Options Strategies Every Trader Should Know

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Options strategies are fixed combinations of calls, puts and sometimes shares, chosen to fit one specific market view: a modest rise, a modest fall, a big move in either direction, or almost no move at all. The ten strategies below cover most of what an individual trader will meet:

• Covered call and married put, which add an option to shares you own
• Bull call spread and bear put spread, which make a directional bet with capped cost
• Protective collar, which locks in a price range on a stock that has already gained
• Long straddle and long strangle, which aim to profit from a large move in either direction
• Long call butterfly, iron condor and iron butterfly, which aim to profit when the price stays in a range

Each one trades away something (upside, premium, or the chance of a large gain) to get something else (income, protection, a lower cost or a higher chance of a small profit). The useful skill is reading that trade-off before placing the order.

The building blocks behind every strategy

A call gives its holder the right, but not the obligation, to buy the underlying at the strike price until the expiration date. A put gives the right to sell at the strike. The buyer pays a premium to the seller (the writer), who takes on the obligation to deliver or buy the shares if the option is exercised.

For standard US equity options, one contract covers 100 shares, so a premium quoted at $2.00 costs $200 per contract. Currency options and options on futures use different contract sizes, so check the multiplier before applying any of the dollar figures below.

Three moneyness terms appear throughout:

• In the money (ITM): a call with a strike below the current price, or a put with a strike above it. The option has intrinsic value.
• At the money (ATM): strike at or very near the current price.
• Out of the money (OTM): a call with a strike above the price, or a put with a strike below it. The premium is all time value.

An option’s premium is intrinsic value plus time value. Time value shrinks as expiration approaches (time decay, measured by theta) and rises or falls with implied volatility (measured by vega). That is why two strategies with the same directional view can behave very differently: a long straddle loses money if implied volatility collapses after an earnings release, even if the stock moves, while an iron condor benefits from that same collapse.

All examples below are hypothetical: expiration-day values, one contract per leg with a 100-share multiplier, and no commissions, bid-ask spreads or taxes. Real fills will differ.

1. Covered call

Construction: own 100 shares and sell one call against them, usually OTM. When the stock and the call are bought and sold together, the trade is also called a buy-write.

The view: neutral to mildly bullish. You expect the stock to drift rather than surge, and you want to earn the call premium while you wait.

Hypothetical example: you buy 100 shares at $50 and sell one 55-strike call for $1.50 ($150).

• Maximum profit: ($55 − $50 + $1.50) × 100 = $650, reached at or above $55. Above that level the call is exercised or assigned and your shares are sold at $55.
• Breakeven: $50 − $1.50 = $48.50.
• Maximum loss: $48.50 × 100 = $4,850 if the stock goes to zero. The premium cushions a decline; it does not prevent one.

The name comes from the fact that the short call is “covered” by the shares. If the stock rallies hard, the loss on the short call is offset by the gain on the stock, so the position has no open-ended risk on the upside. What you give up is any gain above the strike. In this example, a jump to $70 still nets $650, while the unhedged shares would have gained $2,000.

That trade-off defines the strategy: you must be willing to sell the shares at the strike. Effectively, the premium lets you sell at the strike plus the premium received, $56.50 here.

2. Married put

Construction: buy 100 shares and buy one put on the same shares at the same time. Buying a put to protect shares you already held is usually called a protective put; the two terms are often used interchangeably.

The view: bullish, but you want a known worst case. The put acts like an insurance policy with a deductible.

Hypothetical example: you buy 100 shares at $50 and one 45-strike put for $2.00 ($200).

• Maximum loss: ($50 − $45 + $2) × 100 = $700. No matter how far the stock falls before expiration, you can sell at $45.
• Breakeven: $50 + $2 = $52. The stock must rise by the cost of the put before the combined position makes money.
• Maximum profit: unlimited in theory, minus the $200 premium.

If the stock never falls below $45, the put expires worthless and the $200 is the cost of the insurance. A closer strike gives a tighter floor but costs more; a farther strike is cheaper but leaves a larger gap before protection begins. Buying puts repeatedly also creates a steady drag on returns (see the section on protective puts below).

3. Bull call spread

Construction: buy a call at one strike and sell the same number of calls at a higher strike, same underlying, same expiration. It is a vertical spread and, because you pay to enter, a debit spread.

