Options trading is built on a small number of foundational strategies. While many advanced structures exist, they are all derived from the same core concepts of rights, obligations, risk, and reward. At Dorian Trader, these foundational strategies form the basis of all advanced trade construction and risk management decisions.
Below are ten essential options strategies that every trader should understand before progressing to more complex structures.
1. Long Call
A long call is a bullish options strategy that gives the buyer the right, but not the obligation, to purchase an underlying asset at a predetermined strike price before expiration. This strategy is typically used when a trader expects the underlying price to rise within a specific time frame.
Long calls offer unlimited upside potential, as there is no limit to how high the underlying price can move. The maximum loss is limited to the premium paid for the option, which also represents the total buying power required for the trade. If the option expires out-of-the-money, the entire premium is lost.
2. Long Put
A long put is a bearish options strategy that gives the buyer the right to sell an underlying asset at the strike price before expiration. This strategy is commonly used when a trader anticipates a decline in the underlying price.
The maximum profit of a long put is defined by the underlying’s ability to fall, with profits increasing as the price moves lower toward zero. The maximum loss is limited to the premium paid for the option. Buying power required is equal to the premium paid. Long puts benefit from downward price movement and increased volatility.
3. Short Call (Naked Call)
A short call, also known as a naked call, is created by selling a call option without owning the underlying shares. By selling the call, the trader takes on the obligation to sell shares at the strike price if assigned.
This strategy is bearish to neutral and profits when the underlying price stays below the short call strike. Maximum profit is limited to the premium received upfront. Maximum loss is theoretically unlimited, as there is no cap on how high the underlying price can rise. Buying power requirements are determined by broker margin rules and reflect the risk of the position.
4. Short Put (Naked Put)
A short put involves selling a put option and accepting the obligation to buy the underlying asset at the strike price if assigned. This strategy is bullish and is often used by traders who are comfortable owning shares at a lower effective price.
The maximum profit is limited to the premium received for selling the put. Maximum loss occurs if the underlying price falls to zero and is therefore large but defined. Buying power requirements vary depending on the underlying and margin type. The premium collected provides a cushion against downside movement.
5. Strangle
A strangle is a neutral options strategy that consists of selling an out-of-the-money call and an out-of-the-money put with the same expiration date. This structure benefits from time decay and limited price movement.
Maximum profit is the total premium received if the underlying price remains between the short strikes at expiration. Risk is theoretically unlimited due to the naked call on the upside, while downside risk extends toward zero on the put side. Strangles are typically used in high implied volatility environments when traders expect price consolidation.
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6. Iron Condor
An iron condor is a defined-risk variation of a strangle created by adding protective long options on both the call and put sides. The strategy consists of a short call spread and a short put spread with the same expiration.
The iron condor is a neutral strategy that profits when the underlying remains between the short strikes. Maximum profit is limited to the net credit received. Maximum loss is defined and equal to the width of the larger spread minus the credit received. Iron condors are widely used for consistent income generation with controlled risk exposure.
7. Short Put Spread (Bull Put Spread)
A short put spread is a bullish options strategy created by selling a put and buying a lower-strike put in the same expiration. The long put defines risk on the downside.
Maximum profit is limited to the net credit received for entering the spread. Maximum loss is defined and equal to the width of the spread minus the credit received. Buying power required is equal to the maximum loss. This strategy is commonly used when a trader expects the underlying to remain above the short put strike.
8. Long Put Spread (Bear Put Spread)
A long put spread is a bearish strategy created by buying a put and selling a lower-strike put with the same expiration. This structure reduces cost compared to buying a naked put.
Maximum profit is defined and equal to the width of the spread minus the debit paid. Maximum loss is limited to the debit paid to enter the trade. Buying power required is equal to the debit paid. Long put spreads are used when moderate downside movement is expected.
9. Sell Call Spread (Bear Call Spread)
A sell call spread is a bearish options strategy created by selling a call and buying a higher-strike call to cap risk. This structure benefits from time decay and limited upside movement.
Maximum profit is limited to the net credit received. Maximum loss is defined and equal to the width of the spread minus the credit received. Buying power required is equal to the maximum loss. Sell call spreads are commonly used when a trader expects the underlying to remain below the short call strike.
10. Buy Call Spread (Bull Call Spread)
A buy call spread is a bullish strategy created by buying a call and selling a higher-strike call in the same expiration. This structure lowers the cost of entry compared to buying a naked call.
Maximum profit is defined and equal to the width of the spread minus the debit paid. Maximum loss is limited to the debit paid. Buying power required is equal to the debit paid. Buy call spreads are typically used when a trader expects a controlled upward move in the underlying price.
All advanced options strategies are built from these foundational structures. By understanding how each strategy defines risk, profit potential, and market bias, traders can approach the options market with more confidence and discipline. Mastering these core strategies helps traders manage risk more effectively and make clearer decisions as market conditions change.
From O’Brian’s perspective, the bull put spread stands out as one of the most practical strategies for traders, especially those focused on consistency and risk control. He values this strategy for its defined risk, capital efficiency, and ability to generate income while allowing room for error. While no single strategy fits every market environment, the bull put spread is often a strong starting point for traders looking to build a structured and repeatable trading approach.
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