The right options trading strategies can boost your earnings significantly with fairly minimal upfront investment, although there’s risk involved. Not sure how to get started? Let’s walk through 10 popular strategies for option trading along with the possible outcomes of each.
Call option (“call”): Gives you the right, but not obligation, to buy an asset at a specific price by a certain date.
Put option (“put”): Gives you the right, but not obligation, to sell an asset at a specific price by a certain date.
Strike price: Price at which an option can be exercised — when you can buy or sell the asset.
Market price: Current buying or selling price of an asset.
Options spread: A single transaction involving buying or selling multiple options contracts with different strike prices or expiration dates.
Premium: The price you pay to buy an options contract (or the amount you receivfe if you sell one).
1. Covered call strategy
The covered call strategy involves selling call options on stock you own. If the stock doesn’t reach the strike price, you profit from keeping the option contract fees. But you have to sell your stock if the strike price is reached and the buyer decides to buy.
The covered call strategy is most successful when the stock price rises but doesn’t reach the strike price, leaving you with fees for a contract the buyer cannot exercise and stock you can sell at a higher price.
Use this strategy when you expect the stock price to stay flat or rise slightly.
How to use the covered call strategy
Buy stock. Options contracts are typically bought in multiples of 100, so you don’t have to buy if you already own 100+ stocks.
Sell call options. Selling a call option means you give a buyer the right to buy your stock at a specific strike price by a specific date (but the buyer may choose not to do so).
Collect the contract fee. Collect the option contract fee from the buyer. To increase your odds of keeping both the contract fees and your stock, choose a strike price above the current market price and a contract expiration date at least one month in the future.
Strategies for option trading: Covered call example
Say you own 100 Apple shares, and the current market price is $150. Sell a call option for $2 per share with a strike price of $170 and an expiration date of 1 month later. You get $200 (100 shares X $2 per contract).
3 possible outcomes:
Stock doesn’t reach the strike price by the expiration date. The options expire worthless, and you keep the $200 contract fee and your 100 stocks.
Stock rises, but doesn’t reach the strike price. You buy back the option for, say, $1 per stock ($100 total) and keep your stock. You profit $100 ($200 option contract fee, $100 paid to buy back the option) and can now sell another covered call and repeat the process.
Stock reaches the strike price. The buyer exercises the option to buy. You sell your 100 shares at $170 per share.
Covered call ETF
Looking to invest in a covered call ETF? Here are 6 funds you may want to consider:
Symbol
Name
TSX: HEE
Horizons Canadian Oil and Gas Equity Covered Call ETF
The bull call spread strategy involves placing two orders (known as “legs”) at the same time: buy a call option with a low strike price and sell a call option for the same stock with a higher strike price. The lower and higher strike prices create a range in which you can profit, although your profit is capped at the higher strike price.
Use the bull call spread strategy when you expect a stock’s value to experience limited or modest gains.
How to use the bull call spread strategy
Find a stock you think will rise in value. Look for a stock that’s showing steady upward momentum or has positive catalysts coming up, such as strong earnings reports or upcoming product launches.
Open a spread order. Buy a call option at one strike price, and add another leg by selling a call option at a higher strike price. Set the same expiration date for both contracts.
Close or let the position expire. If the stock price rises, the spread increases in value. You can sell it before expiration for a profit, or let it settle automatically at expiration. Your profit comes from the difference between the two strike prices, minus the net cost of entering the trade.
Strategies for option trading: Bull call spread example
You want to buy Apple stock because you think the price will rise. You open a spread order (a combination of 2 orders or positions) where you buy 1 call option for $2 that gives you the right to buy 100 Apple shares at a $150 strike price.
You also sell a call option for $1, giving a buyer the right to buy 100 Apple shares at $155. The fee from selling the second call helps offset part of the cost of buying the first call.