The view: moderately bullish. You expect a rise, but not an explosive one.

Hypothetical example: with the stock at $50, buy the 50-strike call for $3.00 and sell the 55-strike call for $1.00. Net debit: $2.00 ($200).

• Maximum loss: $200, if the stock closes at or below $50.
• Maximum profit: (spread width − debit) × 100 = ($5 − $2) × 100 = $300, at or above $55.
• Breakeven: lower strike + debit = $52.

Selling the higher call is a way to reduce the cost when outright calls look expensive. Here it cut the outlay from $300 to $200. The price of that discount is the cap: above $55, every dollar the long call gains is matched by the short call. The spread offers its best reward-to-risk when the stock rises only a moderate amount, roughly to the short strike. A trader expecting a much larger rally would be better served by the outright call.

4. Bear put spread

Construction: buy a put at one strike and sell the same number of puts at a lower strike, same underlying, same expiration. It is the bearish mirror of the bull call spread and is also a debit spread.

The view: moderately bearish.

Hypothetical example: with the stock at $50, buy the 50-strike put for $3.00 and sell the 45-strike put for $1.20. Net debit: $1.80 ($180).

• Maximum loss: $180, if the stock closes at or above $50.
• Maximum profit: ($5 − $1.80) × 100 = $320, at or below $45.
• Breakeven: higher strike − debit = $48.20.

Both potential losses and gains are limited. The structure suits a trader who wants bearish exposure without the open-ended risk of shorting the stock and without paying the full price of a put.

5. Protective collar

Construction: own the shares, buy an OTM put and sell an OTM call with the same expiration. A collar is effectively a covered call combined with a protective put.

The view: you have a profitable position, want to protect most of the gain, and are willing to give up further upside to pay for that protection.

Hypothetical example: you bought 100 shares at $80 and they now trade at $100. You buy the 95-strike put for $2.10 and sell the 105-strike call for $2.00, a net debit of $0.10 ($10).

• Floor: until expiration, you can sell at $95, so the worst outcome locks in roughly $14.90 per share of gain over your $80 cost ($95 − $80 − $0.10).
• Cap: above $105, the shares are likely to be called away at $105, for a gain of about $24.90 per share.
• Cost: nearly zero, because the call premium finances the put.

When the call premium fully covers the put, the position is often called a zero-cost collar. The trade-off is a possible obligation to sell at the call strike, which collar users usually accept because the purpose is to secure a gain they already have rather than to chase more.

6. Long straddle

Construction: buy a call and a put with the same strike (usually ATM) and the same expiration.

The view: a large move is coming, but you don’t know which direction.

Hypothetical example: with the stock at $100, buy the 100 call for $4.00 and the 100 put for $3.80. Total cost: $7.80 ($780).

• Maximum loss: $780, if the stock closes exactly at $100.
• Breakevens: $100 − $7.80 = $92.20 and $100 + $7.80 = $107.80.
• Maximum profit: unlimited on the upside; on the downside, up to $92.20 per share if the stock went to zero.

The P&L chart has two breakevens, and direction doesn’t matter as long as the move is large enough. The hard part is that ATM options carry the most time value, so the stock has to move 7.8% here just to break even. Straddles are often bought ahead of scheduled events, which is also when implied volatility, and therefore the premium, tends to be elevated. If the event comes and goes with a smaller move than the market priced in, both legs can lose value at once.

7. Long strangle

Construction: buy an OTM call and an OTM put, same underlying, same expiration, different strikes.

The view: the same as a straddle, a large move in either direction, expressed more cheaply. Typical candidates are an earnings release or a binary event such as a regulatory decision on a drug.

Hypothetical example: with the stock at $100, buy the 105 call for $1.90 and the 95 put for $1.70. Total cost: $3.60 ($360).

• Maximum loss: $360, if the stock closes anywhere between $95 and $105.
• Breakevens: $95 − $3.60 = $91.40 and $105 + $3.60 = $108.60.
• At $85 at expiration: the put is worth $10 ($1,000), the call expires worthless, and the net result is $1,000 − $360 = $640 profit.

Tip

Strangles almost always cost less than straddles on the same underlying and expiration, because both legs are OTM. The saving has a price: the breakevens sit farther away ($91.40 and $108.60 here versus $92.20 and $107.80 for the straddle), and there is a whole band of prices, not just a single point, where you lose the full premium. The choice comes down to how big you expect the move to be.

