List of option trading strategies

A Guide Of Option Trading Strategies For Beginners.

Options are conditional derivative contracts that allow buyers of the contracts a. k.a the option holders, to buy or sell a security at a chosen price. Option buyers are charged an amount called a "premium" by the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless and thus ensuring that the losses are not higher than the premium. In contrast, option sellers, a. k.a option writers assume greater risk than the option buyers, which is why they demand this premium.

Options are divided into "call" and "put" options. A call option is where the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called exercise price or strike price. A put option is where the buyer acquires the right to sell the underlying asset in the future at the predetermined price.

Why trade options rather than a direct asset?

There are some advantages to trading options. The Chicago Board of Option Exchange (CBOE) is the largest such exchange in the world, offering options on a wide variety of single stocks and indices. Traders can construct option strategies ranging from simple ones usually with a single option, to very complex ones that involve multiple simultaneous option positions.

[Options allow for both simple and more complex trading strategies that can lead to some impressive returns. This article will give you a rundown of some basic strategies, but to learn practice in detail check out Investopedia Academy's Options Course, which will teach you the knowledge and skills the most successful options trader use when playing the odds.]

The following are basic option strategies for beginners.

This is the preferred position of traders who are:

Bullish on a particular stock or index and do not want to risk their capital in case of downside movement. Wanting to take leveraged profit on bearish market.

Options are leveraged instruments – they allow traders to amplify the benefit by risking smaller amounts than would otherwise be required if the underlying asset traded itself. Standard options on a single stock is equivalent in size to 100 equity shares. By trading options, investors can take advantage of leveraging options. Suppose a trader wants to invest around $5000 in Apple (AAPL), trading around $127 per share. With this amount he/she can purchase 39 shares for $4953. Suppose then that the price of the stock increases about 10% to $140 over the next two months. Ignoring any brokerage, commission or transaction fees, the trader’s portfolio will rise to $5448, leaving the trader a net dollar return of $448 or about 10% on the capital invested.

Given the trader's available investment budget he/she can buy 9 options for $4,997.65. The a contract size is 100 Apple shares, so the trader is effectively making a deal of 900 Apple shares. As per the above scenario, if the price increases to $140 at expiration on 15 May 2015, the trader’s payoff from the option position will be as follows:

Net profit from the position will be 11,700 – 4,997.65= 6,795 or a 135% return on capital invested, a much larger return compared to trading the underlying asset directly.

Risk of the strategy: The trader's potential loss from a long call is limited to the premium paid. Potential profit is unlimited, meaning the payoff will increase as much as the underlying asset price increases.

This is the preferred position of traders who are:

Bearish on an underlying return but do not want to take the risk of adverse movement in a short sell strategy. Wishing to take advantage of leveraged position.

If a trader is bearish on the market, he can short sell an asset like Microsoft (MSFT) for example. However, buying a put option on the shares can be an alternative strategy. A put option will allow the trader to benefit from the position if the price of the stock falls. If on the other hand the price does increase, the trader can then let the option expire worthless losing only the premium.

Risk of the strategy: Potential loss is limited to the premium paid for the option (cost of the option multiplied the contract size). Since payoff function of the long put is defined as max(exercise price - stock price - 0) the maximum profit from the position is capped, since the stock price cannot drop below zero (See the graph).

This is the preferred position of traders who:

Expect no change or a slight increase in the underlying price. Want to limit upside potential in exchange of limited downside protection.

The covered call strategy involves a short position in a call option and a long position in the underlying asset. The long position ensures that the short call writer will deliver the underlying price should the long trader exercise the option. With an out of the money call option, a trader collects a small amount of premium, also allowing limited upside potential. Collected premium covers the potential downside losses to some extent. Overall, the strategy synthetically replicates the short put option, as illustrated in the graph below.

