Understanding long call and long put option contracts is just the first spin of the wheel. Advanced options strategies can increase your chances of the ball dropping exactly where you want it to.

Introduction to Advanced Options Strategies

Advanced options strategies balance risk and reward but require more finesse than basic options plays — and if you get it right, you’ve hit a straight up.

How an Iron Condor Works

The iron condor is a complex strategy that profits when a stock’s price remains stable and stays within a specific range. This technique is called a neutral options strategy, which means it’s focused on collecting option premiums rather than managing or hedging stocks you already own.

In the iron condor, you sell (short) two options with strike prices close to the current stock price. When you sell, you earn a premium and have an obligation to buy or sell the stock when it’s exercised.

Then, you buy (long) two options with strike prices further away. When you buy, you pay a premium and have the right to buy or sell the stock when it’s exercised.

In this strategy, the premiums you collect when selling will ideally be higher than the premiums you pay when you buy.

Trades You Need to Consider

Here are the four trades you need to make and your action for each if they are exercised:

Short Option #1:

Trade: Sell a short put at a strike price lower than the current market value
Action: Obligation to buy the stock at strike price

Short Option #2:

Trade: Sell a short call at a strike price higher than current market value
Action: Obligation to sell the stock at strike price

Long Option #1:

Trade: Buy a long put with a strike price lower than the short put
Action: Right to sell the stock at the strike price

Long Option #2:

Trade: Buy a long call with a strike price higher than the short call
Action: Right to buy the stock at the strike price

The short options define the center range of your iron condor, and the long options create a safety net by limiting your losses if the stock moves too much.

How Does It Work?

For example, let’s say a stock is trading at $100, and you believe it will stay between $95 and $105 over the next month. You could:

Sell a short call with a strike price of $105 and a short put at $95
Buy a long call with a strike price of $110 and a long put at $90

The ideal outcome of an iron condor is when the stock price stays within the tighter range ($95 to $105). All the options you sold and bought expire worthless, and you pocket the net profit from the premiums.

However, things become riskier if the stock price moves outside the range. For instance, if the stock drops below $90, two things will happen:

The short put will be exercised and you’ll buy the stock for $95
You choose to exercise the long put and sell the stock for $90

You’ll lose the $95 on the short put, but since you earn $90 on the long put, you’ll only net a $5 loss per share. If you planned well, the net gains you receive from the premiums will also offset that $5 loss and still leave you with a profit.

Alternatively, if the shares rise to $115, these actions take place:

The short call will be exercised, and you’ll sell the stock for $105
You choose to exercise the long call and buy the stock for $110

But wait — if you just made $105 per share by selling the short call, why would you turn around and spend $110 to lose $5 when you could just let it expire?

The Concept of Neutral Options

Let’s go back to the concept of a neutral options strategy. Since your goal is to profit from premiums, it’s more than likely that you don’t own the stock you’re obligated to sell. So, you have to buy it first.

You could pay the current market price of $120 per share, or you could exercise your long call, buy the stock at the discounted price of $110, and save $5. This offsets the $5 loss, and you break even. Plus, you still get to keep what you’ve earned from the premiums.

Understanding Straddles and Strangles

Straddles and strangles are similar strategies that capitalize on a stock making a substantial price movement, regardless of whether it rises or falls.

Straddle

Imagine a stock is currently trading at $100. You believe something major — like an earnings report or a newsworthy event — is coming that could cause the stock price to make a big swing. However, you don’t know which direction it will go.

This is a perfect opportunity for a straddle trade. To prepare:

Buy a long call option (which lets you profit if the stock price goes up) at a $100 strike price
Buy a long put option (which lets you profit if the stock price goes down) at a $100 strike price

If the stock price jumps to $120, your call option becomes valuable because you can buy the stock at $100 and sell it at the higher market price. Meanwhile, the put option will expire worthless.

Similarly, if the stock drops to $80, your put option gains value because you can sell the stock at $100, while the call option expires worthless.

The key to a straddle is that the stock must move significantly in either direction to cover the premiums of both options and generate a profit. If the stock price barely moves and stays close to $100, both options lose value, and you lose the premiums you paid.

Strangle

A strangle is similar to a straddle, but it’s slightly cheaper and more flexible. This strategy also profits from big price movements, but it requires the stock to move even further to be successful.

Instead of buying a call and a put at the same strike price, you buy them at different strike prices that are slightly out-of-the-money, or just outside the current market price.

For example, let’s say the same stock is trading at $100:

Buy a long call option at $105 for the right to buy
Buy a long put option at $95 for the right to sell

Buying options with out-of-the-money strike prices are less risky for the seller. Thus, the premiums are lower than they would be on straddle options with at-the-money (equal to or very close to the current market price) strike prices.

Your call option ($105 strike) gains value if the stock price moves up to $120, and you can sell it for a profit. The put option ($95 strike) expires with no value.

If the stock falls to $80, your put option is more valuable, while the call option expires worthless.

How To Trade a Butterfly Spread

A butterfly spread is an options trading strategy that works best in low-volatility markets when you expect a stock’s price to remain near a specific level by the time the options expire. It’s a low-cost, low-risk strategy with limited profit potential, which makes it a conservative choice for those looking to balance defined risk with steady returns.

The setup involves four transactions:

Sell two options at a middle strike price
Buy one option at a higher strike price
Buy one option at a lower strike prices

For example, if a stock is trading at $100, you might:

Sell two short call options with a $100 strike price at a premium of $5 ($10 total)
Buy one long call option with a $105 strike price at a premium of $2
Buy one long call option with a $95 strike price at a premium of $3

In an ideal outcome, the stock price stays at $100, and all the options you sold and bought expire worthless. You still keep the premiums you collected from selling the two middle short options ($10) minus the cost of the options you purchased ($2 and $3) — your profit is $5 per share.

