Options are a popular way for traders to make money in the market. While basic option strategies let traders take big swings — with some big risks — more advanced multi-leg options strategies allow traders to hedge their risks, giving them more fine-tuned exposure and payoffs.

But what all options strategies have in common is that they’re based on the two basic types of options: calls and puts. Below are five more advanced strategies, their risks and rewards and when traders might use them. These multi-leg strategies are more complex than the basics, exposing traders to more granular risks than the basics, but they aren’t risk-free. If you’re looking to trade options, make sure you’re good with call options and put options before getting started here.

1. Bull call spread

In this strategy, the trader buys a call at a low strike price and sells a call at a high strike price with the same expiration. The trader expects the stock to rise toward or exceed the high strike price by expiration. The trade’s profit is capped at the difference between the two strike prices. This hedged trade reduces your break-even point and multiplies your money faster, relative to a long call alone.

Example: Stock X is trading for $20 per share, and a call with a strike price of $20 is trading at $1 and a call with a strike price of $24 is trading at $0.50. Setting up this trade costs $50 per contract, or $100 for the long call (1 contract * $1 * 100 shares per contract) minus the $50 premium received for the short call (1 contract * $0.50 * 100 shares per contract).

Here’s the profit on the bull call spread at expiration for various stock prices:

Reward/risk: In this example, the trade breaks even at $20.50 per share, or the strike price of the long call plus the net cost of the bull call spread. Above $20, the value of the option strategy increases by $100 for every dollar the stock increases — up to $24 per share. At a stock price of $24 and above, the profitability of the trade is capped at $3.50 per contract.

The maximum potential upside on a bull call spread is limited to the difference between the two strike prices minus the cost of the strategy, or $4 minus $0.50.

The downside on a bull call spread is a total loss of your investment, $50 in this example. This trade expires totally worthless when the stock is below the strike price of the long call.

When to use it: This multi-leg strategy works well when you expect the stock to rise moderately. The spread reduces your break-even point and allows you to multiply your money faster for a given change in the stock price, relative to a basic long call. For a given amount of money, the bull call spread allows you to turbocharge your gains between the two strike prices, by selling off the potential upside above the short call.

A bull call spread can work well on some of the best long-term investments, as these stocks rise, allowing you to buy long-term call options and then “harvest” a series of short calls over time.

2. Bear put spread

Like the bull call spread, the bear put spread is a hedged trade — a short option and a long option — but it’s set up to profit when the underlying stock falls. In the bear put spread, the trader buys a put at a high strike price and sells a put at a low strike price with the same expiration. The trader expects the stock to fall toward or below the low strike price by expiration. The profit on this trade is limited to the difference between the two strike prices. This hedged trade reduces your break-even point and multiplies your money faster, relative to a long put alone.

Example: Stock X is trading for $20 per share, and a put with a strike price of $20 is trading at $1 and a put with a strike price of $16 is trading at $0.50. Setting up this trade costs $50 per contract, or $100 for the long put (1 contract * $1 * 100 shares per contract) minus the $50 premium received for the short put (1 contract * $0.50 * 100 shares per contract).

Here’s the profit on the bear put spread at expiration for various stock prices:

Reward/risk: In this example, the trade breaks even at $19.50 per share, or the strike price of the long put minus the net cost of the bear put spread. Below $19.50, the value of the option strategy increases by $100 for every dollar the stock decreases — down to $16 per share. At a stock price of $16 and below, the profitability of the trade is capped at $3.50 per contract.

The maximum potential upside on a bear put spread is limited to the difference between the two strike prices.

The downside on a bear put spread is a total loss of your investment, $50 in this example. This trade expires worthless when the stock is above the strike price of the long put.

When to use it: This multi-leg options strategy works well when you expect the stock to fall moderately. The spread reduces your break-even point and allows you to multiply your money faster for a given change in the stock price, relative to a basic long put. For a given amount of money, the bear put spread allows you to turbocharge your gains between the two strike prices, by selling off the potential upside below the short put.

(Want to start with the basics first? Take Bankrate’s exclusive intro to investing course.)

3. Synthetic long

In this strategy, the trader buys a call and sells a put at the same strike price and expiration. The trader expects the stock to rise moderately or significantly by expiration. The upside on this trade is theoretically unlimited. This trade reduces the amount of upfront capital you need to invest while still giving you the potential upside of a long stock position.

Example: Stock X is trading for $20 per share, and a put with a strike price of $20 is trading at $1 and a call with a strike price of $20 is trading at $1. Setting up this trade costs nothing out of pocket, since the $100 cost of the call (1 contract * $1 * 100 shares per contract) is offset by the $100 premium received from the put (1 contract * $1 * 100 shares per contract).

Here’s the profit on the synthetic long at expiration for various stock prices:

Reward/risk: In this example, the trade breaks even at $20 per share, or the strike price of the long call minus the net cost of the synthetic long. Above $20, the value of the option strategy increases by $100 for every dollar the stock increases, while it falls by $100 for every dollar below the $20 stock price.

The maximum potential upside on a synthetic long is theoretically unlimited as long as the stock continues to rise.

