10 Options Strategies To Know

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By
Lucas Downey
Updated October 10, 2024

Reviewed by
Samantha Silberstein
Fact checked by
Jared Ecker

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Options contracts allow investors to purchase the right, but not the obligation, to buy or
sell an asset at a set price before the option expires. These kinds of contracts are often
used as a hedge against risk in a portfolio, limiting losses in the case of a declining
market.

However, options trading itself can be risky, no matter the experience level of the trader.
Using specific, tested strategies can help investors limit risk and maximize returns.
Selecting the right strategy to use will depend on what position you have taken and what

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direction you expect you expect the market to move.

Because they require a thorough understanding of the options market, options trading
strategies aren't for novice investors. However, when used strategically, they can help
investors take advantage of the flexibility and power that stock options can provide.

Key Takeaways

Options trading might sound complex, but there are basic strategies that most
investors can use to improve returns, bet on the market's movement, or hedge
existing positions.
Covered calls, collars, and married puts are used when you already have an
existing position in the underlying shares.
Spreads involve buying one (or more) options and simultaneously selling another
option (or options).
Long straddles and strangles can generate a profit when the market moves either
up or down.

4 Options Strategies To Know

1. Covered Call
Beyond simply buying call options, the most popular option strategy is to structure
a covered call or buy-write transaction.

How It Works: To execute the strategy, you buy the underlying stock as usual and
simultaneously write—or sell—a call option on those same shares.

This is a popular approach because it generates income and reduces some risk of being
long on the stock alone. Investors using it often want to generate income by selling the
call premium or to protect against a potential decline in the underlying stock’s value.1

When To Use It: Investors can use this strategy when they have a short-term position in
the stock and a neutral opinion on its direction.

Risk vs. Profit: Must be willing to sell your shares at the short strike price.

A call option gives the option holder the right to buy the underlying asset, while a put
option gives the holder the right to sell the underlying asset. If you are not already familiar
with options trading, start with the basics before attempting to develop a more complex
strategy.

Example: Suppose you are using a call option on a stock that represents 100 shares of
stock per call option. For every 100 shares of stock you buy, you would simultaneously
sell one call option against it. This strategy is called a covered call because if a stock
price increases rapidly, the short call is covered by the long stock position.

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In the profit and loss (P&L) chart above, note that as the stock price increases, the
negative P&L from the call is offset by the long shares. Because you get a premium from
selling the call, as the stock moves through the strike price to the upside, your premium
allows you to effectively sell your stock at a higher level than the strike price: strike price
plus the premium received.

2. Married Put
How It Works: In a married put strategy, you buy an asset—such as shares of stock—
and simultaneously purchase put options for the same number of shares. The holder of a
put option has the right to sell stock at the strike price, and each contract is worth 100
shares.

Investors can use this strategy like an insurance policy; it establishes a price floor if the
stock's price falls sharply. This strategy is also known as a protective put, though that can
sometimes refer to purchasing a put option while holding shares from a previous
purchase.2

When To Use It: Used to protect against downside risk when holding a stock.

Risk vs. Profit: Losses are limited, but if the stock doesn't fall in value, the investor loses
the amount of the premium paid for the put option.

Example: Suppose an investor buys 100 shares of stock and buys one put option
simultaneously. This strategy is appealing since investors are protected if the stock price
drops—they can still exercise their option and sell the same number of shares at the price
in their option contract. Meanwhile, investors can profit from all the gains of the pricing
going up.

In the P&L graph above, with the long put and long stock positions combined, you can
see that as the stock price falls, the losses are limited. However, the investor profits
above the amount spent on the put.

3. Bull Call Spread

How It Works: In a bull call spread strategy, an investor simultaneously buys calls at a
specific strike price while also selling the same number of calls at a higher strike price.
Both call options will have the same expiration date and underlying asset.

This type of vertical spread strategy allows investors to benefit from using up less cash to
make the trade than other strategies, such as buying calls or initiating a covered call
trade. When outright calls are expensive, one way to offset the higher premium is by
selling higher strike calls against them.

When To Use It: Often used when an investor is bullish on the underlying asset and
expects a moderate rise in its price.

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Risk vs. Profit: Potential profit is limited. Trades have a larger reward-to-risk ratio when
the underlying stock price moves only a bit higher.3

The P&L graph above shows that the stock price has to increase for these trades to go off
successfully. The trade-off of a bull call spread is that your upside is limited (even though
the amount spent on the premium is reduced).

4. Bear Put Spread

How It Works: The bear put spread strategy is another vertical spread. In this strategy,
you simultaneously buy put options at a specific strike price and sell the same number of
puts at a lower strike price. Both options are purchased for the same underlying asset
and have the same expiration date.