Suppose on 20 March 2015, a trader uses $39,000 to buy 1000 shares of BP (BP) at $39 per share and simultaneously writes a $45 call option at the cost of $0.35, expiring on 10 June. Net proceeds from this strategy is an outflow of $38.650 (0.35*1,000 – 39*1,000) and thus total investment expenditure is reduced by the premium of $350 collected from the short call option position. The strategy in this example implies that the trader does not expect the price to move above $45 or significantly below $39 over the next three months. Losses in the stock portfolio up to $350 (in case the price decreases to $38.65) will be offset by the premium received from the option position, thus, a limited downside protection will be provided.

Risk of the strategy: If the share price increases more than $45 at expiration, the short call option will be exercised and the trader will have to deliver the stock portfolio, losing it entirely. If the the share price drops significantly below $39 e. g. $30, the option will expire worthless, but the stock portfolio will also lose significant value significantly a small compensation equal to the premium amount.

This position would be preferred by traders who own the underlying asset and want downside protection.

The strategy involves a long position in the underlying asset and as well as a long put option position.

An alternative strategy would be selling the underlying asset, but the trader may not want to liquidate the portfolio. Perhaps because he/she expects high capital gain over the long term and therefore seeks protection on the short run.

If the underlying price increases at maturity, the option expires worthless and the trader loses the premium but still has the benefit of the increased underlying price which he is holding. On the other hand, if the underlying price decreases, the trader’s portfolio position loses value but this loss is largely covered up by the gain from the put option position that is exercised under the given circumstances. Hence, the protective put position can effectively be thought of as an insurance strategy. The trader can set exercise price below the current price to reduce premium payment at the expense of decreasing downside protection. This can be thought of as deductible insurance.

Suppose for example that an investor buys 1000 shares of Coca-Cola (KO) at a price of $40 and wants to protect the investment from adverse price movements over the next three months. The following put options are available:

15 June 2015 options.

The table implies that the cost of the protection increases with the level thereof. For example, if the trader wants to protect the investment portfolio against any drop in price, he can buy 10 put options at a strike price of $40. In other words, he can buy an at the money option which is very costly. The trader will end up paying $4,250 for this option. However, if the trader is willing to tolerate some level of downside risk, he can choose less costly out of the money options such as a $35 put. In this case, the cost of the option position will be much lower, only $2,250.

Risk of the strategy: If the price of the underlying drops, the potential loss of the overall strategy is limited by the difference between the initial stock price and strike price plus premium paid for the option. In the example above, at the strike price of $35, the loss is limited to $7.25 ($40-$35+$2.25). Meanwhile, the potential loss of the strategy involving at the money options will be limited to the option premium.

Options offer alternative strategies for investors to profit from trading underlying securities. There's a variety strategies involving different combinations of options, underlying assets and other derivatives. Basic strategies for beginners are buying call, buying put, selling covered call and buying protective put, while other strategies involving options would require more sophisticated knowledge and skills in derivatives. There are advantages to trading options rather than underlying assets, such as downside protection and leveraged return, but there are also disadvantages like the requirement for upfront premium payment.

A - Z List of Trading Strategies.

Below you will find a simple alphabetical list of all the options trading strategies that we cover on this site. If you are looking for further details on a specific strategy then simply scroll down to that one and click on the relevant link. We have also provided a very brief description of each one.

Albatross Spread: An advanced neutral trading strategy.

Bear Butterfly Spread: A complex bearish trading strategy.

Bear Call Spread: A bearish trading strategy that requires a high trading level.

Bear Put Ladder Spread: A complex bearish trading strategy.

Bear Put Spread: A bearish trading strategy that is suitable for beginners.

Bear Ratio Spread: A complex bearish trading strategy.

Box Spread, Conversion & Reversal Arbitrage and Strike Arbitrage: See Options Arbitrage Strategies.

Bull Butterfly Spread: A complex bullish trading strategy.

Bull Call Ladder Spread: A complex bullish trading strategy.

Bull Call Spread: A bullish trading strategy that is suitable for beginners.

