So far in our education we've only discussed single-leg options like buying calls and puts. This is where most companies actually stop teaching. But the beauty of trading options is that you have the ability to use multiple options with different strike prices, calls and puts, and different expiration dates to create unique strategies that profit from all types of market environments. Using multi-leg strategies also enables you to help define your risk and reward for the various strategies that we will be teaching for income generation, like credit spreads and iron condors. Once you understand the limitless potential for building an option strategy with different legs you'll fully understand the power that options trading has over traditional stock trading which is one directional, either up or down.
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In this video, I want to talk about the difference between single-leg options and multi-leg options. So far during our education and through this course, you’ve obviously learned the power of doing regular options, whether that’s buying a single-leg call or buying a single-leg put.
And as we know, we can do things like selling a naked put or selling a naked call. But the real power of options comes in the ability to combine different types of options buying and selling at different strike prices to create unique and customized strategies that you can use to profit from multiple variations and different market scenarios.
On the screen right now, we obviously have that one example which is that regular call option which is just a single-leg option. And now, what we can do is we can take this call option that’s a single-leg call and marry this up with a short call above the market as well.
You can see it’s the complete inverse and opposite and we’ve looked at both of these. But when I combined both of these two strategies together, I get a profit loss diagram that looks something like this. Let me just drag it onto the screen here.
And it looks something like this. And this is a call debit spread that we would end up trading. And you can see that this first part of the strategy right down here all the way as it starts to head up, this is what is the first leg of this trade.
This is that long call option that we had originally. But because we sold a call option at possibly a higher strike, that now levels out our profit and loss line going forward from that price.
Now, we have this unique strategy that not only has a very defined risk, meaning the maximum that we can lose is completely defined from the beginning of the trade, but also has 100% and complete definition of how much we can also make in the trade which is a little bit different concept and a little bit more advanced from our discussion of just single-leg options.
This talk about using options and being very creative has no end. There are thousands of strategies that you can ultimately create because there's tons of strike prices and contract months to work with.
But I first wanted just to introduce this idea of using single-leg versus multi-leg option strategies to you. I will tell you honestly that most of the trades that we do here at Option Alpha are multi-leg strategies.
Those are going to be your call spreads, your debit spreads, iron condors, strangles, straddles, things like that that are using multiple different types of options, types, whether that’s puts and calls at different strike prices and different contract months, just depending on where the market is and what the situation.
As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below. And happy trading!