Lesson Advanced options trading
Whether you’re aiming to maximize profits or minimize risks, multi-leg options trading can help unlock more strategies with additional precision and order flexibility.
At Questrade, we’re proud to offer multi-leg options trading with both pre-built and fully custom strategies in our suite of Questrade Edge platforms.
Some trading strategies involve buying multiple securities, sometimes of different types, at the same time. There’s a number of reasons to do this, such as limiting the risk exposure of an options play, increasing potential profitability, ‘rolling’ a contract to a new expiration/strike, or even purchasing shares to cover short option contract obligations.
Multi-leg orders allow you to enter multiple buy & sell orders at the same time instead of having to place them one by one separately.
Multi-leg options strategies can be a powerful tool for traders looking to optimize their portfolios, and expand their trading beyond stocks and ETFs. These strategies come in many different shapes and sizes, with varying levels of risk and complexity.
In this article we'll discuss some of the most popular multi-leg strategies, starting with the foundational covered call. Covered calls can help build a foundation for more advanced multi-leg trading and are often the first strategy used by many traders looking to get further into options.
The covered call is one of the most straightforward and widely used multi-leg options strategies, especially among more conservative, income-oriented investors.
This strategy involves holding a long position in a stock/ETF (owning the shares) and then selling a call option on that same stock or ETF. The primary goal here is to generate income from the premium received for selling the call option, while also having the potential to benefit from any appreciation in the stock’s price, up to the strike price of the call option.
Securities shown are for illustrative, educational, and visual purposes only, and should not be relied upon as financial advice. The information provided is not intended to be and should not be construed as a recommendation, offer, or solicitation to buy or sell.
Tip: With tools like OptionsPlay, which are built right into Questrade Edge Web and Desktop, you can easily identify covered call opportunities and fine-tune your strike prices and expiration dates for maximum profit potential—all while aligning with your personal risk tolerances.
The Income Tab in OptionsPlay (shown above) makes it simple to see how much income you could generate from covered calls or cash-secured puts.
A long straddle involves buying both a call and a put option on the same underlying asset, with the same strike price and expiration date. The beauty of the long straddle lies in its ability to profit from significant price movements in either direction—whether
the market goes up or down, you stand to profit as long as the price movements are substantial.
Similar to a straddle, a long strangle also involves buying both a call and a put option. However, in a strangle, the call and put options have different strike prices, typically with the call option having a higher strike price than the put.
This setup allows you to be more flexible and manage costs while still positioning for significant market movements and volatility.
Customize your strategy: With OptionsPlay’s Trading Tab, you can preview a range of bullish or bearish strategies, including strangles, straddles and more.
Spreads are a category of multi-leg strategies that involve buying and selling options of the same type (calls or puts) but with different strike prices and/or expiration dates. Spreads come in several varieties, each serving a specific trading purpose:
Stuck remembering which spread is which?
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Tip: Tools like the Plain English Tab in OptionsPlay break down complex strategies like spreads into easy-to-understand explanations. You can also use the P&L Simulator and Risk Calculator to ensure the strategy aligns with your personal risk tolerance.
With the multitude of option strategies available, it’s easy to get lost in the details. By understanding how they are named you can quickly identify their characteristics:
By visualizing these spreads as lines on a graph, you can easily remember their key differences.
Butterflies and condors are multi-leg strategies that involve many options contracts to create a defined risk/reward profile, making them ideal for traders who expect limited price movement within a specific range.
Butterfly Spread: This strategy involves buying one option at a lower strike price, selling two options at a middle (usually at-the-money) strike price, and buying another option at a higher strike price (all with the same expiration date), for a total of four option contracts being bought & sold at the same time.
Butterfly spreads profit the most when the underlying asset’s price remains close to the middle strike price at expiration, and doesn’t move significantly in either direction.
Iron Condor: An iron condor is an extension of the butterfly spread, involving four options with different strike prices, but the same expiration date.
The strategy combines two vertical spreads: a bull put spread and a bear call spread. The iron condor profits when the underlying asset stays within a defined price range, making it a favored strategy in low-volatility markets.
These strategies are just the tip of the iceberg in the world of options trading. By mastering these multi-leg approaches, you can gain greater control over your trades, tailor your risk/reward profiles, and navigate the complexities of the options market with confidence.
Whether you’re just starting with covered calls or diving into more advanced strategies like iron condors, there’s a multi-leg approach that can help you achieve your trading goals.
As you dive into the world of multi-leg options trading, here are a few key considerations to keep in mind:
Trade with confidence using powerful, free tools tailored to your success. Unlock the full potential of options trading with Questrade.
Note: Transactions in options can carry a high degree of risk, and may not be suitable for investors with a limited risk profile. Purchasers and sellers of options should familiarize themselves with the type of option (i.e. put or call) they contemplate trading and the associated risks.
Please be advised that the strategies discussed above are for informational and educational purposes only and do not constitute financial advice. They may not be suitable for all investors depending on your personal risk tolerance, and familiarity with options contracts.
This article does not disclose all of the risks and other significant aspects of trading in options. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk.
You should carefully consider whether trading options is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For more information, please refer to our complete Options Risk disclosure.
Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.
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