Options Strategies

Bullish

Long Call – An option contract that gives the buyer (holder) the right to purchase a specified number of shares (typically 100) of the underlying stock at the given strike price on or before the expiration date of the contract. This strategy is a leveraged, limited risk alternative to owning stock, but is subject to other factors such as volatility, interest rates and time decay.

Covered Call – A short option position in which the seller (writer) owns the number of shares of underlying stock represented by the sold options. This strategy is less risky than outright long stock positions and is equivalent in its profit/loss profile to naked put writing.

Protective Put – For investors who want to protect the stocks in their portfolio from falling prices, protective puts provide a relatively low-cost form of portfolio insurance. In this case, investors would purchase one put contract for each 100 shares of stock they own.

Bull Call Spread – An option strategy implemented by selling a higher-strike call and purchasing a lower-strike call. This results in a net debit to the investor’s account. The maximum profit is achieved if the underlying stock closes at or above the strike of the sold call.

Bull Put Spread – An option strategy implemented by selling a higher-strike put and purchasing a lower-strike put. This results in a net credit to the investor’s account. The maximum profit is achieved as long as the sold put stays out of the money by expiration.

Call Ratio Back Spread – A directional trade with a hedging component that allows a trader to book a small profit or break even in the event that the trade moves against them. The risk is limited while the reward is unlimited. Call ratio backspreads involve selling a call at one strike and then buying two more calls at a higher strike price (other ratios can be used). The goal is to keep the ratio of calls sold to calls purchased under 0.67, allowing a credit to be received in order to profit from a strong move in either direction by the underlying security.

Short Put – A strategy that involves selling a put, which places upon the seller the obligation to buy the shares at the strike price if the put is exercised. Put writers typically sell puts below the market to either acquire a stock at a price below current market prices or to get paid while they wait by retaining the option premium when the put expires worthless. Put writers should want to own the stocks they sell puts on, as they are incurring the obligation to buy the stock at a certain price up until that option’s expiration.

Synthetic Long Call – A long stock position combined with a long put of the same series as that call.

Synthetic Long Stock – A long call position combined with a short put of the same series.

Synthetic Short Put – A long stock position combined with a short call of the same series as that put.

Bearish

Long Put – An option contract that gives the buyer (or holder) the right to sell a specified number of shares (typically 100) of the underlying stock at a given strike price on or before the expiration date of the contract. This strategy is a leveraged, limited risk alternative to shorting stock, but is subject to other factors such as volatility, interest rates and time decay.

Bear Put Spread – An option strategy implemented by selling a lower-strike put and purchasing a higher-strike put. This results in a net debit to the investor’s account. The maximum profit is achieved if the underlying stock closes at or below the strike of the sold put.

Bear Call Spread – An option strategy implemented by selling a lower-strike call and purchasing a higher-strike call. This results in a net credit to the investor’s account. The maximum profit is achieved as long as the sold call stays out of the money by expiration.

Put Ratio Back Spread – Put ratio backspreads involve selling a near-the-money put (illustrated by a higher strike price) while purchasing two or more out-of-the-money puts. This strategy is designed for a bearish outlook on the underlying stock. Sharp moves lower and increasing volatility are ideal for this strategy.

Uncovered Call – A short call option in which the seller (writer) doesn’t own an equivalent position in the underlying stock represented by their call contracts.

Synthetic Long Put – A short stock position combined with a long call of the same series as that put.

Synthetic Short Stock – A short call position combined with a long put of the same series.

Synthetic Short Call – A short stock position combined with a short put of the same series as that call.

Neutral

Back Spread – A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying instrument.

Butterfly – A strategy involving three strike prices that has both limited risk and limited profit potential. A long call butterfly is established by: buying one call at the lowest strike price, writing two calls at the middle strike price, and buying one call at the highest strike price. A long put butterfly is established by: buying one put at the highest strike price, writing two puts at the middle strike price, and buying one put at the lowest strike price. A butterfly is typically entered anytime a credit can be received (i.e., when the premium received is greater than the premium paid).

Calendar – The sale of an option with a nearby expiration and the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit depends on the time value of the distant option when the nearby expires. This strategy takes advantage of time value differentials during periods of relatively flat prices.

Collar – A collar is an options strategy that involves the purchase of a put option and the sale of a call option on the same pre-owned underlying stock. The call and put do not have the same strike price (the call is always at a higher strike than the put), nor must they necessarily have the same expiration date.

Condor – A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a ‘flat-top butterfly.’

Double Calendar – A strategy that involves selling a calendar spread in both calls and puts on the same underlying at the same time. This strategy can offer a wider area of profitability, and is more responsive to changes in implied volatility than a typical calendar spread.

Double Diagonal – A strategy that involves selling a diagonal spread in both calls and puts on the same underlying at the same time. Typically the long options are purchased in a farther out month and at strikes that are farther out of the money than the nearer term, short strikes. This strategy takes advantage of time value differentials during periods of relatively flat prices, but also benefits from an increase in implied volatility. The maximum risk for this strategy is limited, but the profit potential is theoretically unlimited.

Iron Butterfly – An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) combination. An iron butterfly contains four options as is an equivalent strategy to a regular butterfly spread which contains only three options.

Iron Condor – An option strategy with limited risk and limited profit potential that involves both a long and short strangle. Similar to a Condor, except both puts and calls are used simultaneously. Typically the strike prices of the four options are evenly spaced. This strategy is equivalent to selling a Bull Put Spread and Bear Call Spread on the same underlying. Both sides may be entered at once or the strategy can be “legged into” one contract or spread at a time.

Ratio Spread – For aggressive investors who don’t expect much short-term volatility, ratio spreads are a limited reward, unlimited risk strategy. Put ratio spreads, which involve buying puts at a higher strike and selling a greater number of puts at a lower strike, are neutral in the sense that they are hurt by market movement.

Straddle – The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same exercise prices and expiration dates. The straddle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.

Strangle – The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same expiration date but different strike prices. The strangle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.