2 possible outcomes:
Stock price goes up. The price reaches the first option strike price of $150. This won’t trigger your trade if you entered the position as a spread. If the market price reaches the strike price by the expiration date, you buy 100 stocks for $150 each and sell those stocks for $155 each, profiting $5 per stock (for a total of $500) minus the net options contract fees.
Stock price goes down. Neither options contract is exercised. You only lose the buy call option fee you paid, minus the sell call option fee you earned.
3. Bear put spread strategy
Also known as a debit put spread or a long put spread, the bear put spread strategy involves placing two orders at the same time: buy a put option with a high strike price, and sell a put option for the same stock with a lower strike price.
The premium you receive from selling the lower strike put helps offset part of the cost of buying the higher strike put, making this strategy less expensive than purchasing a single long put.
The bear put spread works just like the bull call spread, except you profit if the stock price drops. This strategy is useful when you expect a stock to experience moderate to large losses.
How to use the bear put spread strategy
Find a stock you think will fall in value. Look for a stock that’s showing signs of weakness, negative earnings guidance or broader market headwinds. This strategy works best when you expect a steady decline, not a crash.
Open a spread order. Buy a put option at a high strike price, and sell a put option at a lower strike price. Set the same expiration date for both contracts.
Manage or close the position. If the stock price falls, the spread gains value. You can sell the spread before expiration for a profit, or let it settle automatically. Your maximum profit occurs when the stock price closes at or below the lower strike price at expiration.
Strategies for option trading: Bear put spread example
You suspect the price of Apple stock will decline and want to profit from the prediction. You open a spread order (a combination of 2 orders or positions) where you buy 1 put option that gives you the right to sell 100 Apple shares at a $150 strike price.
You also sell a put option that gives you the right to buy back 100 Apple shares at a $145 strike price. You pay a fee to buy the put options. By selling put options, you earn back some of what you spent to buy put options.
Note: You don’t need to own Apple stocks to exercise a put order (the right to sell). You just need enough money to exercise the trade. Your broker will hold your funds as collateral until the options contracts are exercised.
2 possible outcomes:
Stock price goes down. This is ideal. Say Apple’s stock price is now $140. You sell Apple stocks at the $150 strike price and buy the stocks back at the second strike price of $145, pocketing the difference minus the contract fees.
Stock price goes up. Your options contracts aren’t exercised and expire as worthless. You’ve only lost the premium you paid to buy the put options contract.
4. Protective put (married put) strategy
The protective put strategy, also known as the married put strategy, involves buying a put option on stock you already own so you have the right to sell it at the strike price. This strategy is useful as an insurance policy, limiting your losses if a stock doesn’t perform as well as you think it will.
Protective put vs. Stop-loss order
A stop-loss order is exercised as soon as the strike price is reached, regardless of whether a more favourable price is reached afterwards. With a protective put, you have the option to exercise a trade until the expiration date, giving you the chance to trade when the strike price is reached or wait to see if the price moves in a more favourable direction.
How to use the protective put strategy
Buy stock. Options contracts are typically bought in multiples of 100, so you don’t have to buy if you already own 100+ stocks.
Buy a put option. This gives you the right, but not the obligation, to sell your stock at a certain price. The strike price should be set at a point where you’re comfortable taking a loss.
Exercise your option if the strike price is reached. If your stock goes down in value, selling can limit your losses.
Strategies for option trading: Protective put example
Say you have 100 Apple shares currently valued at $150. The market suddenly takes a downturn, and you’re worried your stock will be affected. You buy 1 put option for $2 per stock ($2 x 100 shares = $200) with a strike price of $140, giving you the right the sell if the stock price falls to $140.
2 possible outcomes:
Stock price rises (you were wrong). Against your expectations, the stock rises to $200. Your option expires worthless, and you lose the contract fee of $200. However, this is offset by gains from the stock price rising.
Stock price goes down beyond the strike price (you were right). As expected, the stock price falls to $120. You exercise your option and sell for $140 per stock. You lose the contract fee you paid ($200), but if you hadn’t bought an option, you would have lost $20 per stock ($2,000 total).
