options strategies
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
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Call backspread |
Long Put spread or bear spread (volatility down) |
Short combo |
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Call ratio spread |
Long semi-futures (volatility up) |
Short condor Call |
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Long Call albatross |
Long semi-futures (volatility down) |
Short condor gut iron |
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Long gut iron albatross |
Long straddle |
Short condor iron |
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Long iron albatross |
Long strangle |
Short condor Put |
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Long albatross Put |
Long gut strangle |
Short fence (volatility up) |
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Long butterflies Call |
Long Call synthetic |
Short fence (volatility down) |
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Long butterflies gut iron |
Long Call semi-futures synthetic (volatility up) |
Short Call |
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Long butterflies iron |
Long Call semi-futures synthetic (volatility down) |
Short Put |
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Long butterflies Put |
Long Put synthetic |
Short Put christmas tree |
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Long Call christmas tree |
Long Put semi-futures synthetic (volatility up) |
Short Put spread or bull spread (volatility up) |
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Long Call spread or bull spread (volatility up) |
Long Put semi-futures synthetic (volatility down) |
Short Put spread or bull spread (volatility down) |
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Long Call spread or bull spread (volatility down) |
Long underlying |
Short semi-futures (volatility down) |
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Long combo |
Put backspread |
Short semi-futures (volatility up) |
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Long Call condor |
Put ratio spread |
Short straddle |
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Long gut iron condor |
Short Call albatross |
Short strangle |
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Long iron condor |
Short gut iron albatross |
Short gut strangle |
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Long condor Put |
Short iron albatross |
Short Call synthetic |
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Long fence (volatility up) |
Short Put albatross |
Short Call semi-futures synthetic (volatility up) |
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Long fence (volatility down) |
Short Call butterflies |
Short Call semi-futures synthetic (volatility down) |
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Long Call |
Short gut iron butterflies |
Short Put semi-futures synthetic (volatility up) |
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Long Put |
Short iron butterflies |
Short Put semi-futures synthetic (volatility down) |
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Long Put christmas tree |
Short Put butterflies |
Short Put synthetic |
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Long Put spread or bear spread (volatility up) |
Short Call christmas tree |
Short underlying |
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Long Put spread or bear spread (volatility down) |
Short Call spread or bear spread (volatility up) |
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Long semi-futures (volatility up) |
Short Call spread or bear spread (volatility down) |