Option Strategies

Single options are building blocks. They become interesting when combined – with each other or with stock. That lets you build positions that only make money in certain scenarios, have capped losses or benefit from quiet markets. This lesson introduces the most important strategies.

The payoff calculator#

Every strategy is best understood through its payoff profile: what’s the profit or loss at expiration, depending on where the price ends up? Choose a strategy, change the strike, volatility and time, and watch how risk and reward shift. Premiums are calculated with the Black-Scholes model.

Strategies with stock#

Covered call#

You own a stock and sell a call on it with a strike above the current price. You collect the premium immediately. If the stock rises above the strike, you must hand it over at that price – your upside is capped. If it falls, the premium cushions the loss slightly but doesn’t really protect you.

The covered call suits sideways markets. It’s often marketed as “extra income”. That’s only half true: in return you sell the chance of big rallies – and keep the full downside.

Protective put#

You own a stock and buy a put with a strike below the current price. If the stock falls below the strike, you can sell there – your loss is capped. The protective put works like insurance with a deductible: the lower the strike, the cheaper the premium and the larger the deductible.

Hedging permanently means paying premiums continuously – a noticeable drag over the years. Protection makes most sense when targeted, for example to cap a large single-stock risk over a specific period.

Collar#

Combine both: hold the stock, buy a put, sell a call. The premium from the call funds all or part of the put. Result: downside capped, upside capped too.

Spreads: capping risk and reward#

A spread combines a bought and a sold option of the same type with different strikes.

• Bull call spread: buy a call at a lower strike, sell one at a higher strike. You bet on rising prices but pay less than for a plain call. In return your profit is capped.
• Bear put spread: buy a put at a higher strike, sell one at a lower strike. The equivalent for falling prices.

Spreads are popular because profit and loss are fixed from the outset and because they’re less sensitive to changes in volatility.

Betting on volatility#

Long straddle and strangle#

In a long straddle you buy a call and a put with the same strike. If the price moves a lot – in either direction – one side gains strongly. If it stays put, you lose both premiums. In a strangle the strikes are further apart – cheaper, but it needs an even bigger move.

Straddles are often bought ahead of events like earnings. The catch: the market knows that too. Before such dates implied volatility is high and options are expensive. After the release, volatility often collapses (volatility crush), and even a sizeable move may not be enough to profit.

Iron condor#

The iron condor is the opposite: you sell a put spread below and a call spread above the current price. If the stock stays within the range, you keep the premiums. If it breaks out, the loss is capped by the outer options you bought. Iron condors benefit from calm markets and time decay.

Overview#

Summary#

Options can be combined into almost any risk-reward profile. Covered calls trade upside for premiums, protective puts buy insurance, spreads cap both, straddles bet on movement and iron condors on calm. Every strategy is a bet on direction, size and time. The calculator helps you understand the profiles – it doesn’t replace understanding the risks between today and expiration.