5. Long straddle strategy
The long straddle strategy involves buying a long call option and a long put option on the same stock with the same strike price and expiration date. This gives you the right to buy or sell the stock if the strike price is reached.
This strategy is useful when you think a stock’s price will strongly change based on market-influencing factors (such as earnings reports or legislative changes), but you aren’t sure whether the price will go up or down.
To profit, the stock price needs to change in value enough to exceed the cost of buying both types of options. So, the long straddle strategy isn’t suitable unless you anticipate the stock price will change significantly.
How to use the long straddle strategy
Buy a call (right to buy) option. The strike price should be “at the money” (current market price) or as close to it as possible.
Buy a put (right to sell) option for the same stock. Set the same strike price and expiration date as the call option.
Exercise your option if the stock price changes. If the stock price goes up, exercise your call option to buy the stock at a lower price than it’s worth. If the stock price goes down, exercise your put option to sell stock at a higher price than it’s worth.
Strategies for option trading: Long straddle example
You buy a $2 call option on Apple stock with a strike price of $150, giving you the right to buy 100 Apple shares at this price. In addition, you buy a $2 put option on Apple stock with a strike price of $150 and the same expiration date. This gives you the right to sell 100 Apple stocks at $150.
2 possible outcomes:
Stock price goes down. The price drops to $120. You exercise your put option and sell 100 stocks at the strike price of $150. Your call option, or the right to buy Apple stocks, expires worthless. Your only cost is the total fee you paid to buy both the call and put contracts ($4 per stock).
Stock price goes up. By the expiration date, the stock price rises to $170. You exercise your call option to buy 100 Apple stocks at $150. Your cost is also the total fee you paid for both the call and put contracts ($4 per stock).
6. Long strangle strategy
The long strangle strategy is similar to the long straddle, except the strike prices are different. In a long strangle, you buy a call option with a strike price above the current market price and a put option with a strike price below the current market price. Both options have the same expiration date, but since they’re out of the money, the total cost is lower than a long straddle.
How to use the long strangle strategy
Find a stock you expect to move sharply. Look for companies about to release earnings, make major announcements or experience significant market volatility.
Buy a call option. Choose a strike price slightly above the current market price.
Buy a put option. Choose a strike price slightly below the current market price, with the same expiration date as the call option.
Exercise the profitable option. If the stock rises sharply, your call option increases in value. If it falls sharply, your put option gains value.
Strategies for option trading: Long strangle example
You buy a call option for $2 on Apple stock with a strike price of $155, and a put option for $2 with a strike price of $145. Both expire in one month.
2 possible outcomes
Stock price rises. The stock climbs to $165. You exercise your call option and buy 100 Apple shares at $155, profiting $10 per share ($1,000 total) minus $400 in premiums.
Stock price falls. The stock price drops to $135. You exercise your put option and sell 100 shares at $145, again profiting $10 per share ($1,000 total) minus $400 in premiums.
7. Protective collar strategy
The protective collar strategy involves buying a put option (right to buy) with a strike price below the current market price and selling a call option (obligation to sell) with a strike price above the current market price. The fee earned from selling the call option helps offset the cost of buying the put option.
This strategy aims to protect your stock from potential short-term losses. It’s suitable if you’re unsure which direction a stock is going to move.
Protective collar vs. Bull call spread
With the protective collar strategy, you buy a put option and sell a call option. With the bull call spread strategy, you buy a call option and sell a higher-strike call option.
You profit from a bull call spread if the stock price rises. But if it drops, neither option you purchased is exercised, and you only lose the options contract fees you paid. The bull call spread is suitable if you expect a stock to experience modest gains.
The protective collar strategy is also profitable if the stock price rises. But if it drops, you’re forced to sell at a loss, although the loss is limited by the fact that the strike price is higher than the market price. The protective collar is suitable if you aren’t sure how a stock is going to move, and you want to guard against losses.
