4. Advanced Options Strategies

You’ve seen calls, puts, basic spreads. This chapter is about multi-leg structures — used to express specific views on direction + volatility + time, with defined risk.

Spreads (vertical)

Two options, same expiry, different strikes.

Bull Call Spread

• Buy ATM/ITM call, sell OTM call.
• Net cost = lower than naked call.
• Max profit = (high strike − low strike) − net premium.
• Max loss = net premium.

Use: Mildly bullish, IV moderate, want defined risk.

Bear Put Spread

• Buy ATM/ITM put, sell OTM put.
• Mirror of the above.

Bull Put Spread (Credit)

• Sell higher-strike put, buy lower-strike put.
• Net credit (you receive premium).
• Profit if price stays above short strike.

Use: Mildly bullish + high IV → sell premium with defined risk.

Bear Call Spread (Credit)

• Sell lower call, buy higher call.
• Profit if price stays below short strike.

Straddles & Strangles

Long Straddle

• Buy ATM call + ATM put (same strike).
• Profits from large move either direction.
• Max loss = total premium.

Use: Pre-event, expecting big move, IV low.

Short Straddle

• Sell ATM call + ATM put.
• Profits if price stays at strike.
• Unlimited risk on both sides.

Use: Range-bound view, high IV — but never naked. Always cap with wings.

Long/Short Strangle

• Same as straddle but with OTM strikes (call > spot, put < spot).
• Cheaper than straddle, needs bigger move to profit.

Iron Condor

A range-bound, defined-risk structure. Four legs:

Sell OTM put         (e.g., 24300 PE)
Buy further OTM put  (e.g., 24200 PE)
Sell OTM call        (e.g., 24700 CE)
Buy further OTM call (e.g., 24800 CE)

= short strangle + long strangle wings.

• Max profit = net credit, achieved if Nifty stays between 24300 and 24700.
• Max loss = (wing width) − credit.
• Defined risk on both sides.

Use: High IV, expecting range, want limited risk. Common Nifty/Bank Nifty weekly play.

Iron Butterfly

Same idea but short legs at the same (ATM) strike:

Sell ATM put + Sell ATM call (= short straddle)
Buy OTM put + Buy OTM call (wings)

Higher credit than condor, narrower profit zone.

Calendar (Time / Horizontal) Spreads

Sell front-month, buy back-month, same strike.

• Profit from front-month decaying faster than back.
• Best when underlying stays near strike.
• Vega positive (helps if IV rises).

Diagonal

Same as calendar but different strikes. Combines time + directional bets.

Ratio Spreads

Buy 1 close-to-money option, sell 2 (or 3) further OTM options.

Call Ratio Spread

Buy 1 ATM CE
Sell 2 OTM CE

Profits from a controlled upmove (max profit at the short strikes). Loses if price rallies hard past short strikes.

Use: Mildly bullish, expect price to drift to short strike.

Backspread

Sell 1 ATM, buy 2 OTM. Opposite Greek profile — profits from huge moves.

Broken-wing Butterflies (BWB)

Asymmetric butterflies — one wing wider than the other. Often opened for credit (no upfront cost).

Buy 1 ITM put
Sell 2 ATM puts
Buy 1 far-OTM put

Skewed risk/reward, used by experienced traders to express directional view with low/no debit.

Choosing the right structure — decision matrix

View	IV	Best structure
Strongly bullish	Low	Long call / Bull call spread
Strongly bullish	High	Bull put spread (credit)
Mildly bullish	High	Bull put spread / Cash-secured put
Strongly bearish	Low	Long put / Bear put spread
Strongly bearish	High	Bear call spread
Range-bound	High	Iron condor / Short strangle (with hedges)
Range-bound	Low	Long calendar
Big move expected, direction unknown	Low	Long straddle / strangle
Big move expected	High	Calendar/diagonal — vega play

Adjustments — when trades go wrong

A position moves against you. Don’t just close — adjust.

Iron condor: short put side under threat

• Roll the short put down and out (lower strike, later expiry).
• Add a debit put spread below to provide more cushion.
• Convert to an iron butterfly (move call side closer to action).

Long calendar: underlying moved away from strike

• Roll to a new strike near current price.
• Convert to diagonal by adjusting the back-month strike.

Short strangle: one side under pressure

• Roll the untested side closer to collect more credit (raises breakeven).
• Add a hedge wing to convert to an iron condor.

Adjustments buy time and reduce risk. They don’t always rescue trades — sometimes the right move is to take the loss and move on. Don’t adjust losers indefinitely; that’s how 1R losses become 5R disasters.

Position sizing for option structures

Not based on number of lots — on maximum loss vs capital.

$\text{Lots} = \frac{\text{Capital} \times \text{Risk \%}}{\text{Max loss per lot}}$

For a defined-risk structure (condor) with max loss ₹3,000/lot, capital ₹5L, 1% risk: $\text{Lots} = \frac{5{,}000}{3{,}000} = 1 \text{ lot (rounded down)}$

For undefined-risk structures (naked shorts), use a stress test: what if the underlying moves 5%? 10%? Position size for the stress scenario, not the typical one.

Greeks of common structures (quick ref)

Structure	Δ	Γ	Θ	ν
Long call	+	+	−	+
Bull call spread	+	small +	small −	small +
Bull put spread (credit)	+	small −	+	−
Long straddle	0	++	−−	++
Short straddle	0	−−	++	−−
Iron condor	0	−	+	−
Iron butterfly	0	−−	++	−−
Long calendar (ATM)	0	small −	+	+
Call ratio	+ → −	varies	+	−

Use this to check: “Does my structure’s Greek profile match my view?”

Putting it all together — a weekly options play

Setup: Bank Nifty closed at 51,200 on Monday. India VIX at 14. No major events this week.

View: Range-bound expected (no catalyst). Modest theta, willing to take limited risk.

Trade: Iron Condor for Thursday expiry.

• Sell 50800 PE, Buy 50500 PE
• Sell 51600 CE, Buy 51900 CE

Net credit: ₹120 × 15 (lot) = ₹1,800 per lot. Max loss: ₹300 wing − ₹120 credit = ₹180 × 15 = ₹2,700 per lot.

R:R = 1.5:1 reward (asymmetric, but high prob).

Management:

• Profit target: 50% of max credit (close at +₹900 per lot).
• Adjustment trigger: if Bank Nifty breaches a short strike, roll the untested side.
• Stop: if max loss is hit, accept and exit.

Expected: ~70% win rate on these. Edge is in process (consistent execution, no panic adjustments).