Combinations are constructed with more than one option type, strike price, or expiration date on the same underlying asset.
The types of combinations
Simple combinations include option spread trades such as vertical spreads, calendar (or horizontal) spreads, and diagonal spreads. More involved combinations include trades such as Condor or Butterfly spreads which are actually combinations of two vertical spreads.
Some combinations are regularly used by options market makers and other professional traders because the trades can be constructed to capture risk premiums while protecting their own capital from extensive risk.
For any given underlying asset, the individual trader, commercial market maker, or institutional investor likely has two principal goals. One goal is to speculate on the future movement of the asset's price (whether higher, lower, or that it stays the same). The second goal is to limit losses to a defined amount where possible.
Comments