Options Trading Strategies

To trade Exchange Traded Options (ETO) markets, traders must start with an understanding of call options and put options. They are the initial building blocks of all option strategies. Bought put options can be used to capture profits from downward moves in the price of the underlying stock, and bought call options can be used to capture profits from upward moves. (We teach you exactly how this works in our Options Mentoring course.) By themselves bought call options and bought put options are limited to money being made when the underlying stock has large directional price movement. But how does a trader manage to make money in slow directional price moves or even sideways price action? The answer lies in the combination of bought and sold options (calls or puts). When combining these basic building blocks, traders are able to form what is called an option spread strategy, the result can be a very profitable and low risk trade. (Make sure you check out our trade examples.)

There are countless ways of combining call options, or put options, or call and put options in one trade to form an option strategy. Many novice option traders are keen to learn all they can about every option strategy they can find. To satisfy your interest, we will list a few right here, and others can be found in our options glossary, but let us give you a word of advice:

Successfully trading the options markets is not about just teaching you lots of options strategies, and promising you an 85% win/loss ratio. Most education courses will call that a complete “trading system”. That is not true!

There is a lot more to designing a trading system! You can learn about credit spreads, debit spreads and other option strategies until you are blue in the face, and not extract one cent from the markets. Until you understand how the options markets work in terms of time, price and volatility and until understand how the market dictates which option strategy to choose and when to enter your trade, you will always be left sitting on the sidelines. To understand better what we are talking about, we invite you to read about our comprehensive professional mentoring program.

Examples of option strategies

BEAR CALL SPREAD

This is a net credit transaction established by selling a call and buying another call at a higher strike price, on the same underlying, in the same expiration. It is a directional trade where the maximum loss = the difference between the strike prices less the credit received, and the maximum profit = the credit received.

BEAR PUT SPREAD

A net debit transaction established by selling a put and buying another put at a higher strike price, on the same underlying, in the same expiration. It is a directional trade where the maximum loss = the debit paid, and the maximum profit = the difference between the strike prices less the debit.

BULL CALL SPREAD

This is a net debit transaction established by buying a call and selling another call at a higher strike price, on the same underlying, in the same expiration. It is a directional trade where the maximum loss = the debit paid, and the maximum profit = the difference between the strike prices, less the debit.

BULL PUT SPREAD

This is a net credit transaction established by buying a put and selling another put at a higher strike price, on the same underlying, in the same expiration. It is a directional trade where the maximum loss = the difference between the strike prices, less the credit, and the maximum profit = the credit received.

BUTTERFLY SPREAD

A strategy involving four contracts of the same type at three different strike prices. A long (short) butterfly involves buying (selling) the lowest strike price, selling (buying) double the quantity at the central strike price, and buying (selling) the highest strike price. All options are on the same underlying, in the same expiration.

CALENDAR SPREAD

The simultaneous purchase and sale of options of the same type, but with different expiration dates. This includes the strategies: horizontal debit spreads, horizontal credit spreads, diagonal debit spreads, and diagonal credit spreads.

CONDOR

A strategy similar to the butterfly involving 4 contracts of the same type at four different strike prices. A long (short) condor involves buying (selling) the lowest strike price, selling (buying) 2 different central strike prices, and buying (selling) the highest strike price. All contracts are on the same underlying, in the same expiration.

LONG BACKSPREAD

It involves selling one option nearer the money and buying two (or more) options of the same type farther out-of-the-money, using the same type, in the same expiration, on the same underlying.

SHORT BACKSPREAD

It involves buying one option nearer the money and selling two (or more) options of the same type farther out-of-the-money, with the same expiration, on the same underlying.

STRADDLE

A strategy involving the purchase (or sale) of both call and put options with the same strike price, same expiration, and on the same underlying. A short straddle means that both the call and put are sold short, for a credit. A long straddle means that both the call and put are bought long, for a debit.

STRANGLE

A strategy involving the purchase or sale of both call and put options with different strike prices – normally of equal, but opposite, Deltas. The options share the same expiration and the same underlying. A strangle is usually a position in out-of-the-money options. A short strangle means that both the calls and puts are sold short, for a credit. A long strangle means both the calls and puts are bought long, for a debit.