5 mins read

Popular Options Strategies

Options trading can be an effective way for traders to manage risk and maximize returns. However, with so many options strategies available, it can be difficult to know which one is right for you.

In this article, we will provide a brief overview of some popular options strategies, including the basic call and put options, as well as more advanced strategies like the straddle, butterfly, and iron condor. Understanding these strategies can help traders make more informed decisions and achieve their financial goals.

Popular Options Strategies

Single-Leg Options Strategies

Buying Calls: This is a bullish strategy in which an investor buys a call option, giving them the right but not the obligation to purchase an underlying asset at a specific price (strike price) on or before a specific date (expiration date). The investor profits if the price of the underlying asset increases above the strike price.
Buying Puts: This is a bearish strategy in which an investor buys a put option, giving them the right but not the obligation to sell an underlying asset at a specific price (strike price) on or before a specific date (expiration date). The investor profits if the price of the underlying asset decreases below the strike price.
Buying Protective Puts: This is a strategy to hedge against potential losses. An investor buys a put option to protect an existing long position in the underlying asset. If the price of the underlying asset decreases, the value of the put option increases, offsetting some of the losses in the long position.
Selling Covered Calls: This is a strategy in which an investor sells call options on an underlying asset they already own. The investor receives a premium for selling the option, but also agrees to sell the underlying asset at the strike price if the price of the asset rises above the strike price.
Selling Naked Calls: This is a high-risk strategy in which an investor sells call options on an underlying asset they do not own. The investor receives a premium for selling the option, but is exposed to unlimited potential losses if the price of the underlying asset rises above the strike price.
Selling Cash-Secured Puts: This is a strategy in which an investor sells put options on an underlying asset they are willing to buy at a specific price (strike price) if the option is exercised. The investor receives a premium for selling the option, and if the price of the underlying asset remains above the strike price, they keep the premium without having to purchase the asset.
Selling Naked Puts: This is a high-risk strategy in which an investor sells put options on an underlying asset they do not own. The investor receives a premium for selling the option, but is exposed to potential losses if the price of the underlying asset drops below the strike price and the option is exercised.
Buying LEAPS: LEAPS (Long-term Equity Anticipation Securities) are long-term options contracts that have expiration dates up to three years in the future. Buying LEAPS allows investors to take advantage of long-term market trends and can be used as an alternative to buying the underlying asset outright.

Multi-Leg Options Strategies

Credit Spread: A credit spread is an options trading strategy that involves simultaneously buying and selling options on the same underlying asset, with the option being sold having a higher premium than the option being bought. The investor receives a credit for the transaction, and the profit potential depends on the specific type of credit spread used.
Debit Spread: A debit spread is an options trading strategy that involves simultaneously buying and selling options on the same underlying asset, with the option being bought having a higher premium than the option being sold. The investor pays a debit for the transaction, and the profit potential depends on the specific type of debit spread used.
Bull Put Spread: A bull put spread is a bullish strategy that involves selling a put option with a higher strike price and buying a put option with a lower strike price in the same expiration cycle. The investor receives a net credit for the transaction, and profits if the price of the underlying asset remains above the strike price of the sold option at expiration.
Bull Call Spread: A bull call spread is a bullish strategy that involves buying a call option with a lower strike price and selling a call option with a higher strike price in the same expiration cycle. The investor pays a net debit for the transaction, and profits if the price of the underlying asset moves beyond the strike price of the sold option at expiration.
Straddle: A straddle is a neutral strategy that involves buying or selling both a call option and a put option with the same strike price and expiration date. The investor profits if the price of the underlying asset either moves significantly in either direction for a long straddle or remains stable for a short straddle.
Strangle: A strangle is a neutral strategy that involves buying or selling both a call option and a put option with different strike prices but the same expiration date. The investor profits if the price of the underlying asset either moves significantly in either direction for a long strangle or remains stable for a short strangle.
Collar: A collar is a hedging strategy that involves buying a protective put option while simultaneously selling a covered call option. The investor limits potential losses and profits if the price of the underlying asset remains within a certain range.
Call Calendar: A call calendar is a strategy that involves buying a call option with a longer expiration date and selling a call option with the same strike price but a shorter expiration date. The investor profits if the price of the underlying asset remains at or near the strike price at expiration of the shorter-term option.
Put Diagonal: A put diagonal is a trading strategy that involves buying a long-term put option and selling a short-term put option with a higher strike price. The investor profits from either a neutral to bullish price movement for a bullish put diagonal or a neutral to bearish price movement for a bearish put diagonal.
Strap: A strap is a strategy that involves buying two call options and one put option for a long strap, all with the same strike price and expiration date. The investor profits if the price of the underlying asset moves significantly in either direction.
Call Backspread: A call backspread is a bullish strategy that involves selling one call option and buying two call options with a higher strike price and the same expiration date. The investor profits if the price of the underlying asset moves significantly in either direction.
Put Backspread: A put backspread is a bearish strategy that involves selling one put option and buying two put options with a lower strike price and the same expiration date. The investor profits if the price of the underlying asset moves significantly in either direction.
Butterfly: A butterfly is a neutral strategy that involves the purchase and sale of multiple options contracts at three different strike prices, all with the same expiration date. The options are bought and sold in a pattern that creates a profit zone between the two strike prices, with maximum profit if the price of the underlying asset remains stable.
Iron Condor: An iron condor is a strategy that involves selling both a bull put spread and a bear call spread with the same expiration date, creating a profit zone between the strike prices of the options sold. The investor profits if the price of the underlying asset remains within the range of the strike prices at expiration.
Reverse Iron Condor: A reverse iron condor is a strategy that involves buying both a bear put spread and a bull call spread with the same expiration date, creating a profit zone outside the range of the strike prices of the options sold. The investor profits if the price of the underlying asset moves significantly in either direction.

The Bottom Line

In conclusion, options trading can be a powerful tool for traders looking to manage risk and maximize returns. While options trading can be complex and involves various factors, understanding different options strategies can help traders make informed decisions and achieve their financial goals.

Traders should carefully consider their risk tolerance and financial objectives before engaging in options trading, and always remember to do their due diligence and research before making any trades. With proper education and experience, options trading can be a valuable addition to any trader’s investment portfolio.