There is a common myth and misunderstanding amongst most beginners and relatively experienced options traders that the more "advanced" the options strategy they employ, the better the result they will get and the more profit they are going to make. This leads to a general negligence of the basics of options trading and the power of the very basic options strategies such as the simple long call or put, vertical spreads and Covered Call etc. However, the truth is, more advanced options strategies do NOT mean more profits or better results. In fact, when employed hapzardly without a full and complete strategic framework, these so-called advanced options strategies can result in more severe losses than those so-called basic options strategies! On top of that, they may not even produce a higher profit than perhaps a simple long call or put!
To be honest, there is no such distinction between what is a basic options strategy or what is an advanced options strategy. Categorizing options strategies in this way seem to give the impression that advanced options strategies are just better than basic options strategies so nobody should waste time studying the "basic" options strategies. This is a huge mistake. If so-called advanced options strategies are automatically better than basic options strategies in every way, why then would basic options strategies still exist and still widely used?
In fact, what people call advanced options strategies are usually just strategies that have more options legs involved than the so called basic options strategies. Through my observation, options strategies that involves only 1 or 2 legs are usually classified as "Basic Options Strategies" while strategies that involve 3 legs or more are classified as "Advanced Options Strategies". However, that is pretty much where the distinction ends. Basic Options Strategies and Advanced Options Strategies cannot be distinguished in terms of potential profit or loss potential. In fact, most often the reverse is true that basic options strategies produce much higher profit potential and sometimes more stable return profile than so-called advanced options strategies!
In that case, what then exactly are Advanced Options Strategies?
To understand what Advanced Options Strategies are, one needs to understand what options strategies do in the first place. Essentially, what options strategies do is simply to give the options trader the ability to optimize profits on a certain outlook. If your outlook is that the price of the stock is going to go up endlessly, then a long call would be the best options strategy to maximize that profit, no other "advanced options strategies" can match the simple long call in this scenario at all. However, if you now think the stock is going to go upwards but only up to a certain price, then a Bull Call Spread would enhance the profitability of that outlook by adding profit from a short leg. However, if you think the stock is going to EITHER go upwards to a certain price or downwards to a certain price, then you add a Bear Put Spread to your Bull Call Spread and turn it into a Reverse Iron Condor Spread in order to profit from that outlook! As the nature of the outlook increases in complexity, so does the number of legs involved in an options strategy and these are what people call "Advanced" options strategies.
Not at all! In fact, as outlined above, in certain scenarios, basic options strategies like long call, long put or vertical spreads produce a better potential profit than so called advanced options strategies. In the end of the day, advanced options strategies may not necessarily be more profitable and may even be riskier but they are ways to profit from very sophisticated outlooks and also ways to profit from factors other than just the movement of the underlying stock. In fact, using an advanced options strategy on a wrong outlook, meaning the stock just didnt behave the way you expect it to, you are most likely still going to make a loss. In fact, for less sophisticated options traders with less sophisticated outlooks, basic options strategies work far better than so-called advanced options strategies. On top of that, the more legs you add to an options strategy, meaning, the more complex an options strategy, the more likely you are going to make a mistake on executing or maintaining the position. The resulting loss from such mistakes may never be recoverable even if you fix the position.
Not at all! As mentioned, if you have a specific complex outlook and is actually competent in producing accurate predictions, advanced options strategies are pretty much the only way to go in order to profit from those scenarios. On top of that, the more advanced an options strategy is, the more ways it tends to be able to profit from. For example, a long call profits only if the stock moves up strongly, however, a bull call spread would be able to profit even if the stock moved up only moderately. As such, your chances of winning increases with advanced options strategies usually at the expense of lower profit potential. There is generally a give and take in options strategies. Higher chance of winning, lesser profit. Lower chance of winning, higher profit. As such, advanced options strategies are not by themselves necessarily better than basic options strategies, it is just that they are all designed to maximize profit in different scenarios. As such, it is a folly to start out in options trading thinking basic options strategies are a waste of time and blindly pursuit only the so-called advanced options strategies. There is really no such thing as basic or advanced options strategies and in fact, until you get good and consistent with the more basic options strategies, you are also unlikely to do very well with the more advanced options strategies. It is the hope of this article to break this misunderstanding and that options traders would revisit the roots and build a strong foundation.
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