8. Long call butterfly spread

Construction: three strikes, all calls, same expiration. Buy one lower-strike call (ITM), sell two middle-strike calls (ATM), buy one higher-strike call (OTM). It combines a bull call spread and a bear call spread that share the middle strike. When the distance from each wing to the body is equal, the butterfly is balanced.

The view: the stock will stay near the middle strike through expiration.

Hypothetical example: with the stock at $100, buy the 95 call for $7.00, sell two 100 calls for $4.00 each, and buy the 105 call for $2.20. Net debit: $7.00 − $8.00 + $2.20 = $1.20 ($120).

• Maximum loss: $120, if the stock closes at or below $95 or at or above $105.
• Maximum profit: (wing width − debit) × 100 = ($5 − $1.20) × 100 = $380, if the stock closes exactly at $100.
• Breakevens: $96.20 and $103.80.

The payoff peaks at the middle strike and falls off on either side. Butterflies are cheap relative to their maximum payoff, but that maximum requires the stock to land almost exactly at one price. Most outcomes inside the profitable zone produce something smaller. Before expiration, a butterfly’s value changes slowly, so much of the profit tends to arrive in the final days if the price is sitting near the body.

9. Iron condor

Construction: sell an OTM put and buy a further-OTM put (a bull put spread), and sell an OTM call and buy a further-OTM call (a bear call spread). Four options, same underlying, same expiration. The two sides typically have the same width. You receive a net credit.

The view: low volatility. The stock will stay between the short strikes.

Hypothetical example: with the stock at $100, sell the 95 put, buy the 90 put, sell the 105 call and buy the 110 call, for a net credit of $1.80 ($180).

• Maximum profit: $180, kept in full if the stock closes between $95 and $105 and all four options expire worthless.
• Maximum loss: (spread width − credit) × 100 = ($5 − $1.80) × 100 = $320, if the stock closes at or below $90 or at or above $110. Only one side can lose at expiration, because the stock can’t be below $90 and above $110 at the same time.
• Breakevens: $95 − $1.80 = $93.20 and $105 + $1.80 = $106.80.

The long wings cap the loss that a short strangle would leave open, which makes the iron condor a common defined-risk way to sell options. Note the shape of the trade, though: the maximum loss is larger than the maximum profit. You get a higher chance of a smaller win in exchange for a lower chance of a larger loss. Moving the short strikes farther out widens the profit zone, lowers the credit and makes the loss-to-gain ratio worse.

10. Iron butterfly

Construction: sell an ATM put and an ATM call (a short straddle), then buy an OTM put and an OTM call as protective wings. All four options share an underlying and expiration. It resembles a butterfly but uses both calls and puts, and it opens for a credit rather than a debit.

The view: the stock will stay very close to the current price, ideally with implied volatility falling.

Hypothetical example: with the stock at $100:

• Sell one 100 call
• Sell one 100 put (together, the short ATM straddle)
• Buy one 110 call (caps the upside risk)
• Buy one 90 put (caps the downside risk)

Assume the four legs produce a net credit of $6.00 ($600).

• Maximum profit: $600, if the stock closes exactly at $100.
• Maximum loss: (wing width − credit) × 100 = ($10 − $6) × 100 = $400, at or beyond $90 or $110.
• Breakevens: $94 and $106.

The long OTM call protects against unlimited losses on the short call, and the long OTM put protects against the short put’s exposure all the way down to zero. Compared with an iron condor, the iron butterfly collects a larger credit relative to its width but has a narrower profit zone with a single peak.

One sanity check applies to every credit spread: the credit received can never exceed the width between the strikes. If a quote or a worked example shows a credit larger than the width, the maximum loss would be negative, which means something in the numbers is wrong.

Reading a strategy’s risk profile

Maximum profit, maximum loss and breakevens together describe a position’s risk profile, usually drawn as a payoff diagram or risk graph with the underlying price on the horizontal axis and P&L at expiration on the vertical axis. Many platforms add a probability of profit (POP), an estimate derived from implied volatility of how likely the price is to finish beyond the breakeven(s). POP is a model output, not a forecast, and it says nothing about the size of the loss when the trade doesn’t work.

