Advanced options strategies (Level 3)

Although options may not be appropriate for everyone, they can be among the most flexible of investment choices. Whether you're hedging or seeking to grow your investments, you can use options to help reach the goals you set for your portfolio.

Use this page as an educational tool to learn about the options strategies available with Level 3 on Robinhood. Before you begin trading options, it's worth taking the time 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.

Note

Level 3 options trading is available in Robinhood Instant and Gold accounts, but not in cash accounts.

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Call debit spread

The basics

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 two strike prices.

When to use it

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.

Building the strategy

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 two 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 two 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 two 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.

The goal

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.

Cost of 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.

Factors to consider

  • 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.

Calculations

P/L Chart at expiration

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.

Call debit spread P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

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

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

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.

Example

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.

Call debit spread example table

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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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 is not 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 two 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.

Option Greeks

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.

Closing the position

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

Sell to close the spread

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.

Leg out of the spread

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.

Hold the spread through expiration

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 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 brokerage 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.

Additional risks

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 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.

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.

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Call credit spread

The basics

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 two 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 is not realized until the position is closed.

When to use it

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.

Building the strategy

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.

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 two 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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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.

Calculations

P/L Chart at expiration

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.

Call credit spread P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

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).

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

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.

Example

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.

Call credit spread example table

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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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 is not 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 two 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.

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.

Option Greeks

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.

Closing the position

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
  • Leg out of the spread
  • Hold the spread through expiration

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.

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.

Leg out of the spread

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.

Hold the spread through expiration

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 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.

Additional risks

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

    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 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.

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.

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Put debit spread

The basics

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 two strike prices.

When to use it

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.

Building the strategy

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.

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 two 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.

The goal

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.

Cost of 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.

Factors to consider

  • 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.

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

    • 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.

  • 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 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.

Calculations

P/L Chart at expiration

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.

Put debit spread P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

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

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

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.

Example

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.

Put debit spread example table

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).

Keep in mind

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.

Monitoring

Managing the trade

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 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 will not 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 rises and implied volatility decreases, the value of both options will likely decrease. This is not 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 two 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.

Option Greeks

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.

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.

Closing the position

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:

  • Sell to close the spread
  • Leg out of the spread
  • Hold the spread through expiration

Sell to close the spread

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).

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.

Leg out of the spread

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.

Hold the spread through expiration

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 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.

    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.

Additional risks

For put debit spreads, a common risk is 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 put 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 put option (thereby buying the shares at the long strike price)

In either circumstance, your brokerage 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, see early assignments.

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.

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Put credit spread

The basics

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 two 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 is not realized until the position is closed.

When to use it

A put debit 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.

Building the strategy

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 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 two 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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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.

Calculations

P/L Chart at expiration

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.

Put credit spread P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

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).

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

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.

Example

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.

Put credit spread example table

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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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 is not 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 two 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.

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.

Option Greeks

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.

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 using options pricing models and are theoretical estimates. All Greek values assume all other factors are held equal.

Closing the position

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:

  • Buy to close the spread
  • Leg out of the spread
  • Hold the spread through expiration

Buy to close the spread

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.

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.

Leg out of the spread

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.

Hold the spread through expiration

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 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 brokerage 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.

Additional risks

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:

  • 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 brokerage 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.

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.

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Long call calendar

The basics

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 two 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.

When to use it

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 will not 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.

Building the strategy

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 two 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 two 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.

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.

The goal

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 two options, it’s possible to roll your short call multiple times, collecting premiums along the way. The total gain or loss of the strategy will not be known until you close the longer-dated call option.

Cost of the trade

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 two 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.

Factors to consider

  • 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 the two:

  • A calendar spread involves two options with the same strike prices but different expiration dates. The two 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 two options.

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

Calculations

P/L Chart at expiration

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 two breakeven prices.

Long call calendar P/L chart

Theoretical max gain

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.

Theoretical max loss

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 two 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.

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

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 is not exercised.

Example

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):

Aug 26 (32 DTE)PriceImplied volatilitySept 16 (53 DTE)PriceImplied volatility
$100 Call$438%$100 Call$534%

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 two 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.

Keep in mind

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.

Monitoring

Managing the trade

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 is not 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.

Option Greeks

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.

