Neutral and Looking For Opportunities?

Recently the Grand Hyatt in midtown Manhattan was the site of two more of the Option Industry Council’s (OIC) option education seminars. There were 190 attendees for the Intermediate Strategies session on the first day and 160 the next day for the Advanced Strategies session. I covered the intermediate seminar in my previous blog and now I’ll cover the advanced session.

Options are becoming more popular every year. The Options Clearing Corp. (OCC) reports that the growth in option contracts traded year after year has been steady. As options volume has grown, more investors have become interested in strategies that move beyond the basics of buying calls and puts or executing buy-writes.  They look for strategies to help manage positions and for information regarding debit and credit spreads.  They may even look for option strategies that help them with stocks that are stuck in a trading range.

You know these stocks, they move up a few points and drop back down again, then go back up and back down. You like these stocks; you just don’t know how to generate a profit from them.

Butterflies and condors may be able to help. The Advanced Strategies seminar from the OIC reviews debit and credit spreads and explains how they are the building blocks for understanding Butterfly and Condor spread strategies.

These are advanced strategies and a complete understanding of options, spreads, exercise and assignment, margin requirements and commissions is an absolute must before executing the fly or condor. Butterflies and condors as well as iron butterflies and iron condors are limited risk, limited reward, multi-leg option spread strategies that may be profitable if the underlying stock or ETF closes on the trading day before expiration at a price or in a small range of prices. These 3 legged (butterfly) or 4 legged (condor) spreads are constructed by buying a low strike price option, selling higher strike price options and buying an even higher strike price option. The goal here is to have the options expire with the underlying stock at or close to the middle strike. Sounds confusing? They can be. The key here is the details. They are complicated and not for the novice option user, that’s why the seminar lasts 3 hours and why a high option trading approval level is needed from your brokerage house. They can’t be covered completely in a blog, or even in a 3 hour seminar, they require additional research, time and effort. After the seminar, intermediate users have an understanding of how and why the fly and condor can be profitable and with additional research they may even be comfortable enough try one someday.

Remember, options involve risk and are not for everyone. If you are interested in any of the strategies mentioned in my blog, please contact your investment advisor for further information and be sure to know and understand the risks and rewards of any option strategy before entering into that strategy.