Bull Condor Spread: A complex bullish trading strategy.

Bull Put Spread: A bullish trading strategy that requires a high trading level.

Bull Ratio Spread: A complex bullish trading strategy.

Butterfly Spread: An advanced neutral trading strategy.

Buy Call Options: See Long Call.

Buy Put Options: See Long Put.

Calendar Call Spread: A simple neutral trading strategy.

Calendar Put Spread: A simple neutral trading strategy.

Calendar Straddle: An advanced neutral trading strategy.

Calendar Strangle: An advanced neutral trading strategy.

Call Ratio Backspread: A fairly complicated volatile trading strategy that leans towards bullish.

Call Ratio Spread: An advanced neutral trading strategy.

Condor Spread: An advanced neutral trading strategy.

Covered Call Collar: A fairly simple neutral trading strategy that is suitable for beginners.

Covered Call: A relatively simple neutral trading strategy that is suitable for beginners.

Covered Put: A fairly complex neutral trading strategy.

Iron Albatross Spread: An advanced neutral trading strategy.

Iron Butterfly Spread: An advanced neutral trading strategy.

Iron Condor Spread: An advanced neutral trading strategy.

Long Call: A single transaction bullish trading strategy. Suitable for beginners.

Long Gut: A simple volatile trading strategy suitable beginners.

Long Put: A single transaction bearish trading strategy that is suitable for beginners.

Long Straddle: A simple volatile trading strategy suitable for beginners.

Long Strangle: A simple volatile trading strategy suitable for beginners.

Naked Call Write: See Short Call.

Naked Put Write: See Short Put.

Put Ratio Backspread: A reasonably complex volatile trading strategy that leans towards bearish.

Put Ratio Spread: An advanced neutral trading strategy.

Reverse Iron Condor Spread: An advanced volatile trading strategy.

Short Albatross Spread: A complex volatile trading strategy.

Short Bear Ratio Spread: A fairly complicated bearish trading strategy.

Short Bull Ratio Spread: A fairly complicated bullish trading strategy.

Short Butterfly Spread: A complicated volatile trading strategy.

Short Calendar Call Spread: An advanced volatile trading strategy.

Short Call: A single transaction bearish trading strategy.

Short Condor Spread: An advanced volatile trading strategy.

Short Gut: A simple neutral trading strategy.

Short Put: A single transaction bullish trading strategy.

Short Straddle: A relatively simple neutral trading strategy.

Short Strangle: A quite straightforward neutral trading strategy.

Strap Straddle: A simple volatile trading strategy suitable for beginners.

Strap Strangle: A simple volatile trading strategy suitable for beginners.

Strip Straddle: A simple volatile trading strategy suitable for beginners.

Strip Strangle: A simple volatile trading strategy suitable for beginners.

Synthetic Covered Call, Short Straddle, and Straddle: See Synthetic Options Strategies.

6 Great Option Strategies For Beginners.

Option rookies are often eager to begin trading – too eager. It’s important to get a solid foundation to be certain you understand how options work and how they can help you achieve your goals – before trading.

Here’s a list of my favorite methods. Note: this list contains strategies that are easy to learn and understand. Each is less risky than owning stock. Most involve limited risk. For investors not familiar with options lingo read our beginners options terms and intermediate options terms posts.

1. Covered call writing. Using stock you already own (or buy new shares), you sell someone else a call option that grants the buyer the right to buy your stock at a specified price. That limits profit potential. You collect a cash premium that is yours to keep, no matter what else happens. That cash reduces your cost. Thus, if the stock declines in price, you may incur a loss, but you are better off than if you simply owned the shares.

Example: Buy 100 shares of IBM.

Sell one IBM Jan 110 call.

2. Cash-secured naked put writing. Sell a put option on a stock you want to own, choosing a strike price that represents the price you are willing to pay for stock. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. You may not buy the stock, but if you don’t, you keep the premium as a consolation prize. If you maintain enough cash in your brokerage account to buy the shares (if the put owner exercises the put), then you are considered to be ‘cash-secured.’

