A Simple Role for Complex Options

Abstract

Among the many possible complex options trades, just a few dominate the market. Two simple
roles largely explain their use. Using a new approach to identify complex trades, we find that
vertical, vertical ratio, calendar, and diagonal spreads account for most complex volume, and
volatility trades such as straddles and strangles account for a much smaller fraction. Many trades
are executed not to obtain the payoffs of the complex packages, but instead to adjust simple
options positions by changing either strikes or expiration dates. Others appear intended to make
simple bets on price movements with small initial investments.

Keywords: options trading, complex trades, volatility trades

JEL Classification: G12, G23