What are Paired Options Contracts?

Short Answer

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.

Detailed Answer

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 -

  1. Both the Call, as well as the Put option, should be of the same underlying asset.
  1. 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.

Tagged With: paired option contractoption trading
Categories: Option Trading
Comments (0)
Related FAQs

What is the Best strategy for Options Trading?

There are many complex Option Trading strategies out there but the most profitable are some of the simpler ones. The top 3 of them are Long & Short Straddles, Long & Short Strangles and Bull/Bear spreads.

What is Uncovered or Naked Options Trading?

Naked or Uncovered Option trading is a type of trading/speculating where a Call or Put option is bought or sold by different individuals at the same time expecting different price direction movements. Naked Option trading is a Zero-Sum game which means that the Profit for one is a Loss for the other individual.

Is Sensibull free option trading platform?

Sensibull is not a complete free website for option trading but it does offer some free features and also a 7 day free trail. For more details read through the expanded version.

Is Sensibull Pro Worth it? How good is the Options Trading Platform?

Sensibull Pro is a package offered by the company in terms of options trading. Features such as a statistical tool, strategy implementation advice, custom strategy build, IV charts, currency options, and more make it unique and different from the other plans. If you're serious about trading in options and are looking for a concrete structure in trading in options, then the pro package of Sensibull makes complete sense.

What is an Iron Condor trade in options?

An Iron Condor is a 4 legged hedged option strategy that includes selling 1 slightly OTM (Out of The Money) Call as well as 1 Put option and, buying 1 Slightly Far OTM Put & 1 Call options in order to cover the risk of the Naked short positions. This strategy is implemented when the overall outlook of the underlying asset is neutral or rangebound and no major moves in any direction are anticipated. The maximum profit and loss are capped in this strategy, and by hedging, margin benefits can be enjoyed.

What is Call Option and Put Option?

Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. The two most impactful options are Call Options and Put Options.

What is Sensibull Option Chain?

Sensibull is an online Options trading platform that provides various Analysis tools that can be used to have a better understanding of the Options as well as to create and deploy various Option Trading Strategies that can be used by Investors & traders to Speculate as well as Hedge their existing portfolio. The Option Chain is an important feature of Sensibull. It is discussed in detail below.

What is an Option Spread? Meaning, Types & Examples

Option Spreads are usually used to hedge a position and try to increase the chances to make money. By doing this we limit our profits but most importantly we minimize our losses that is the most important part in trading, which is to preserve our capital.

Can I automate my trading with Zerodha Streak?

Streak is an online Options trading platform that helps Derivative traders to, create, backtest and deploy their own option strategies in the live market. Streak also provides Algo trading to its users without the need for any coding. This automates the process of trading to a large extent.

Is Wisdom Capital Good, Safe & Reliable Broker for Stock Trading and Investing?

Yes, Wisdom Capital is good, safe, and reliable for all stock trading and investing options. However, weighing in on the lack of trading options and the unjustified charges imposed, it is a cause of worry. But other than this, the broker is reliable enough to execute a trade from the platform.