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.

Closing the position

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
  • Leg out of the spread
  • Hold the spread through expiration of the short call

Close the entire spread

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.

Roll the short option

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.

Leg out of the spread

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.

Hold the spread through expiration of the short call

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.

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.

Additional risks

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:

  • 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 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.

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.

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Short call calendar

The basics

What’s a short call calendar?

Important: This strategy is not available to trade at Robinhood

A short call calendar is a two-legged options strategy that involves buying a short-dated call and simultaneously selling 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 short call calendar is a premium selling strategy. Typically, the debit paid for the short-dated call option is less than the credit received from selling the longer-dated call option. Therefore, the seller collects 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 two options.

At Robinhood, you cannot trade this strategy. If the short-dated long option expires, then you’d be left with a naked short call, which has undefined risk and is not allowed at Robinhood. However, if you plan on buying a call calendar, understanding the other side of your trade can provide insight into the long side of the strategy.

When to use it

Typically, a short call calendar is created as a volatility strategy. The seller might consider this strategy when they think the underlying stock will move far from its current price and implied volatility is high. A calendar spread is also used to trade differences in time value between the short- and longer-dated options. 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 two options.

Building the strategy

Typically, a short call calendar is created using two at-the-money options, which are traded simultaneously using a spread order. The seller can also leg into the strategy by buying the shorter-dated call first, and then selling the longer-dated call later, or vice versa.

The goal

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

Cost of the trade

Despite collecting a credit, a short call calendar requires a cash collateral determined by the brokerage firm. Since the strategy carries the potential for undefined risk, many times that collateral is large and for that reason, this is a capital intensive strategy.

When one sells a call calendar, they’re simultaneously buying and selling a call option. Let’s say the longer-dated call is trading for $5 and the short-dated call 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, the seller would collect $200 to sell one spread. For selling 10 spreads, they’d collect $2,000, and so on.

Factors to consider

  • Sellers look for an underlying stock or ETF whose price they think is about to break out of a range and become volatile. They often consider one on the higher end of its implied volatility range, with potential to decrease over the life of the trade. Sellers tend to look for underlyings with more liquid options that have tighter bid/ask price spreads, larger volumes, and plenty of open interest.

  • Often the expiration dates chosen are the first two monthly options (also known as the front-month and back-month options). This involves selling the back month option expiring in ~60-90 days and buying the front month option expiring in ~30-45 days.

  • Typically, short call calendars are created using at-the-money strike prices.

  • Sellers look for a total premium that’s enough for them to warrant taking undefined risk.

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

A calendar spread involves two options with the same strike prices but different expiration dates. The two 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 two options. Meanwhile, a diagonal spread involves two options with different strike prices and expiration dates.

Calculations

P/L Chart at expiration

A short call calendar has defined theoretical profit and loss (assuming the long option is still held). At expiration of the short-dated call, it profits if the underlying stock is trading above or below the two breakeven prices.

Short call calendar P/L chart

Theoretical max gain

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

Theoretical max loss

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 the seller will not know how much extrinsic value will be left in the longer-dated short option when the short-dated long option expires. However, it can be estimated using a theoretical pricing model. Once the long option expires, if the seller continues to hold the short call, the theoretical max loss becomes unlimited.

Breakeven stock price at expiration

There are two 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 long call and are dependent on the extrinsic value left in the short call. While these prices are somewhat unknown, they can be estimated using a theoretical pricing model.

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

Yes. If the seller holds the short call after the long call expires, the position will have undefined risk and the potential to lose more than the theoretical max loss of the calendar spread.

Example

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):

Aug 26 (32 DTE)PriceImplied volatilitySept 16 (53 DTE)PriceImplied volatility
$100 Call$438%$100 Call$534%

The seller expects XYZ to become volatile and decides to sell the $100 call calendar.

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

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

= Net credit of $1

The theoretical max gain is $1 per share, or $100, and occurs if the both options expire on their respective expiration dates. Since this involves undefined risk, most sellers will close their position prior to the expiration of the long option, and do not realize a 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 call option. The theoretical max loss becomes unlimited if the seller maintains the short call after the long call expires.