The downside on a synthetic long is $2,000 (100 shares * $20), assuming the stock went to $0. Unless the stock finishes expiration at exactly $20, this strategy will generate a profit (above $20 per share) or a loss (below $20), requiring you to buy shares at the strike price.

When to use it: This strategy works well when you expect the stock to rise moderately or significantly and you don’t want to put up your own money now to open a position. The synthetic long gets you in the game with no immediate net cost, but you’re on the hook to buy stock if the stock price declines and someone exercises the short put option against you. Because you needn’t put up capital to start, your potential return, percentage-wise, is theoretically infinite.

4. Long straddle

In this strategy, the trader buys a call and put at the same strike price with the same expiration. The trader expects the stock to move in one direction or the other by expiration but is not sure which. The trade’s profit could be uncapped, minus the cost of establishing the long straddle.

Example: Stock X is trading for $20 per share, and a put with a strike price of $20 is trading at $1 and a call with a strike price of $20 is trading at $1. Setting up this trade costs $200, adding together the $100 cost of the call (1 contract * $1 * 100 shares per contract) and the $100 cost of the put (1 contract * $1 * 100 shares per contract).

Here’s the profit on the long straddle at expiration for various stock prices:

Reward/risk: In this example, the trade breaks even in two places: above $22 per share and below $18 per share, or the options’ strike prices minus the trade’s net cost of $2 per share. Both above and below $20, the value of the option strategy increases by $100 for every dollar change in the stock price, either higher or lower.

The maximum potential upside on a long straddle is theoretically unlimited. If the stock continued to rise, the long call would increase in value, while the long put would expire worthless. On the other hand, if the stock fell, the maximum potential upside is limited to the max value of the put, or $2,000 (1 contract * $20 strike * 100 shares), if the stock went to zero.

The maximum downside on a long straddle is the net cost of the strategy, or $200 here. That would occur if the stock’s value at expiration was $20 per share. Both above and below $20, either the call or put would retain some value at expiration, allowing you to recoup some of the cost.

When to use it: This strategy works well when you expect the stock to move significantly in one direction or the other but you’re not sure which. The cost of both long options makes it more expensive to put on this trade, but also reduces the chances that you end with a complete loss. Still, you can end up paying a lot for an option’s time value, only to watch that value decay.

5. Short straddle

This strategy is just the reverse of the long straddle. In the short straddle, the trader sells a call and put at the same strike price with the same expiration. The trader expects the stock to remain range-bound at expiration. The trader’s profit is capped at the total premium received.

Example: Stock X is trading for $20 per share, and a put with a strike price of $20 is trading at $1 and a call with a strike price of $20 is trading at $1. Setting up this trade yields a premium of $200, adding together the $100 premium from the call (1 contract * $1 * 100 shares per contract) and the $100 premium from the put (1 contract * $1 * 100 shares per contract).

Here’s the profit on the short straddle at expiration at various stock prices:

Reward/risk: In this example, the trade breaks even in two places: above $18 per share and below $22 per share, or the options’ strike prices minus the trade’s net premium of $2 per share. So, the short straddle is profitable in between the strikes, but is more profitable closer to $20. Both above and below $20, the value of the option strategy declines by $100 for every dollar change in the stock price, either higher or lower.

The maximum potential upside on a short straddle is limited to the initial premium received, or $200 here. This would occur exactly at $20 per share, with both call and put expiring worthless.

The maximum downside on a short straddle is substantial, theoretically unlimited, in fact. If the stock continued to rise, the short call would increase in value, while the short put would expire worthless. The potential loss would be uncapped if the stock continued to rise.

The trader is also exposed to significant loss if the stock falls a lot, too. In that case, the maximum potential downside is limited to the max value of the short put, or $2,000 (1 contract * $20 strike * 100 shares), if the stock went to zero.

When to use it: This strategy works well when you expect the stock to remain stagnant until expiration and the options offer a lot of time value. If the stock moves significantly in either direction, you’ll be on the hook for significant losses, and you’ll need to be able to absorb them.

How to start trading options

If you’re looking to trade options, it’s important to have a strong understanding of how they work, including a comprehensive knowledge of basic options strategies. Then you’ll have to find a broker that enables options trading and apply for permission to trade options. It’s not a complicated process, but you’ll need to answer some questions about the types of strategies you intend to use, since some strategies present more risk than others.

If you’re doing riskier trades, such as short calls or short puts, then the brokerage will typically require you to have a margin account, allowing you to buy stock using the equity in your account. If you’re putting on options trades without the same risks, such as covered calls, the broker may not require you to have a margin account.

Each broker has its own requirements for options trading, so you’ll want to look at what each requires if you determine that you want to trade options. If you’re looking to trade options in your retirement account such as an IRA, some brokers allow you to do that. If you stick with safer income-producing strategies, options can still be a reasonable choice even in an IRA.

Bottom line

Options are typically considered high-risk trades, but more advanced trades are hedged transactions that limit your risk in certain ways or give you exposure to certain outcomes, even while limiting your risk in other areas. But given their complexity, it’s vital that you understand the downsides of any options trade and whether it’s worth the potential upside. You could easily end up putting on an options trade that’s exactly the reverse of what you intended.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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