For this strategy to be successful, the stock price needs to fall. If outright puts are
expensive, one way to offset the high premium is by selling lower strike puts against
them.

When To Use It: Best when the trader has a bearish sentiment about the underlying
asset and expects the asset's price to decline.

Risk vs. Profit: Limits both potential losses and gains.4

In the P&L graph above, you can see that this is a bearish approach. When employing a
bear put spread, your upside is limited, but the premium spent is lower.4

5. Protective Collar
How It Works: A protective collar is done by purchasing an out-of-the-money (OTM) put
option and simultaneously writing an OTM call option (of the same expiration) when you
already own the underlying asset.

This strategy is a neutral trade setup, meaning that you're protected should the price of
the stock fall. It provides downside protection since the long put helps lock in the potential
sale price.

When To Use It: Best after a long position in a stock has had substantial gains.

Risk. vs. Profit: Traders may need to sell shares at a higher price, forgoing the potential
for further profits.5

Example: Suppose you are long on 100 shares of IBM at $100 as of Jan. 1. You could
construct a protective collar by selling one IBM March 105 call and simultaneously buying
one IBM March 95 put. You are protected below $95 until the expiration date. The trade-
off is that you may be obligated to sell your shares at $105 if IBM trades at that price
before expiry.

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The P&L graph above shows that the protective collar is a mix of a covered call and a
long put. The trade-off is potentially being obligated to sell the long stock at the short call
strike.5 However, you'll likely be happy to do this because you have already profited from
the underlying shares.

6. Long Straddle
How It Works: A long straddle options strategy involves simultaneously buying a call
option and a put option on the same underlying asset with the same strike price and
expiration date. This strategy becomes profitable when the stock significantly shifts in one
direction or another. A significant enough shift in either direction is enough to cover the
premiums paid for the options and realize a profit.

When To Use It: Best when investors believe the underlying asset's price will move
significantly out of a specific range but are unsure of which direction it will go.6

Risk vs. Profit: Theoretical chance at unlimited gains. Maximum loss is limited to the
cost of both options contracts.

In the P&L graph above, there are two break-even points. It doesn't matter which direction
the stock moves as long as the move is large enough.

7. Long Strangle
How It Works: In a long strangle options strategy, you buy a call and a put option with a
different strike price: an OTM call option and an OTM put option simultaneously on the
same underlying asset with the same expiration date. Investors can use this strategy if
they believe the underlying asset's price will move significantly but are unsure of which
direction.7

An excellent use of this strategy would be a wager on news from an earnings release for
a company or an event related to a Food and Drug Administration approval for a
pharmaceutical company's new treatment. These are times when you can expect
volatility.

When To Use It: Best for high-volatility environments when the stock experiences large
price swings in either direction.

Risk vs. Profit: Losses are limited to the cost paid for both options.

Strangles will almost always be less expensive than straddles because the options
bought are OTM options.

Example: Suppose you've bought Starbucks stock, trading at $50 per share, and want to
employ a long strangle strategy by entering into two long options positions: one call and
one put, with the same expiration date. You buy a Starbucks call option with a strike price
of $52, paying a premium of $3 per share for a total cost of $300 (each option contract

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represents 100 shares). Meanwhile, you buy a Starbucks put option with a strike price of
$48, paying a premium of $2.85 per share for a total cost of $285. The combined cost of
both options is $585.

This strategy is designed to profit from an increase above the call strike price of $52 or a
decrease below the put strike price of $48. The trade has a maximum loss of $585 if the
stock price remains between $48 and $52 at expiration—so the worst result for you is if
the price stays stable.

If the stock price drops to $38 at expiration, the call option will expire worthless, but the
put option will gain value. The put will be worth $1,000 (100 shares × $10), and after
deducting the initial $285 cost for the put, the trader will have a net gain of $715 on the
put option. When the $300 loss from the expired call option is subtracted, the trader’s
total profit from the strangle strategy will be $415 ($715 - $300).

For this strategy to be profitable, Starbucks’ stock price must move significantly below the
break-even point of $42.15 or above $57.85 at expiration, covering the total cost of $5.85
per share for both options.

8. Long Call Butterfly Spread

How It Works: In a long butterfly spread using call options, you combine both a bull
spread strategy and a bear spread strategy. They will also use three different strike
prices. All options are for the same underlying asset and expiration date.

A long butterfly spread can be constructed by purchasing one in-the-money call option at
a lower strike price, selling two at-the-money (ATM) call options, and buying one OTM call
option. A balanced butterfly spread will have the same wing widths. This example is
called a “call fly, " resulting in a net debit.

When To Use It: Investors enter into a long butterfly call spread when they think the stock
will not move much before expiration.