Example: Sell one AMZN Jul 50 put; maintain $5,000 in account.

3. Collar. A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal (but adjustable) amount. Profits are also limited, but conservative investors find that it’s a good trade-off to limit profits in return for limited losses.

Example: Buy 100 shares of IBM.

Sell one IBM Jan 110 call.

Buy one IBM Jan 95 put.

4. Credit spread. The purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another. Both options have the same expiration. It’s called a credit spread because the investor collects cash for the trade. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought. This strategy has a market bias (call spread is bearish and put spread is bullish) with limited profits and limited losses.

Example: Buy 5 JNJ Jul 60 calls.

Sell 5 JNJ Jul 55 calls.

or Buy 5 SPY Apr 78 puts.

Sell 5 SPY Apr 80 puts.

5. Iron condor. A position that consists of one call credit spread and one put credit spread. Again, gains and losses are limited.

Example: Buy 2 SPX May 880 calls.

Sell 2 SPX May 860 calls.

and Buy 2 SPX May 740 puts.

Sell 2 SPX May 760 puts.

6. Diagonal (or double diagonal) spread. These are spreads in which the options have different strike prices and different expiration dates.

1. The option bought expires later than the option sold.

2. The option bought is further out of the money than the option sold.

Example: Buy 7 XOM Nov 80 calls.

Sell 7 XOM Oct 75 calls This is a diagonal spread.

Or Buy 7 XOM Nov 60 puts.

Sell 7 XOM Oct 65 puts This is a diagonal spread.

If you own both positions at the same time, it’s a double diagonal spread.

Note that buying calls and/or puts is NOT on this list , despite the fact that the majority of rookies begin their option trading careers by adopting that strategy. True, it’s fun to buy an option and treat it as a mini-lottery ticket. But, that’s gambling. The likelihood of consistently making money when buying options is small, and I cannot recommend that strategy.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies Premium. He also is the author of the book, The Rookie’s Guide to Options.

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10 Options Strategies to Know.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

1. Covered Call.

Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits (through receipt of the call premium), or protect against a potential decline in the underlying asset's value. (For more insight, read Covered Call Strategies For A Falling Market.)

2. Married Put.

In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. (For more on using this strategy, see Married Puts: A Protective Relationship . )

3. Bull Call Spread.

In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. (To learn more, read Vertical Bull and Bear Credit Spreads.)

4. Bear Put Spread.

The bear put spread strategy is another form of vertical spread​ like the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset's price to decline. It offers both limited gains and limited losses. (For more on this strategy, read Bear Put Spreads: A Roaring Alternative To Short Selling.)

Investopedia Academy "Options for Beginners"

Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:

Improve flexibility in your portfolio by adding options Approach Calls as down-payments, and Puts as insurance Interpret expiration dates, and distinguish intrinsic value from time value Calculate breakevens and risk management Explore advanced concepts such as spreads, straddles, and strangles.

5. Protective Collar.

A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset (such as shares). This strategy is often used by investors after a long position in a stock has experienced substantial gains. In this way, investors can lock in profits without selling their shares. (For more on these types of strategies, see Don't Forget Your Protective Collar and How a Protective Collar Works.)

6. Long Straddle.

A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. (For more, read Straddle Strategy A Simple Approach To Market Neutral . )

7. Long Strangle.

In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. (For more, see Get A Strong Hold On Profit With Strangles.)

8. Butterfly Spread.

All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price. (For more on this strategy, read Setting Profit Traps With Butterfly Spreads . )

9. Iron Condor.

An even more interesting strategy is the iron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. (We recommend reading more about this strategy in Take Flight With An Iron Condor, Should You Flock To Iron Condors? and try the strategy for yourself (risk-free!) using the Investopedia Simulator.)

10. Iron Butterfly.

The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk. (To learn more, read What is an Iron Butterfly Option Strategy?)