How to use the protective collar strategy
Buy stock. Options contracts are typically bought in multiples of 100, so you don’t have to buy if you already own 100+ stocks.
Buy a put option. Set the strike price below the current market price. If the stock price goes lower than the strike price, you can limit losses by selling at the strike price.
Sell a call option. The strike price should be above the current market price, and the expiration date should be the same as the put option you bought. You’ll be obligated to sell if the strike price is reached.
Strategies for option trading: Protective collar options example
You buy 100 Apple shares for $140 each. Later, you buy a $2 put option with a strike price of $135, giving you the right to sell at $135 if the stock price tanks. The cost is $200 ($2 contract fee X 100 shares).
You simultaneously sell a $1.50 call option with a strike price of $150, giving you the right to sell if the price reaches $150. You earn $150 from this transaction ($1.50 contract fee X 100 stocks).
2 possible outcomes:
Stock price goes down. The price drops to $120. You exercise your option to sell at $135, limiting your losses to $500 (100 stocks X $5 difference between the purchase and sale price) instead of $2,000 (100 stocks X $20 difference between the purchase and sale price).
Stock price goes up. By the expiration date, the stock price rises to $160. You sell your stocks at $150, earning $10 more than you paid to buy each stock. Your cost is $50 ($200 paid to buy put options minus $150 collected for selling call options).
8. Long call butterfly spread strategy
The long call butterfly spread strategy combines three strike prices and four option contracts to profit when a stock’s price stays relatively stable. It involves buying one call option at a lower strike price, selling two call options at a middle strike price and buying one call option at a higher strike price, all with the same expiration date.
How to use the long call butterfly spread strategy
Choose a stock with low volatility. Consider companies
Buy and sell the call options. Buy one call option at a lower strike price, sell two call options at a middle strike price and buy one call option at a higher strike price.
Hold until expiration. You profit if the stock’s price ends up close to the middle strike price because the options you sold expire worthless while your lower strike call retains value.
Strategies for option trading: Long call butterfly spread example
You create a butterfly spread on Apple stock using three strike prices:
Buy 1 call at $145 for $4
Sell 2 calls at $150 for $2 each
Buy 1 call at $155 for $1
This makes your net cost $1
2 possible outcomes
Stock stays near $150. All options except the middle call expire worthless. You profit from the difference between the lower strike and the middle strike minus your net cost.
Stock moves sharply up or down. Your loss is limited to the $100 total premium paid.
9. Iron condor strategy
The iron condor strategy involves four options: you sell a call and a put at strike prices near the current market price, then buy another call and put at farther strike prices to limit risk. All options have the same expiration date.
How to use the iron condor strategy
Find a low volatility stock. This strategy works best when price movement is minimal.
Sell a call and a put. Choose strike prices close to the current market price to collect premiums.
Sell a call and a put at farther strike prices. This protects against large losses if the stock moves too far in either direction.
Hold to expiration. You profit if the stock price remains between the two short strike prices.
Strategies for option trading: Iron condor example
You sell a $145 put and a $155 call on Apple stock while buying a $140 put and a $160 call to protect against losses.
2 possible outcomes
Stock stays between $145 and $155. All options expire worthless, and you keep the premiums from the short options.
Stock moves beyond either outer strike. Your loss is limited because of the long call and put that protects the position.
10. Iron butterfly spread strategy
The iron butterfly strategy is similar to the iron condor, but it uses the same middle strike price for both the short call and short put. It involves selling one call and one put at the same strike price (the “body”) and buying one call and one put at farther strike prices (the “wings”).
How to use the iron butterfly spread strategy
Choose a stable stock. This strategy profits most when prices barely move.
Sell a call and a put at the same strike price. This creates the “body” of the butterfly.
Buy a call and a put at higher and lower strike prices. This creates the “wing” of the butterfly and protects against sharp moves.
Hold to expiration. Maximum profit occurs if the stock closes exactly at the middle strike price.
Strategies for option trading: Iron butterfly spread example
You sell a $150 call and a $150 put on Apple stock. You also buy a $155 call and a $145 put for protection.
