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Options Trading Strategies

Key Points to Remember:

  • ALL options eventually lose ALL of their "time value."
  • ALL "Out-Of-The-Money" options expire worthless.
  • Markets only "trend" 1/3 of the time; they move sideways the other 2/3.

BULLISH Market Strategies

Option Spread Strategy Description Reason to use When to use
Buy a Call Strongest bullish option position. Loss limited to premium paid. Undervalued option with volatility increasing.
Sell a Put Neutral bullish option position. Profit limited to premium received. High volatility, bullish trending market.
Buy Vertical Bull Call Spread Buy Call & sell Call of higher strike price. Loss limited to debit. Small debit, bullish market.
Sell Vertical Bear Put Spread Sell Put & buy Put of lower strike price. Loss limited to strike price difference less premium received. Large credit, bullish market.

 

BEARISH Market Strategies

Option Spread Strategy Description Reason to use When to use
Buy a Put Strongest bearish option position. Loss limited to premium paid. Undervalued option with increasing volatility.
Sell a Call Neutral bearish option position. Profit limited to premium received. Option overvalued, market flat to bearish.
Buy Vertical Bear Put Spread Buy at the money Put & sell out of the money Put. Loss limited to debit. Small debit, bearish market.
Sell Vertical Bull Call Spread Sell Call & buy Call of higher strike price. Loss limited to strike price difference minus credit. Large credit, bearish market.

 

NEUTRAL Market Strategies

Option Spread Strategy Description Reason to use When to use
Strangle Sell out of the money Put & Call. Maximum use of time value decay. Trading range market with volatility peaking.
Arbitrage Buy & sell similar options simultaneously. Profit certain if done at credit. Any time credit received.
Calendar Sell near month, buy far month, same strike price. Near month time value decays faster. Small debit, trading range market.
Butterfly Buy at the money Call (Put) & sell 2 out of the money Calls(Puts) & buy out of the money Call (Put). Profit certain if done at credit. Any time credit received.
Guts Sell in the money Put & Call. Receive large premium. Options have time premium & market in trading range.
Box Sell Calls & Puts same strike price. Profit certain if done at credit. Any time credit received.
Ratio Call Buy Call & sell Calls of higher strike price. Neutral, slightly bullish. Large credit & difference between strike price of option bought & sold.
Conversion Buy futures & buy at the money Put & sell out of the money Call. Profit certain if done at credit. Any time credit received.

 

Special Market Situations

Option Spread Strategy Description Reason to use When to use
Straddle Purchase Buy Put & Call. Options will lose time value premium quickly. Options under-valued & market likely to make a big move.
Covered Call Buy future & sell Call. Collect premium on Calls sold. Neutral to slightly bullish.
Covered Put Sell future & sell Put. Collect premium of Puts sold. Neutral to slightly bearish.
Synthetic futures position. Buy Call (Put) & Sell Put (Call). Neutral, slightly trending market. Receive credit, option sold far out of the money.

 

74 Option Trading Strategies

Call backspread

Long Put spread or bear spread (volatility down)

Short combo

Call ratio spread

Long semi-futures (volatility up)

Short condor Call

Long Call albatross

Long semi-futures (volatility down)

Short condor gut iron

Long gut iron albatross

Long straddle

Short condor iron

Long iron albatross

Long strangle

Short condor Put

Long albatross Put

Long gut strangle

Short fence (volatility up)

Long butterflies Call

Long Call synthetic

Short fence (volatility down)

Long butterflies gut iron

Long Call semi-futures synthetic (volatility up)

Short Call

Long butterflies iron

Long Call semi-futures synthetic (volatility down)

Short Put

Long butterflies Put

Long Put synthetic

Short Put christmas tree

Long Call christmas tree

Long Put semi-futures synthetic (volatility up)

Short Put spread or bull spread (volatility up)

Long Call spread or bull spread (volatility up)

Long Put semi-futures synthetic (volatility down)

Short Put spread or bull spread (volatility down)

Long Call spread or bull spread (volatility down)

Long underlying

Short semi-futures (volatility down)

Long combo

Put backspread

Short semi-futures (volatility up)

Long Call condor

Put ratio spread

Short straddle

Long gut iron condor

Short Call albatross

Short strangle

Long iron condor

Short gut iron albatross

Short gut strangle

Long condor Put

Short iron albatross

Short Call synthetic

Long fence (volatility up)

Short Put albatross

Short Call semi-futures synthetic (volatility up)

Long fence (volatility down)

Short Call butterflies

Short Call semi-futures synthetic (volatility down)

Long Call

Short gut iron butterflies

Short Put semi-futures synthetic (volatility up)

Long Put

Short iron butterflies

Short Put semi-futures synthetic (volatility down)

Long Put christmas tree

Short Put butterflies

Short Put synthetic

Long Put spread or bear spread (volatility up)

Short Call christmas tree

Short underlying

Long Put spread or bear spread (volatility down)

Short Call spread or bear spread (volatility up)

 

Long semi-futures (volatility up)

Short Call spread or bear spread (volatility down)

 
  

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