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

Keep in mind

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

Monitoring

Managing the trade

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

Meanwhile, If the underlying stock price stays close to the strike price, the value of the calendar will increase. This is not ideal. If the spread is worth more than the original selling price, the seller can attempt to cut their losses and close the position before expiration. This would result in a loss on the trade.

Option Greeks

A short call calendar contains both a long and short 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 negative because the short-term option decays at a faster rate than the longer-term option.

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

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.

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.

Closing the position

There are multiple ways for the seller to close a calendar spread, which are described in this section:

  • Close the entire spread
  • Roll the long option
  • Leg out of the spread
  • Hold the spread through expiration of the short call

Close the entire spread

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

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

Roll the long option

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

Leg out of the spread

Some traders prefer to leg out of a calendar spread. This approach includes both benefits and risks and can be done to mitigate liquidity concerns or change the structure of the strategy.

Hold the spread through expiration of the long call

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 below the strike price of the calendar, the long option will expire worthless. The long call will be removed from their account, and they’d lose the premium paid for the long call. If they take no further action, they’ll be left with a short call.

  • If the underlying’s price closes above the strike price of the calendar, the long call will be automatically exercised. As a result, the seller will buy shares of the underlying stock at the strike price of the option.

Additional risks

For short call calendars, two of the more common risks are early assignment and dividend risk.

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 held, potentially resulting in changes to the option, such as its structure, price, and deliverable.

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Long put calendar

The basics

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 two 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.

When to use it

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 will not 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 two options. The greater the difference, the more potential profit, but with that comes added risk.

Building the strategy

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 two 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.

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 two 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.

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.

The goal

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 will not 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 two 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 will not be known until you close the longer-dated put option.

Cost of the trade

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.

Since both options have the same strike price, the net debit is ultimately determined by the difference in extrinsic value between the two 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.

Factors to consider

  • 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 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.

  • 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 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.

  • 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 the two:

  • A calendar spread involves two options with the same strike prices but different expiration dates. The two 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 two options.

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

Calculations

P/L Chart at expiration

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 two breakeven prices.

Long put calendar P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven stock price at expiration

There are two 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.

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

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 is not exercised. This will leave you with a long stock position, which can realize losses greater than the net debit paid for the spread.

Example

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):

Aug 26 (32 DTE)PriceImplied volatilitySept 16 (53 DTE)PriceImplied volatility
$100 Put$438%$100 Put$534%

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 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 sell the long shares. The underlying stock will be bought and sold at $100 and you’ll lose the net debit paid.

Keep in mind

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.

Monitoring

Managing the trade

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 is not 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 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.

Option Greeks

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.

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.

Closing the position

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:

  • Close the entire spread
  • Roll the short option
  • Leg out of the spread
  • Hold the spread through expiration of the short put

Close the entire spread

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.

Roll the short option

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.

Leg out of the spread

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.

Hold the spread through expiration of the short put

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 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 do not have the necessary funds to hold the long stock position.

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.

Additional risks

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 brokerage 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.

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.

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Short put calendar

The basics

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 two 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.

When to use it

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 two options.

Building the strategy

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 two 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 two 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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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 two 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.

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

A calendar spread involves two options with the same strike prices but different expiration dates. The two 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 two options. Meanwhile, a diagonal spread involves two options with different strike prices and expiration dates.

Calculations

P/L Chart at expiration

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 two breakeven prices.

Short put calendar P/L chart

Theoretical max gain

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.

Theoretical max loss

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 will not 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.

Breakeven stock price at expiration

There are two 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.

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

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.

Example

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):

Aug 26 (32 DTE)PriceImplied volatilitySept 16 (53 DTE)PriceImplied volatility
$100 Put$438%$100 Put$534%

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 do not 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.

Keep in mind

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

Monitoring

Managing the trade

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 is not 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.

Option Greeks

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 gamm a 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.

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.

Closing the position

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:

  • Close the entire spread
  • Roll the long option
  • Leg out of the spread
  • Hold the spread through expiration of the long put

Close the entire spread

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.

Roll the long option

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.

Leg out of the spread

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.

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.

Hold the spread through expiration of the long put

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 do not 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.

    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.

Additional risks

For short 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 brokerage 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.

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 held, potentially resulting in changes to the option, such as its structure, price, and deliverable.