2 possible outcomes
Stock stays near $150. All options expire worthless except the short call and put, which you collected premiums for. This results in maximum profit.
Stock moves far up or down. Your losses are limited by the long call and put that cap risk on both sides.
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How to decide which of these options trading strategies is right for you
There are many options strategies, only some of which are covered in this guide. Here are some tips for figuring out which strategy could be useful for you:
Covered call strategy: Use when you don’t expect a stock’s price to change much in the next little while and intend to hold on to your stock for a while.
Bull call spread strategy: Use when you expect a stock’s value to experience limited or modest gains and want to limit your upfront cost.
Bear put spread strategy: Use when you expect a stock to experience moderate to large losses.
Protective put (married put) strategy: Useful for limiting your losses if a stock doesn’t perform as you expect while still allowing potential gains.
Long straddle strategy: Use when you expect a big price move soon and want to profit from volatility in either direction with options at the same strike price.
Long strangle strategy: Use when you expect extreme volatility in either direction but want to lower upfront costs by using out-of-the-money options with different strike prices.
Protective collar strategy: Helps protect your stock from potential short-term losses if you’re unsure which direction a stock is going to move.
Long call butterfly spread strategy: Use when you expect a stock’s price to remain near a specific level by expiration.
Iron condor strategy: Use when you expect a stock’s price to stay within a specific range.
Iron butterfly strategy: Use when you expect a stock’s price to stay very close to one price level until expiration.
Pros of options trading
Leverage: You can control a large number of shares for a fraction of the cost of buying the stock outright.
Flexibility: Options can be used for various strategies, such as speculating, hedging against losses or generating income.
Limited risk (for buyers): When you buy options, your maximum loss is limited to the premium you paid.
Profit in any market direction: You can design strategies to benefit from rising, falling or even stagnant markets.
Hedging tool: Options can protect your portfolio from downside risk by acting like insurance.
Cons of options trading
Complexity: Options require understanding multiple factors, like time decay and market volatility, that affect prices.
Time sensitivity: Options expire and their value erodes over time, even if the stock doesn’t move.
High risk (for sellers): Selling options can expose traders to large or even unlimited losses.
Commissions and fees: Frequent trading and multiple contracts can lead to higher transaction costs.
Steep learning curve: Successful options trading requires skill, research and disciplined risk management.
Bottom line
Options trading can boost your earnings and diversify your investment portfolio, but it comes with risk. Start small, pick strategies that match your goals and comfort level and make sure you understand how each trade works. With the right knowledge and careful planning, option trading can be a useful tol to grow and protect your investments.
Frequently asked questions about options strategies
An option is a financial derivative, which means you don't trade a security directly. Instead, you trade the right (but not obligation) to buy or sell a security at a specific price by a specific date (called the "expiration date"). The terms of the transaction are laid out in a contract agreed upon by the buyer and seller.
The best strategy for options trading depends on your level of confidence in how a stock's price will move in the short or long run, whether you think it'll move a little or a lot, how much you prioritize preventing loss, the degree to which the market is volatile/predictable and other factors.
If you aren't reasonably confident of how a stock will move and/or can't afford to take a loss, you should consider a less risky investment strategy.
The covered call strategy is considered by many to be one of the safest options strategies, because it requires that you actually own stock and you can earn money from selling call options. But there's still risk involved, as the value of your stocks could go down.
Sources
Important information: Powered by Finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Kliment Dukovski was a personal finance writer at Finder, specializing in investments and cryptocurrency. He's written more than 700 articles to help readers compare the best trading platforms, understand complex investment terms and find the best credit cards for their needs. His expert commentary has been featured in such digital publications as Fox Business, MSN Money and MediaFeed. He’s also well-versed in money transfers, home loans and more — breaking down these topics into simple concepts anyone can understand. In another life, Kliment ghostwrote guides and articles on foreign exchange, stock market trading and cryptocurrencies.
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