A credit spread involves a purchase of one option and a sale of another option in the same class and expiration month but different strike prices. Investors receive a net credit for entering the position and want the spreads to narrow or expire worthless for a profit.
For example, if stock XYZ is currently trading at $100 and we sell the $120 strike price call for $3 and then we buy the $125 strike price call for $2.25 we collect a net of $.75. As long as the stock stays below $120 until expiration, the $.75 is ours to keep. Being there is a time limit on the position, with each passing day the position decays away, now we can repurchase it for significantly less or let it decay to zero.
The iron condor is a favorite among many home option traders. It works by selling an out of the money call spread and a put spread in the same class together. This way, the investor can receive a larger credit, and at the same time, not decrease their buying power because they're guaranteed to win at least one side of the trade.
Iron condors are great in sideways markets, but do carry more risk as a swift move in either direction can be problematic. If the stock breaks our range an adjustment is necessary to ensure we win.
The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are three strike prices involved in a butterfly spread, and it can be constructed using calls or puts.
At OptionStrategiesInsider.com, we use the long call butterfly spread. We combine two short calls at a middle strike, and one long call at a lower and upper strike, creating a long call butterfly. The upper and lower strikes, called the wings, must both be equidistant from the middle strike, called the body, and all the options must have the same expiration date.
What we want is for the options to pin at the middle strike price, this way we keep the credit for the body, we lose the credit for the upper wing, and we win on the lower wing.