A paired options contract is an options trading strategy where 2 option contract of the same underlying asset is executed at the same time. It involves a combination of buying a Call option and selling a Put Option or vice versa. Some strategies of a paired options contract are Straddle, Strangle Spread, etc.
Paired Options Contract
Paired options contracts involve taking at least two option positions in the same underlying asset at any particular point in time. As the name suggests there has to be at least a pair of options contracts in the strategy. It can be termed as a multi-legged option strategy where a Call option, as well as a Put option, is bought or sold of the same underlying Stock or Index at a particular point in time.
Paired option strategies are mainly used to mitigate the risks and maximize profits. In some cases, the profit is capped in such a strategy but that is much better compared to facing the risk of unlimited losses in naked option selling.
Some ideal examples of a paired options strategy are-
Straddle, Strangle, Spreads, etc - In a Straddle a Put option as well a Call Option is bought of the same Stock or Index at the same time for the same expiry. Some things to ensure while implementing a paired option strategy -
- Both the Call, as well as the Put option, should be of the same underlying asset.
- Both of them should be of the same expiry
A paired options contract like a long straddle is used when there is an anticipation of a big move but the direction of it is unknown. This strategy is used mainly before any major events such as Quarterly results, Union Budgets, Election results, etc. In all these cases there is 2 maximum outcome which is either “Good or Bad” reacting to which either the market will go Up or Down and in either of these cases this strategy will make money.
Some problems of this strategy-
- As we are anticipating a big move in a Long straddle, and if the price fails to move more than our break-even then in that case there will be a loss due to Theta Decay of option premiums.
- Volatility or the VIX should be low while implementing a Long straddle because as the VIX falls the options premiums will fall alongside causing a loss.
On the other hand, a Strangle is a strategy that benefits from the high VIX and high option prices as it involves selling of a Call & Put option of the same underlying asset and enjoying the theta decay.
So to sum it up it is clear that if the right type of paired options contract is implemented at the right time then the chances of profits are very high. It can be also considered as a price neutral strategy which means that irrespective of the price going Up or Down, implementing this strategy can make money either way.
These are contracts that have put and call options contracts taken at the same time, with the same value and the same expiration date. It’s quite risky considering that you never know how much you might lose or gain. But one could compliment one another and it’s a broadly used strategy amongst retail traders to have a lower loss ratio but a higher profit margin.