Options Strategies: Spreads, Straddles, and Iron Condor1. Option Spreads
An option spread involves buying one option and simultaneously selling another option of the same type (call or put) but with different strike prices or expiries. Spreads are primarily used to limit risk, reduce premium cost, or target specific price zones.
Types of Option Spreads
a) Vertical Spreads
A vertical spread uses options with the same expiration date but different strike prices.
There are two kinds:
• Bull Call Spread
Used when the trader is moderately bullish.
Buy a lower-strike call, sell a higher-strike call.
Limits both profit and loss.
Example: Buy 100 CE @ ₹10 → Sell 110 CE @ ₹5 → Net cost ₹5.
• Bear Put Spread
Used when the trader is moderately bearish.
Buy higher-strike put, sell lower-strike put.
Limited profit and limited loss.
Example: Buy 100 PE @ ₹12 → Sell 90 PE @ ₹6 → Net cost ₹6.
• Bear Call Spread
A credit spread for bearish to neutral outlook.
Sell lower-strike call, buy higher-strike call.
Net credit received.
• Bull Put Spread
A credit spread for bullish to neutral outlook.
Sell higher-strike put, buy lower-strike put.
Popular due to high probability of profits.
b) Horizontal (Calendar) Spreads
Calendar spreads use the same strike price but different expiry dates.
When is it used?
When the trader expects low near-term volatility but higher long-term volatility.
It benefits from time decay differences (theta) between near and far expiries.
c) Diagonal Spreads
Diagonal spreads combine both different strikes and different expiries.
Why use them?
To take advantage of both direction and time decay.
More flexible but more complex.
Why Traders Use Spreads
Lower capital requirement.
Defined maximum loss.
Can be structured for any market condition.
Reduce the impact of volatility swings and time decay.
Spreads are ideal for traders who aim for risk-controlled trading instead of outright long or short options.
2. Straddles
A straddle is a highly popular volatility strategy where the trader buys or sells both a call and a put option with the same strike price and same expiry.
a) Long Straddle
Buy 1 Call + Buy 1 Put (ATM).
Used when the trader expects big movement but doesn’t know the direction.
This is a volatility-buying strategy.
Maximum loss = total premium paid.
Profit = unlimited on upside, substantial on downside.
Ideal Conditions
Earnings announcements.
RBI policy decisions.
Major news (mergers, litigation, global events).
Low IV (implied volatility) before expected spike.
Example
NIFTY at 22,000:
Buy 22000 CE @ 120
Buy 22000 PE @ 130
Total cost = ₹250.
If NIFTY moves sharply to either:
22,500 (big CE profit), or
21,500 (big PE profit),
the long straddle gains.
Key Greeks
Vega positive → benefits from IV increase.
Theta negative → loses money from time decay.
b) Short Straddle
Sell 1 Call + Sell 1 Put (ATM).
Used when market is expected to be range-bound with very low volatility.
High risk; unlimited loss potential.
Maximum profit = premiums received.
Why use it?
Only experienced traders use short straddles when:
IV is extremely high.
Market is unlikely to move drastically.
Time decay is expected to be fast.
Short Straddle Risks
Sharp moves can cause heavy losses.
Requires strong risk management and hedge understanding.
3. Iron Condor
An Iron Condor is a neutral, limited-risk, limited-reward option strategy. It combines a Bull Put Spread and a Bear Call Spread.
Structure
Sell OTM Put
Buy further OTM Put
Sell OTM Call
Buy further OTM Call
This creates a structure where the trader profits if the price stays within a range.
Why Traders Love Iron Condors
Designed for markets with low volatility and consolidation.
High probability of winning.
Controlled risk.
Takes advantage of time decay (theta positive).
Payoff Characteristics
Maximum profit occurs when the underlying price stays between the sold call and sold put.
Maximum loss is limited to the width of either spread minus net premium received.
Works best in sideways markets.
Example: NIFTY Iron Condor
Assume NIFTY = 22,000.
Sell 22500 CE
Buy 22700 CE
Sell 21500 PE
Buy 21300 PE
Net credit = Suppose ₹60.
Possible Outcomes
If NIFTY expires between 21,500 and 22,500 → Full profit = ₹60.
If it goes beyond either side → Loss limited to defined spread width.
Ideal Conditions
Market expected to remain in a range.
IV is high before selling, expecting it to fall.
Greeks
Delta neutral
Theta positive (time decay benefits)
Vega negative (falling IV helps)
Comparing the Key Strategies
Strategy Market View Risk Reward Volatility Impact
Vertical Spread Mild bullish/bearish Limited Limited Moderate
Long Straddle High volatility expected Limited Unlimited Needs IV rise
Short Straddle Low volatility expected Unlimited Limited Benefits from IV drop
Iron Condor Sideways / range-bound Limited Limited Benefits from IV drop & theta
How to Choose the Right Strategy
Choosing a strategy depends on:
1. Market Direction
Trending markets → vertical spreads
Unknown direction → straddles
Sideways markets → iron condor
2. Volatility Expectations
IV high? Use credit strategies (short straddle, iron condor).
IV low? Use debit strategies (long straddle, debit spreads).
3. Risk Appetite
Conservative traders: spreads, iron condors.
High-risk traders: short straddles.
Speculators expecting big moves: long straddles.
4. Time Horizon
Short-term: spreads and straddles.
Medium-term: calendar and iron condor.
Conclusion
Spreads, Straddles, and Iron Condors are essential strategies for building an effective options trading system. Each offers unique advantages:
Spreads help control risk and reduce costs.
Straddles capitalize on directional uncertainty and volatility spikes.
Iron Condors profit from sideways markets with predictable risk.
A trader who understands when to apply each strategy based on market behavior, volatility, and risk preference can dramatically improve long-term consistency. Mastering these strategies allows traders to navigate all phases of market conditions—trending, volatile, or stable—using a systematic and well-risk-managed approach.
