Options strategies combine buying and selling options to create specific risk/reward profiles. From conservative income generation to aggressive speculation, there's a strategy for every outlook.
Watch Out
Options strategies involve significant risk. Understand each strategy thoroughly before trading with real money. This is educational content, not investment advice.
Strategy Categories
| Category | Risk Level | Goal |
|---|---|---|
| Income | Low-Medium | Generate premium income |
| Bullish | Medium-High | Profit from rising prices |
| Bearish | Medium-High | Profit from falling prices |
| Neutral | Low-Medium | Profit from no movement |
| Hedging | Varies | Protect existing positions |
Income Strategies
Covered Call
Setup: Own 100 shares + Sell 1 call against them
Best when: Slightly bullish, want income, willing to sell shares
| Component | Action | Strike | Premium |
|---|---|---|---|
| Stock | Own 100 | — | — |
| Call | Sell 1 | $110 | +$3.00 |
Risk/Reward:
- Max profit: Premium + (Strike - Stock price)
- Max loss: Stock price - Premium (if stock goes to $0)
- Breakeven: Purchase price - Premium received
Pro Tip
Covered calls are one of the most conservative options strategies. You're paid to potentially sell your stock at a higher price.
Cash-Secured Put
Setup: Sell a put while holding cash to buy shares if assigned
Best when: Want to buy stock at a lower price
| Component | Action | Strike | Premium |
|---|---|---|---|
| Put | Sell 1 | $95 | +$2.50 |
| Cash | Reserve | $9,500 | — |
Risk/Reward:
- Max profit: Premium received
- Max loss: Strike price - Premium (if stock goes to $0)
- Breakeven: Strike - Premium = $92.50
Bullish Strategies
Long Call
Setup: Buy 1 call
Best when: Strongly bullish, expect significant upside
Risk/Reward:
- Max profit: Unlimited
- Max loss: Premium paid
- Breakeven: Strike + Premium
Bull Call Spread
Setup: Buy 1 call at lower strike + Sell 1 call at higher strike
Best when: Moderately bullish, want to reduce cost
| Component | Action | Strike | Premium |
|---|---|---|---|
| Call | Buy 1 | $100 | -$5.00 |
| Call | Sell 1 | $110 | +$2.00 |
| Net | -$3.00 |
Risk/Reward:
- Max profit: Spread width - Net premium = $7.00 ($700)
- Max loss: Net premium paid = $3.00 ($300)
- Breakeven: Lower strike + Net premium = $103
Bearish Strategies
Long Put
Setup: Buy 1 put
Best when: Strongly bearish, expect significant downside
Risk/Reward:
- Max profit: Strike - Premium (if stock goes to $0)
- Max loss: Premium paid
- Breakeven: Strike - Premium
Bear Put Spread
Setup: Buy 1 put at higher strike + Sell 1 put at lower strike
Best when: Moderately bearish, want to reduce cost
Neutral Strategies
Iron Condor
Setup: Sell OTM call spread + Sell OTM put spread
Best when: Expect stock to stay in a range, want premium income
| Component | Action | Strike | Premium |
|---|---|---|---|
| Put | Buy 1 | $85 | -$0.50 |
| Put | Sell 1 | $90 | +$1.50 |
| Call | Sell 1 | $110 | +$1.50 |
| Call | Buy 1 | $115 | -$0.50 |
| Net Credit | +$2.00 |
Risk/Reward:
- Max profit: Net credit = $200
- Max loss: Spread width - Credit = $500 - $200 = $300
- Breakeven: $88 and $112
Pro Tip
Iron condors profit from low volatility and time decay. They're popular for generating income in range-bound markets.
Straddle
Setup: Buy 1 call + Buy 1 put at same strike
Best when: Expect big move, uncertain of direction
Strangle
Setup: Buy 1 OTM call + Buy 1 OTM put
Best when: Expect big move, want cheaper entry than straddle
Hedging Strategies
Protective Put
Setup: Own 100 shares + Buy 1 put
Best when: Want to protect gains, worried about downside
Risk/Reward:
- Max profit: Unlimited (stock appreciation)
- Max loss: Stock price - Strike + Premium paid
- Acts like insurance for your stock position
Collar
Setup: Own 100 shares + Buy 1 put + Sell 1 call
Best when: Want downside protection at minimal cost
The call premium offsets the put cost, creating low-cost protection.
Choosing the Right Strategy
| Market Outlook | Confidence Level | Strategy |
|---|---|---|
| Bullish | High | Long call |
| Bullish | Moderate | Bull call spread |
| Bullish | Low, want income | Covered call |
| Bearish | High | Long put |
| Bearish | Moderate | Bear put spread |
| Neutral | Range-bound | Iron condor |
| Volatile | Big move expected | Straddle/Strangle |
| Protective | Own stock, worried | Protective put, Collar |
Position Sizing Rules
- Never risk more than 2-5% of portfolio on one trade
- Account for max loss, not just premium
- Keep cash available for adjustments
- Diversify across strategies and underlyings
The Bottom Line
Options strategies let you create specific risk/reward profiles for any market outlook. Start with simpler strategies (covered calls, cash-secured puts) before advancing to complex multi-leg trades.
Quick Win
Use our Options Profit Calculator to visualize the profit/loss of any strategy before trading. Seeing the payoff diagram helps you understand exactly what you're risking and what you could gain.