Option Strategies
Combine calls and puts to construct specific price outcomes. Option strategies give you the flexibility to profit from rising, falling and directionless markets.
Bullish strategies
Profit from a Rising Market
Long Call Option →
Short Put Option →
Long Synthetic →
Call Backspread →
Call Bull Spread →
Put Bull Spread →
Covered Call →
Protective Put →
Collar →
Bearish strategies
Profit from a Falling Market
Short Call Option →
Long Put Option →
Short Synthetic →
Put Backspread →
Call Bear Spread →
Put Bear Spread →
Market neutral strategies
Profit in a Sideways Market
Iron Condor →
Long Straddle →
Short Straddle →
Long Strangle →
Short Strangle →
Long Guts →
Short Guts →
Call Time Spread →
Put Time Spread →
Call Ratio Vertical Spread →
Put Ratio Vertical Spread →
Long Call Butterfly →
Short Call Butterfly →
Long Put Butterfly →
Double Calendar →
About Option Strategies
Generally, an option strategy involves the simultaneous purchase and/or sale of different option contracts, also known as an option combination. There is such a wide variety of option strategies that use multiple legs as their structure, however, even a one legged Long Call Option can be viewed as an option strategy.
But what if you bought a call and a put option at the same strike price in the same expiry month? How could a trader profit from such a scenario? This is called a Long Straddle — one of the most popular market neutral strategies.
In this example, imagine you bought 1 $40 July call option and also bought 1 $40 July put option. With the underlying trading at $40, the call costs $1.14 and the put costs $1.14 also — a total outlay of $228, which is your maximum loss.
If the market rallies, the call option becomes increasingly profitable while the put expires worthless. If the market sells off, the put becomes profitable while the call expires worthless. Either way, as long as the move is large enough to exceed the $228 cost, you profit.
This is just one example of an option combination. There are many different ways to combine option contracts together — and also with the underlying asset — to customise your risk/reward profile.
For further analysis tools, take a look at the Volcone Analyzer — it analyses any option contract and compares it against historical averages, helping you decide whether to buy or sell.
105 Comments
Meghna September 15th, 2010 at 5:25am
HI, Say if I am buying an in the money European option with an expiry of 4 months and If the option is deep ITM or OTM during at the end of 2nd month and if i want to crystallize my profits than is there any way out for it?
Peter September 5th, 2010 at 5:15am
It's hard to beat Interactive Brokers on brokerage and platform functionality. Although I've heard that Think or Swim have a great platform also.
ramesh September 5th, 2010 at 12:32am
Which firm has best trading tools and low commissions?
Peter September 2nd, 2010 at 5:55pm
I use and can recommend Interactive Brokers. They are a US based company and you don't have to live in the US to open an account with them.
NaZZ September 2nd, 2010 at 7:02am
I stay in Thailand(in Asia), how can I start to trade because I do not any account with any broker in USA. Can you suggest me broker's web site to open account and trade.
Peter August 29th, 2010 at 5:07pm
Hi Sam, thanks for the feedback!
Yes, I think that simple naked long positions are still useful and obviously have the most bang for buck so to speak. It's just that option traders need to understand the factors that affect an option's value - specifically volatility.
Often you may purchase a call option and even though the stock does rally the call option won't gain any value - or could even lose value in the market. This is because the drop in implied volatility has played a larger role in the option's value than the move in the stock price.
This can be discouraging to new option traders. But this doesn't mean that naked call and put buying should be avoided...just needs to be understood.
Sam August 29th, 2010 at 10:41am
hi Peter,
it's really nice website you have. Anyway, talking about options strategy , based on your experience, is it still useful using only simple long call or put ? because i heard that these are useless, mostly worthless.
Peter August 29th, 2010 at 5:44am
Hi Rajesh, are you located in the US? If so, Options University
used to provide in person option courses and training. Otherwise, you can also have a look at the Members Area for our online video courses.
rajashekargoud August 27th, 2010 at 12:11pm
i am interested option please suggest me good insitituion for traning and from where i should start option(instial investments)and for dealing in option we should have any experiance
Peter August 26th, 2010 at 12:31am
Hi Raju, thanks for the feedback...if you have any other suggestions for the site, please let me know.
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