Option Strategies

Basic Strategies

Long Call

Concept: Buying a call option, giving the right to buy the underlying asset at a specific price.

Use Case: When you expect the underlying asset's price to increase significantly.

Why Use It: Limited risk (premium paid) with unlimited profit potential. Requires less capital than buying the underlying asset.

Long Put

Concept: Buying a put option, giving the right to sell the underlying asset at a specific price.

Use Case: When you expect the underlying asset's price to decrease significantly.

Why Use It: Provides downside protection or allows profiting from a price decline with limited risk.

Covered Call

Concept: Owning the underlying asset and selling a call option against it.

Use Case: When you own stocks and want to generate additional income.

Why Use It: Provides income and some downside protection, but limits upside potential.

Spread Strategies

Bull Call Spread

Concept: Buying a call option and selling a higher strike call option with the same expiration.

Use Case: When you expect a moderate increase in the underlying asset's price.

Why Use It: Lower cost and risk compared to a long call, but with limited profit potential.

Bear Put Spread

Concept: Buying a put option and selling a lower strike put option with the same expiration.

Use Case: When you expect a moderate decrease in the underlying asset's price.

Why Use It: Lower cost and risk compared to a long put, but with limited profit potential.

Iron Condor

Concept: Selling an out-of-the-money put spread and an out-of-the-money call spread simultaneously.

Use Case: When you expect the underlying asset to remain within a specific price range.

Why Use It: Potential to profit from time decay and low volatility, with defined risk and reward.

Advanced Strategies

Butterfly Spread

Concept: Combining a bull spread and a bear spread with a common middle strike.

Use Case: When you expect little to no movement in the underlying asset's price.

Why Use It: Limited risk with potential for high reward if the asset price lands near the middle strike at expiration.

Calendar Spread

Concept: Selling a near-term option and buying a longer-term option at the same strike price.

Use Case: When you expect little near-term movement but increased volatility in the longer term.

Why Use It: Profits from time decay of the near-term option and potential increase in implied volatility.

Ratio Spread

Concept: Buying one option and selling multiple options of a different strike price.

Use Case: When you have a specific price target and want to leverage your position.

Why Use It: Potential for significant profits if your price target is hit, often with a credit received or lower cost basis.

Remember, each strategy comes with its own risk profile and is suitable for different market conditions and investor goals. It's crucial to thoroughly understand a strategy before implementing it.

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