A 9AM Traders Academy initiative
Options Strategies Explained
Eighteen options strategies with a large payoff diagram for each one. See what you make, what you can lose and where you break even, before you place a single trade.
Options in plain words
An option is a contract that gives the buyer a right, not an obligation, to buy or sell something at a fixed price before a set date. The buyer pays a fee for that right. The seller takes the fee and accepts the obligation.
Call option
The right to buy at the strike price. A call gains value as price rises above the strike. Buyers are bullish.
Put option
The right to sell at the strike price. A put gains value as price falls below the strike. Buyers are bearish, or protecting shares.
An options strategy is a planned combination of calls, puts and sometimes shares, built so that the result suits your view on price. Traders can build hundreds of combinations, but a few cover almost every situation, and those are the eighteen below.
Strike price
The fixed price at which an option lets you buy (call) or sell (put).
Premium
What the buyer pays and the seller receives for the option. It is quoted per unit of the underlying.
Expiry
The date the option stops existing. After that it has no value except what is left at settlement.
Lot size
Options trade in fixed lots. To turn the points shown in the diagrams into rupees, multiply by the lot size.
In, at and out of the money
A call is in the money when price is above the strike, a put when price is below. At the money means price is at the strike. Out of the money is the opposite of in.
Time decay and volatility
Every option loses a little value each day (time decay). It also gets pricier when markets expect big swings and cheaper when they expect calm (implied volatility).
Which strategy fits your view?
Start with what you think price will do, then find strategies that match.
| Your view | Strategies to look at |
|---|---|
| Strongly bullish | Long call |
| Mildly bullish, defined risk | Bull call spread, bull put spread |
| Strongly bearish | Long put |
| Mildly bearish, defined risk | Bear put spread, bear call spread |
| Big move expected, direction unknown | Long straddle, long strangle |
| Quiet, range-bound market | Iron condor, iron butterfly, long call butterfly |
| Own shares and want income | Covered call |
| Own shares and want protection | Protective put, collar |
All 18 at a glance
| Strategy | Outlook | Risk | Reward |
|---|---|---|---|
| Long call | Bullish | Defined | Unlimited |
| Long put | Bearish | Defined | Capped |
| Short call | Bearish to neutral | Unlimited | Capped |
| Short put | Bullish to neutral | Defined | Capped |
| Covered call | Neutral to mildly bullish | Defined | Capped |
| Protective put | Bullish with insurance | Defined | Unlimited |
| Collar | Neutral, protected | Defined | Capped |
| Bull call spread | Moderately bullish | Defined | Capped |
| Bear put spread | Moderately bearish | Defined | Capped |
| Bull put spread | Neutral to bullish | Defined | Capped |
| Bear call spread | Neutral to bearish | Defined | Capped |
| Long straddle | Big move, either way | Defined | Unlimited |
| Long strangle | Big move, either way | Defined | Unlimited |
| Short straddle | Calm market | Unlimited | Capped |
| Short strangle | Calm market | Unlimited | Capped |
| Long call butterfly | Expect price near one level | Defined | Capped |
| Iron butterfly | Calm market, capped risk | Defined | Capped |
| Iron condor | Range-bound, capped risk | Defined | Capped |
Single option strategies
The four building blocks. Every larger strategy is made out of these.
Long call
BullishHow it is built
Buy one call option.
When traders use it
You expect a sharp rise and want your loss capped at the premium you paid.
Watch out for
Time works against you. If price does not move enough before expiry, the premium can go to zero even when your view on direction was right.
Long put
BearishHow it is built
Buy one put option.
When traders use it
You expect a fall, or you want cheap protection against one.
Watch out for
Like a long call, the move has to be big enough and quick enough to beat time decay.
Short call
Bearish to neutralHow it is built
Sell one call option without owning the shares.
When traders use it
You expect price to stay below the strike and want to collect the premium.
Watch out for
Risk is unlimited if price rallies hard, and margin needs are high. A gap up can hurt badly. This is not a beginner strategy.
Short put
Bullish to neutralHow it is built
Sell one put option.
When traders use it
You would be happy to own the stock at a lower price, or you expect it to hold above the strike.
Watch out for
Losses grow fast if price falls sharply, up to the strike minus the premium you collected. Needs margin.
Strategies with shares: income and protection
If you already hold shares, these three can earn extra income or insure the position.
Covered call
Neutral to mildly bullishHow it is built
Hold the shares and sell a call above the current price.
When traders use it
You hold shares, expect little upside soon and want extra income from the premium.
Watch out for
Your gains stop at the strike, while your downside is still the full fall in the shares, cushioned only by the premium.
Protective put
Bullish with insuranceHow it is built
Hold the shares and buy a put below the current price.
When traders use it
You want to stay invested but limit the damage if the market drops. It works like an insurance policy.
Watch out for
The put costs money each time you buy it, and rolling it again and again drags on your returns.
Collar
Neutral, protectedHow it is built
Hold the shares, buy a put below and sell a call above.
When traders use it
You want protection and use the premium from the call to pay for some or all of the put.
