delta of all 3 options will begin to increase and eventually approach 0.

Bottom line, this strategy is about the directional movement—you want the underlying stock price to fall sharply as quickly as possible and continue moving down. If you’ve opened it for a net credit, you have no upside risk and would also profit if the options expire worthless, albeit much less than if the underlying stock price falls dramatically.

To close your position, take the opposite actions that you took to open it. For a put back spread, this involves simultaneously buying-to-close the short put option (the one you initially sold to open) and selling-to-close the 2 long put options (the ones you initially bought to open).

Typically, you’ll collect a net credit to close your position. In doing so, you’ll realize any profits or losses associated with the trade. If you close your spread for less than you opened it for, you’ll realize a loss. If you close it for more than you opened it for, you’ll profit. And if you sell to close it at the same price as your opening price, you’ll break even.

Keep in mind : If you’ve opened the spread for a net credit, prior to expiration, you’ll unlikely be able to close the position for a max gain on the upside. In many cases, you may have to pay more than theoretical value in order to close the position as expiration approaches.

Some traders prefer to leg out of a put back spread. You can do this by buying to close the short put option, and then selling to close the long options later, using separate orders. You could also close 1 long put first, and then leg out of the put credit spread or vice versa. These approaches include both benefits and risks. You can do this to mitigate liquidity concerns or change the structure of your strategy. However, by doing this you could create a greater loss or gain than that of the original strategy.

Note : With your Robinhood account, if you sell to close the long puts first, you must have enough buying power to purchase 100 shares of the underlying stock for each remaining short put.

A put back spread involves owning a put option. Although it’s not typical to exercise a long put as a part of a ratio spread, when you own a put, you have the right to sell 100 shares of the underlying stock or ETF at the strike price by expiration (assuming you have the necessary shares to do so). Typically, you’d only consider doing this if your option is in-the-money at expiration and you want to sell your underlying shares. However, if you decide to exercise early, you’ll forfeit any extrinsic value ( time value ) remaining in the option. For this reason, it rarely makes sense to exercise early.

To ensure you’re capturing the intrinsic value of the option . If you can't sell your put option for at least its intrinsic value, you can exercise the option and offset it with the necessary purchase of shares to close the resulting short stock position.

If the underlying’s price is above the short put strike price , then all 3 options should expire worthless . If the spread is opened for a net debit, your loss will be limited to the net debit paid. If the spread is opened for a net credit, you’ll keep the credit collected. All 3 options will be removed from your account.

If the underlying’s price is below the short strike price and at or above the long strike price , the short put will expire in-the-money and the long puts will expire out-of-the-money . Be cautious of this scenario. You’ll most likely be assigned on your short put and your long puts will expire worthless. If your short put is assigned, you’ll be left with a long stock position. Meanwhile, your long puts will no longer exist to offset the assignment. This may potentially result in losses greater than the theoretical max loss of the ratio spread.

If the underlying’s price closes below the long strike , all 3 options will expire in-the-money . The short put will likely be assigned and both long puts will be automatically exercised. The one exercise will offset the assignment and the put credit spread will realize a max loss. The other exercise will result in selling 100 shares of the underlying at the long strike price. If you don't have the necessary shares for this sale, this may result in a short stock position. As a result, Robinhood may attempt to place a Do Not Exercise (DNE) request on your behalf.

Important : To help mitigate these risks, Robinhood may close your position prior to market close on the expiration date, which is done on a best-effort basis. Ultimately, you're fully responsible for managing the risk within your account .

For put back spreads, be cautious of an early assignment .

In either circumstance, your brokerage account may temporarily display a reduced buying power or an account deficit as a result of the early assignment. An exercise of the long put is typically settled within 1-2 trading days, and restores buying power partially or fully. To learn more, see Early assignments .

Disclosures

Any hypothetical examples are provided for illustrative purposes only. Actual results will vary.

Content is provided for educational purposes only, doesn't constitute tax or investment advice, and isn't a recommendation for any security or trading strategy. All investments involve risk, including the possible loss of capital. Past performance doesn't guarantee future results.

If multiple option positions or strategies are established in the same underlying symbol, Robinhood Financial may deem it necessary to pair or re-pair the separately established options positions or strategies together as part of its risk management process.

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Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.