Grouped by what each needs from the market:

Option selling vs. option buying

Option buying strategies (long calls, long puts, straddles, strangles, debit spreads) have a known maximum loss and need the price to move enough, and soon enough, to beat time decay. Option selling strategies (covered calls, short puts, credit spreads, condors, iron butterflies) earn time decay but must absorb the occasional large move.

A strategy built around “always win” premium selling is really a bet that the large move won’t arrive before expiration. Selling a naked call has theoretically unlimited risk, and a naked put risks everything down to a zero stock price, minus the premium. Defined-risk structures such as the iron condor exist to put a ceiling on that exposure. For any income strategy, compare the maximum loss to the credit and to the size of your account, not just how often trades win.

Are protective puts a waste of money?

Not by design, but they have a cost. In most periods the put expires worthless; in a sharp decline it caps the loss, leaving the position far better off than unhedged shares. Whether the cost is justified depends on how much a large drawdown would hurt you and how expensive puts are at the time. Implied volatility tends to rise after markets fall, so protection bought before a decline is usually cheaper than protection bought during one.

What is a calendar spread?

A calendar spread (also called a time or horizontal spread) buys and sells options on the same underlying, usually at the same strike, in different expirations. The most common version sells the near-term option and buys the longer-dated one. The near-term option loses time value faster, so the spread can profit if the price stays near the strike until the short leg expires. Because the long leg has more exposure to implied volatility, calendar spreads are also used to trade the volatility term structure. When strikes differ as well, the trade becomes a diagonal spread.

What is a box spread?

A box spread combines a bull call spread with a bear put spread that uses the same two strikes and the same expiration. Whatever the underlying does, the combined position is worth exactly the distance between the strikes at expiration. A 20/40 box, for example, always expires worth $20 per share ($2,000 per contract).

Before expiration, the box trades below that value, like a zero-coupon bond, so its price implies an interest rate and traders use boxes to borrow (by selling one) or lend (by buying one). Early assignment on a short leg of American-style options can break the structure, which is one reason boxes are often traded with European-style index options. Commissions on four legs can also erase the thin margin.

Practical points before placing a multi-leg trade

Approval and margin. Brokers typically assign options approval levels. Covered calls and long options usually need the lowest level; credit spreads and especially uncovered short options need higher levels and margin. A defined-risk spread usually ties up roughly its maximum loss in buying power.

Costs per leg. An iron condor has four legs, so four commissions and four bid-ask spreads on the way in and potentially four on the way out, which matters on a trade with a $180 maximum profit. Wide bid-ask spreads on illiquid strikes can turn a theoretical edge into a loss. Entering multi-leg trades as a single order with a net limit price avoids being filled on one leg and not the others.

Assignment and expiration. US equity options are American-style, so a short ITM option can be assigned before expiration, particularly a short call just before an ex-dividend date. If a spread is left open into expiration with the price between the strikes, one leg can be exercised while the other expires, leaving an unintended stock position over the weekend. Many traders close or roll spreads before the final day for that reason.

Volatility, not just direction. Debit strategies benefit when implied volatility rises; credit strategies benefit when it falls, so a correct directional call can still lose money. Check implied volatility against its own history before choosing between, say, a long straddle and an iron condor.

Managing before expiration. The payoffs above describe expiration. Before then, a position’s value depends on time remaining, implied volatility and the Greeks. Many traders set exit rules in advance, such as closing a credit spread after capturing a set share of the maximum profit or cutting it when the loss reaches a multiple of the credit. These are rules of thumb, not guarantees.

Choosing the right strategy

Start from two questions: what do you expect the price to do, and what do you expect implied volatility to do?

• Own the stock and expect little movement: covered call.
• Own the stock and fear a drop: married or protective put; collar if you want to offset the cost.
• Expect a moderate rise or fall: bull call spread or bear put spread.
• Expect a big move, direction unknown, volatility reasonably priced: long straddle, or long strangle for a cheaper entry.
• Expect a quiet market and elevated volatility to fade: iron condor for a wider zone, iron butterfly for a larger credit around one price, long butterfly for a low-cost debit version.

FAQs

The Bottom Line

Individual traders choosing among common options strategies should start with two expectations: where the price is heading and what implied volatility will do. Every structure gives up upside, premium or the chance of a large gain in return for income, protection or a lower cost. Check the maximum loss against the credit and your account size, and account for per-leg costs and assignment risk before placing a multi-leg order.