Combining options lets you shape a position's risk and reward precisely. Four structures cover most needs: the vertical spread, the straddle, the strangle and the iron condor.
Vertical spreads
Buy one option and sell another of the same type and expiry at a different strike. A bull call spread buys the 100 call and sells the 105 call: the sold call cheapens the trade but caps the profit. Above, it costs $1.80 and can make at most $3.20. Bear put spreads are the mirror. Spreads define both risk and reward and reduce exposure to volatility.
Straddles and strangles
A long straddle buys a call and a put at the same strike: it profits from a big move in either direction. A long strangle buys an out-of-the-money call and put, which is cheaper but needs a bigger move. Both are bets on volatility, and both suffer from theta and IV crush if the move doesn't come.
Iron condors
An iron condor sells an out-of-the-money put spread and an out-of-the-money call spread. It profits if price stays between the short strikes, and its maximum loss is capped by the long "wings". It is a bet on a quiet market, often placed when implied volatility is high.
| Strategy | View | Max loss | Max profit | Likes |
|---|---|---|---|---|
| Bull call spread | Moderately bullish | Net debit | Strike width − debit | A steady rise |
| Bear put spread | Moderately bearish | Net debit | Strike width − debit | A steady fall |
| Long straddle / strangle | Big move, either way | Total premium | Unlimited (upside) | Rising volatility |
| Iron condor | Range-bound | Wing width − credit | Net credit | Falling volatility, time passing |
Key takeaways
- Vertical spreads cap both risk and reward and reduce sensitivity to volatility.
- Straddles and strangles profit from big moves in either direction, but suffer if the move doesn't come.
- Iron condors profit when price stays in a range, with losses capped by the wings.
- Choose the structure from both your direction view and your volatility view.