Risk vs. Profit: Limited upside and downside

In the P&L graph below, notice how the maximum gain is when the stock remains
unchanged until expiration–at the point of the ATM strike. The further the stock moves
from the ATM strikes, the greater the negative change in the P&L. The maximum loss
occurs when the stock settles at the lower strike or below (or if the stock settles at or
above the higher strike call).

9. Iron Condor
How It Works: The iron condor is a neutral strategy designed to profit from low volatility.
The investor simultaneously holds a bull put spread and a bear call spread, and the iron
condor is constructed by selling one OTM put, buying one OTM put of a lower strike,
selling one OTM call, and buying one OTM call of a higher strike–a bear call spread.

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All options have the same expiration date and are on the same underlying asset.
Typically, the put and call sides have the same spread width. This approach earns a net
premium on the structure.

When To Use It: During times of low volatility. This strategy is best when you're not
expecting big price moves in the underlying stock.

Risk vs. Profit: The most profitable outcome occurs within the range of the strike prices
for the options sold.

Example: Say you collect $4 per iron condor ($400 for each 100-share contract) by
selling OTM puts and calls while protecting against large movements with further OTM
options. The maximum profit of $4,000 occurs if the stock price stays between $95 and
$110 at expiration, allowing all options to expire worthless. However, if the stock price falls
below $91 or rises above $114, the strategy begins to incur losses. The maximum loss of
$6,000 occurs if the stock price is below $85 or above $120 at expiration.

10. Iron Butterfly

How It Works: In the iron butterfly strategy, you sell an ATM put and buy an OTM put.
Meanwhile, you also sell an ATM call and buy an OTM call. All options have the same
expiration date and are on the same underlying asset. Although this strategy is like
a butterfly spread, it uses both calls and puts (instead of one or the other). Investors like
this strategy for the income it generates. With it, profit and loss are limited within a
specific range, depending on the strike prices of the options used.

This approach essentially combines selling an ATM straddle and buying protective
“wings.” You can also think of the construction as two spreads. It's common to have the
same width for both spreads. The long OTM call protects against unlimited upside. The
long OTM put protects against the downside (from the short put strike to zero).

When To Use It: Best for creating small gains with nonvolatile stock.

Risk vs. Profit: Maximum loss is limited to the width of the spread minus the premium
collected.

Example: Suppose you expect IBM's stock to rise slightly after a good earnings report,
with implied volatility declining in the coming two weeks. Thus, IBM's stock should remain
near $160 over the next two weeks. By selling an ATM straddle (selling both the 160 call
and 160 put) and buying further OTM options (the 165 call and 155 put), you collect a net
credit of $550.

The maximum profit occurs if IBM’s stock price stays at $160, allowing both sold options
to expire worthless. Your risk is capped by the OTM options you bought, which limits
losses if the stock price moves sharply beyond $154.50 or $165.50.

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You start the trade with an initial net credit of $550 ($5.50 per share) and will profit as long
as IBM’s stock price stays between $154.50 and $165.50 at expiration. You enter the
following trades:

Sell one IBM 160 call

Sell one IBM 160 put (creating the ATM straddle)
Buy one IBM 165 call (to limit upside risk)
Buy one IBM 155 put (to limit downside risk)

The distance between the strikes of the short call/put and the long call/put is $5 per share
(or $500 per contract).

Which Options Strategies Can Make Money in a Sideways Market?

A sideways market is one where prices don't change much over time, making it a low-
volatility environment. Short straddles, short strangles, and long butterflies all profit in
such cases, where the premiums received from writing the options will be maximized if
the options expire worthless (e.g., at the strike price of the straddle).

Are Protective Puts a Waste of Money?

Protective puts are insurance against losses in your portfolio. Like all other types of
insurance, you pay a regular premium to the insurer and hope that you never need to file
a claim. The same is true for portfolio protection: you pay for the insurance, and if the
market does crash, you'll be better off than if you didn't own the puts.

What Is a Calendar Spread?

A calendar spread involves buying (selling) options with one expiration and
simultaneously selling (buying) options on the same underlying in a different expiration.
Calendar spreads are often used to bet on changes in the volatility term structure of the
underlying.

What Is a Box Spread?

A box is an options strategy that creates a synthetic loan by going long a bull call spread
along with a matching bear put spread using the same strike prices. The result will be a
position that always pays off the distance between the strikes at expiration. So if you put
on a 20-strike, 40-strike box, it will always expire worth $20. Before expiration, it will be
worth less than $20, making it like a zero-coupon bond. Traders use boxes to borrow or
lend funds for money management purposes depending on the implied interest rate of the
box.

The Bottom Line

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While options trading can seem intimidating to new market participants, there are many
strategies that can help limit risk and increase return. Some strategies use several
offsetting options. Covered calls, collars, and married puts are among the options for
those who are already invested in the underlying asset, while straddles and strangles can
be used to establish a position when the market is on the move.

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