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Long call condor

The basics

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 debitspread 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 two 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.

When to use it

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 two out-of-the-money call spreads. With this variation, you want the underlying stock to rise, but settle within the range between the two 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.

Building the strategy

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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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 two 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 the two.

  • A long call condor involves buying and selling two 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 two 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.

Calculations

P/L Chart at expiration

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.

Long call condor P/L chart

Theoretical max gain

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 two 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.

Theoretical max loss

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.

Breakeven point at expiration

At expiration, a call condor has two 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.

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

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.

Example

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.

Long call condor example table

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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

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.

Option Greeks

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 two 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.

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.

Closing the position

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
  • Leg out of your position
  • Close the call debit spread or call credit spread
  • Hold through expiration

Sell to close the call condor

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.

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.

Leg out of your position

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.

Close the call debit spread or call credit spread

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.

Hold through expiration

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 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 three 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 do not 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 two 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 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.

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.

Additional risks

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:

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

    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 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.

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.

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Short call condor

The basics

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.

When to use it

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.

Building the strategy

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).

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 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.

The goal

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.

Cost of the trade

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.

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 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 the two.

  • A short call condor involves buying and selling two 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 two 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.

Calculations

P/L Chart at expiration

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.

Short call condor P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

At expiration, a short call condor has two 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.

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

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.

Example

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.

Short call condor example table

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)

Buy 1 XYZ $105 Call for ($4.95)

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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

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.

Option Greeks

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 two 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.

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.

Closing the position

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
  • Leg out of your position
  • Close the call debit spread or call credit spread
  • Hold through expiration

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.

Leg out of your position

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.

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.

Close the call debit spread or call credit spread

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.

Hold through expiration

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 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 do not 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.

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 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:

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

    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.

  • 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.

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.

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Long put condor

The basics

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 two 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.

When to use it

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 two out-of-the-money put spreads. With this variation, you want the underlying stock to fall, but settle within the range between the two 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.

Building the strategy

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.

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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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 two 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 the two.

  • A long put condor involves buying and selling two 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 two 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.

Calculations

P/L Chart at expiration

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.

Long put condor P/L chart

Theoretical max gain

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 two 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.

Theoretical max loss

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.

Breakeven point at expiration

At expiration, a put condor has two 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.

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

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.

Example

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.

Long put condor example table

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)

= 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 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

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 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.

Option Greeks

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 two 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.

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

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.

Closing the position

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
  • Leg out of your position
  • Close the put debit spread or put credit spread
  • Hold through expiration

Sell to close the put condor

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.

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.

Leg out of your position

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.

Close the put debit spread or put credit spread

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.

Hold through expiration

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 all four strike prices, all four 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 two 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 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 three 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 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.

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.

Additional risks

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:

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

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, 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 are 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.

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Short put condor

The basics

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 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 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.

When to use it

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.

Building the strategy

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 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 credit 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 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.

The goal

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.

Cost of the trade

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.

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 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 the two.

  • A short put condor involves buying and selling two 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 two 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.

Calculations

P/L Chart at expiration

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.

Short put condor P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

At expiration, a short put condor has two 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.

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

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.

Example

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.

Short put condor example table

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

= 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 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

Option Greeks

A short 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 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 two 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.

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.

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.

Closing the position

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
  • Leg out of your position
  • Close the put debit spread or put credit spread
  • Hold through expiration

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.

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.

Leg out of your position

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.

Close the put debit spread or put credit spread

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.

Hold through expiration

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 all four strike prices, all four 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 do not 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 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.

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 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:

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

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.

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.

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.

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Long iron condor

The Basics

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 two 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 is not 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 two 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.

When to use it

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.

Building the strategy

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 four 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 are not equidistant from the underlying stock price and/or they are not 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 four 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 two 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.

The goal

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.

Cost of the trade

When you buy an iron condor, you’re buying two 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.

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 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 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 the two.

  • 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 two long options whereas an iron condor is four options—two long and two short. As a result, an iron condor exposes you to assignment risk.

Calculations

P/L Chart at expiration

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.

Long iron condor P/L chart

Theoretical max gain

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).

Theoretical max loss

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 four options should expire worthless.

Breakeven point at expiration

At expiration, an iron condor has two 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.

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

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.