If the stock price moves slightly above or below $100, one of the long options you bought will begin to gain some value, but your profit will decrease as the stock price moves further away from the middle strike price.

However, your potential loss is limited. If the stock price moves far above the $105 strike price or far below the $95 strike price, the losses from the options you sold will be offset by the protective options you purchased. This limits your maximum loss to the initial cost of setting up the spread.

Risks and Rewards of Advanced Strategies

Using advanced options strategies allow you to play it cool with steady profits or spin the wheel for big wins, but beware; the risks can sneak up on you if you're not careful.

Iron Condor

Rewards:

It’s a good strategy for markets that don’t move much.
You know your maximum loss upfront, so no surprises.
You can earn steady, modest profits if the stock stays within the price range you set.

Risks:

If the stock moves outside the range, you’ll take a loss.
The potential profit is limited, so you won’t make huge gains.
If you misjudge the range, you risk losing the premium you collected.

Straddles and Strangles

Rewards:
You can profit whether the stock price jumps up or drops significantly.
There’s no limit to how much you can make if the stock moves drastically.
Once you choose your strike prices, you let the market’s movement drive your outcome.
Risks:

Buying two options can be expensive, especially for straddles, if the stock doesn’t move.
If the stock stays flat, you’ll lose the premiums you paid.
As time passes, the value of your options decreases if the stock doesn’t make a big move.

Butterfly Spread

Rewards:

It’s generally inexpensive to set up compared to other options strategies.
Your maximum loss is limited because the options you bought provide protection.
If the stock price ends near the middle strike, you can earn a solid profit.

Risks:

If the stock moves too far in either direction, the trade doesn’t work out.
The profit potential is capped, so this isn’t a strategy for big gains.
It’s more complex than basic strategies, so it can be tricky for beginners.

When To Use Advanced Strategies

Advanced options strategies are best used when you have:

A clear understanding of market conditions
A specific forecast for a stock’s behavior
A need to manage risk in a sophisticated way.

Iron condors, butterfly spreads, straddles, strangles, and other advanced options trades are not for beginners. They address scenarios where basic strategies like buying a single call or put might not be sufficient to maximize returns or control risk. The key is knowing the right market conditions and your own trading goals.

Market Conditions

Use advanced strategies when market movement (or lack thereof) meets your expectations. For example, if you believe a stock’s price will remain stable, a strategy like an iron condor or butterfly spread can help you capitalize on time decay and low volatility.

On the other hand, if you think big price swings are coming but aren’t sure of the direction, straddles or strangles can position you to profit regardless of whether the stock price rises or falls, just as long as it does so significantly.

Risk Management

Advanced strategies are also useful when you need to manage risk more effectively. A strategy like a protective put can act as insurance for your portfolio by limiting losses if a stock’s price takes a sharp dip. Similarly, spread strategies like a butterfly, bull call, or bear put define your maximum risk and reward, which is great for traders who want to cap potential losses while still leaving room for gains.

Position Flexibility

Finally, these strategies allow for greater flexibility in creating positions that match your specific goals. For example, if you want to generate income on a stock you already own, collect premiums while maintaining ownership of the shares with a covered call strategy. Alternatively, a cash-secured put allows you to earn income while you wait for a stock you want to own to fall to a price you’re happy to pay.

Tolling and Adjusting Advanced Trades

Tolling and adjusting advanced trades refer to strategies you can use to manage your options positions when the market isn’t moving as you thought or when you want to optimize your profits and reduce risks. These techniques are particularly useful with complex options strategies involving multiple contracts, such as spreads, iron condors, or straddles. The goal is to respond to changes in the market or your outlook by modifying your trade rather than letting it expire as it is.

Tolling Advanced Trades

Tolling is a way to avoid locking in a loss by extending the timeline of your trade until it turns profitable. If the market hasn’t moved enough for your options to be profitable, you can "roll" your position to a later expiration date.

For instance, if you sold a call option as part of a spread, and it’s about to expire out of the money, you could buy back that call option and sell another one with the same or a slightly adjusted strike price but with a later expiration. This gives your trade more time to work in your favor, particularly if you believe the market conditions will improve.

Adjusting Advanced Trades

Adjusting involves changing the structure of your trade to adapt to new market conditions. For instance, if you have an iron condor and the stock price moves closer to one of your short strikes, you could adjust by buying back the endangered short option and replacing it with a new one at a safer strike price.

Similarly, if you’re holding a straddle and the stock isn’t showing the volatility you expected, you might close one leg of the position (either the call or the put) to minimize losses or lock in partial profits.

Both tolling and adjusting require close monitoring of your trades and a clear understanding of your goals. While these techniques give you flexibility, they also involve additional costs, such as transaction fees and potential increases in margin requirements. Successful tolling and adjusting depend on your ability to assess market conditions, calculate the costs and benefits of the adjustment, and act decisively to manage your position.

Real-World Examples of Complex Options Trades

Kind of complicated, isn’t it? Let’s apply the theories to options contracts for 100 $TSLA shares at $339 each.

Iron Condor

You’re betting the $TSLA stock price will stay steady at $339. You sell a $350 call and a $330 put, collecting $8 per share for the call and $9 per share for the put, for a total premium of $1,700 on the contract.

To protect yourself in case the stock swings wildly, you buy a $360 call for $5 per share and a $320 put for $6 per share, costing you $1,100. Your net premium is $600.

If the stock jumps to $370, your higher call option protects you from unlimited losses. You’ll lose $1,000 because you have to sell 100 shares for $35,000 (at the $350 strike) and buy them back for $36,000 (at the $360 strike).

Subtracting your $600 premium, your net loss is $400. Without the insurance, your loss would have been $2,000 if you had no higher call option to limit the damage.