Watch out for
You give up gains above the call strike in exchange for cheaper protection.
Vertical spreads: defined risk
Buy one option and sell another of the same type. Risk and reward are both capped, and both known at the start.
Bull call spread
Moderately bullishHow it is built
Buy a call and sell a higher strike call with the same expiry.
When traders use it
You expect a steady rise and want to cut the cost of a plain long call.
Watch out for
Profit stops at the higher strike. You trade big upside for a lower cost.
Bear put spread
Moderately bearishHow it is built
Buy a put and sell a lower strike put with the same expiry.
When traders use it
You expect a steady fall and want a defined risk.
Watch out for
Gains stop at the lower strike.
Bull put spread
Neutral to bullishHow it is built
Sell a put and buy a lower strike put for protection.
When traders use it
You expect price to stay above the short strike and want to collect a credit.
Watch out for
The most you can lose is bigger than the most you can make, so you need to be right often.
Bear call spread
Neutral to bearishHow it is built
Sell a call and buy a higher strike call for protection.
When traders use it
You expect price to stay below the short strike and want to collect a credit.
Watch out for
A small credit for a larger defined risk, so the trade must work most of the time.
Volatility strategies: big move or no move
These do not care much about direction. They care about how far price travels.
Long straddle
Big move, either wayHow it is built
Buy a call and a put at the same strike.
When traders use it
You expect a large move but not which way, for example around results or a major event.
Watch out for
You pay two premiums, so price must move beyond the break-evens. If volatility drops after the event, you can lose even on a decent move.
Long strangle
Big move, either wayHow it is built
Buy an out-of-the-money call and an out-of-the-money put.
When traders use it
Like a straddle but cheaper, for when you expect an even bigger move.
Watch out for
The break-evens are wider, so price has to travel further before you make money.
Short straddle
Calm marketHow it is built
Sell a call and a put at the same strike.
When traders use it
You expect price to stay near the strike and volatility to fall.
Watch out for
Loss is unlimited on the upside and very large on the downside. One sudden event can erase weeks of premium.
Short strangle
Calm marketHow it is built
Sell an out-of-the-money call and an out-of-the-money put.
When traders use it
You expect a quiet range and want a wider safety zone than a short straddle.
Watch out for
Risk is open-ended in both directions. It needs strict rules and a lot of margin.
Range-bound strategies
Cap the risk on the short options by buying protection further away.
Long call butterfly
Expect price near one levelHow it is built
Buy one call at a lower strike, sell two calls at the middle strike and buy one call at a higher strike.
When traders use it
You expect price to finish close to the middle strike at expiry and want a low-cost trade.
Watch out for
Profit is only large close to the middle strike, so the timing has to be right.
Iron butterfly
Calm market, capped riskHow it is built
Sell a call and a put at the same strike, then buy a further call and put as protection.
When traders use it
You like the idea of a short straddle but want the risk capped.
Watch out for
The profit zone is narrow, and four legs mean more trading costs.
Iron condor
Range-bound, capped riskHow it is built
Sell an out-of-the-money call and put, and buy further out-of-the-money options as protection.
When traders use it
You expect price to stay inside a range until expiry and want to collect premium with a known maximum loss.
Watch out for
The most you can lose is much bigger than the most you can make. A sharp move through either side hurts, so plan an exit before price reaches the long strikes.
Five rules that protect your capital
- Know your worst caseBefore you enter, write down the most you can lose. If you cannot, do not trade it.
- Size smallRisk a small slice of your capital on any one trade. Options can lose most of their value fast.
- Respect expiryThe last few days move quickly. Decide in advance when you will exit instead of hoping.
- Check the event calendarResults, policy announcements and budgets can swing option prices sharply.
- Practise before payingPaper trade each strategy until you can predict its payoff without looking.
Options strategy questions, answered
Which options strategy is best for beginners?
Start by buying a call or a put so you see how premium and time decay behave. Then move to defined-risk spreads such as the bull call spread. Stay away from selling naked options until you understand margin and what a bad day looks like.
Are options riskier than shares?
It depends on how you use them. Buying an option risks only the premium, but you can lose all of it quickly. Selling naked options can lose far more than the premium you collect. Spreads, condors and butterflies cap the loss.
What does defined risk mean?
It means the maximum loss is known when you enter, because a protective option limits it. Vertical spreads, iron condors, iron butterflies and long butterflies are all defined-risk strategies.
How much money do I need to trade options?
Buying options needs only the premium times the lot size. Selling needs margin, which changes with the market. Use your broker’s margin calculator and begin with very small positions.
Why do I lose money when I am right about direction?
Time decay and falling implied volatility reduce the value of the option you bought. The move has to be big enough and quick enough to outrun both.
Learn options with a mentor
Work through these strategies on live charts and get your questions answered in a free demo class.
Published by 9AM Traders Academy as a free learning initiative. Also read our chart patterns guide. Payoff diagrams use example numbers and ignore brokerage, taxes and other charges. This page is for education only and is not investment advice. Options trading involves substantial risk and you can lose your entire investment.