A Simple Role for Complex Options

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.