Example

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.

Long iron condor example table

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)

Buy 1 XYZ $105 Call for ($4.95)

Sell 1 XYZ $110 Call for $3.20

= 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 four 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

Option Greeks

A long iron condor involves four 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 four options. As time goes by, theta will reduce the extrinsic value of all four options.

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

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.

Closing the position

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
  • Leg out of your position
  • Close the call spread or put spread
  • Exercise early
  • Hold through expiration

Sell to close the iron condor

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.

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.

Leg out of your position

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.

Close the call spread or put spread

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.

Exercise early

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.

  • 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, do not 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.

Hold through expiration

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 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 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 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.

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 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.

  • 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.

  • 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 is not 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.

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.

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Short iron condor

The basics

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 two 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 two 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.

When to use it

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.

Building the strategy

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 four 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 are not equidistant from the underlying stock price and/or they are not 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 four 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.

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.

Note: A “gut iron condor” is a variation of an iron condor that involves selling two 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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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 the two.

  • Iron condors consist of a call credit spread and put credit 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 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 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.

Calculations

P/L Chart at expiration

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

Short iron condor P/L chart

Theoretical max gain

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 two short strikes (the short put and short call), and all four options must expire worthless.

Theoretical max loss

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.

Breakeven point at expiration

At expiration, an iron condor has two 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.

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

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.

Example

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.

Short iron condor example table

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

Sell 1 XYZ $105 Call for $4.95

Buy 1 XYZ $110 Call for ($3.20)

= 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 four 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

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.

Option Greeks

A long iron condor involves four 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 four options. As time goes by, theta will reduce the extrinsic value of all four options.

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

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.

Closing the position

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
  • Leg out of your position
  • Close the call spread or put spread
  • Hold through expiration

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.

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.

Leg out of your position

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.

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.

Close the call spread or put spread

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.

Hold through expiration

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 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 brokerage 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 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 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.

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.

Additional risks

For iron 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 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.

  • 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.

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.

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.

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Long call butterfly

The basics

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.

When to use it

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.

Building the strategy

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 are not 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 four 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.

The goal

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.

Cost of the trade

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.

Factors to consider

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.

Calculations

P/L Chart at expiration

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.

Long call butterfly P/L chart

Theoretical max gain

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 is not guaranteed.

Theoretical max loss

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.

Breakeven point at expiration

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.

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

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.

Example

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.

Long call butterfly example table

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 is not 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 four 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

Option Greeks

A long call butterfly involves four 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 four options. As time goes by, theta will reduce the extrinsic value of all four 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.

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.

Closing the position

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
  • Leg out of your position
  • Close the call debit spread or call credit spread
  • Hold through expiration

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.

Leg out of your position

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.

Close the call debit spread or call credit spread

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.

Hold through expiration

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 four 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 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 call butterfly.

  • If you do not 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 is not 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 four 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.

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.

Additional risks

For long call butterflies, 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 your short call, 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 (thereby buying the shares at the long strike price)

    In either circumstance, your brokerage 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.

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.

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Short call butterfly

The basics

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.

When to use it

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.

Building the strategy

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 (four 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 are not 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 four 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.

The goal

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.

Cost of the trade

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.

Factors to consider

  • 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 do not give the underlying a lot of time to move. On the other hand, longer-dated butterflies will not 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 does not 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.

Calculations

P/L Chart at expiration

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.

Short call butterfly P/L chart

Theoretical max gain

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.

Theoretical max loss

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.

Breakeven point at expiration

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.

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

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.

Example

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.

Short call butterfly example table

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 four 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).

Keep in mind

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.

Monitoring

Managing the trade

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 will not 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.

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.

Option Greeks

A short call butterfly involves four 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 four options. As time goes by, theta will reduce the extrinsic value of all four options.

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

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.

Closing the position

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
  • Leg out of your position
  • Close the call debit spread or call credit spread
  • Hold through expiration

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.

Leg out of your position

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.

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.

Close the call debit spread or call credit spread

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.

Hold through expiration

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 short call, all four 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 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 call butterfly. If you do not 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 four 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.

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.

Additional risks

For short call butterflies, 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 your short call, 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 (thereby buying the shares at the long strike price)

    In either circumstance, your brokerage 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