# Option Strategies

## What is an Option Strategy

An option strategy is an investment and risk management tool that can consist of one option contract or a combination of different option contracts that have a specific goal, such as reducing risk, generating income or speculating on market direction. Option strategies can be bullish, bearish or neutral and there are many different option strategies that a trader or investor can use, each with their own unique advantages and risks. Here are some of the most popular option strategies and how they work.

### Long Call Strategy

A long call strategy involves buying a call option, which gives the holder the right, but not the obligation, to buy an underlying asset at a specific price, known as the strike price, on or before a certain date, known as the expiration date. By buying a call option, the trader pays a premium and is betting that the price of the underlying asset will increase enough to allow them to sell the option at a higher price than the premium they paid for it.

### Short Call Strategy

A short call strategy involves selling a call option, which gives the holder the right, but not the obligation, to buy the underlying asset at a specific price. By selling a call option, the trader collects a premium and is betting that the price of the underlying asset will remain the same or decrease enough to be able to buy back the option at a lower price than they sold it for. If the call expires worthless, the seller has earned the maximum profit, which is the full premium.

### Long Put Strategy

A long put strategy involves buying a put option, which gives the holder the right, but not the obligation, to sell an underlying asset at a specific price on or before a certain date. By buying a put option, the trader pays a premium and is betting that the price of the underlying asset will decrease enough to allow them to sell the option at a higher price than the premium they paid for it.

### Short Put Strategy

A short put strategy involves selling a put option, which gives the holder the right, but not the obligation, to sell the underlying asset at a specific price. By selling a put option, the trader collects a premium and is betting that the price of the underlying asset will remain the same or increase enough to be able to buy back the option at a lower price than they sold it for. If the put expires worthless, the seller has earned the maximum profit, which is the full premium.

### Covered Call Strategy

A covered call strategy involves buying an underlying asset, such as a stock, and simultaneously selling a call option on that same asset at a strike price that is higher than the current price. By selling the call option, the trader is generating income in the form of the option premium. If the stock price does not exceed the strike price by the expiration date, the trader has earned the full premium and they still owns the stock.

However, if the price of the stock increases above the strike price, the trader may be required to sell the stock at the strike price, potentially missing out on further gains but they will have locked in an additional profit, which is the difference between the price they paid and the price they sold it at.

### Protective Put Strategy

A protective put strategy involves buying an underlying asset, such as a stock, and simultaneously buying a put option on that same asset. By buying the put option, the trader is hedging against a potential decrease in the price of the underlying asset. If the price of the underlying asset decreases, the trader can exercise the put option to sell the underlying asset at the strike price.

### Bull Call Spread Strategy

A bull call spread is a vertical spread strategy that involves buying a call option and simultaneously selling a call option on the same underlying asset at a higher strike price with both options having the same expiration date. By selling the call option with the higher strike price, the trader is reducing the cost of owning the spread with the creation of a debit spread.

A bull call spread makes money when the underlying stock price goes up since the bull call spread value increases with the stock price. The ideal situation is when the stock price goes above the long call (purchase) strike price but stops at the short call (sale) strike price at expiration.

### Bull Put Spread Strategy

A bull put spread is a vertical spread strategy that involves selling a put option and simultaneously buying a put option on the same underlying asset at a lower strike price with both options having the same expiration date. By selling the put option with the higher strike price, the trader is collecting more premium than they are paying, which creates a credit spread.

A bull put spread makes money when the underlying stock price goes up since the bull put spread value will decrease when the stock price increases. It will also make money as time passes (time decay) with the stock price above the short put strike price. The ideal situation is when the stock price is expected to have little movement or not go above the short call strike price at expiration.

### Bear Call Spread Strategy

A bear call spread is a vertical spread strategy that involves selling a call option and simultaneously buying a call option on the same underlying asset at a higher strike price with both options having the same expiration date. By selling the call option with the lower strike price, the trader is collecting more premium than they are paying, which creates a credit spread.

A bear call spread makes money when the underlying stock price goes down since call option prices go down when the stock price decreases. It will also make money as time passes (time decay) with the stock price below the breakeven price. The ideal situation is when the stock price is expected to have little movement and not go above the short call strike price at expiration.

### Bear Put Spread Strategy

A bear put spread is a vertical spread strategy that involves buying a put option and simultaneously selling a put option on the same underlying asset at a lower strike price with both options having the same expiration date. By selling the put option with the lower strike price, the trader is reducing the cost owning the spread with the creation of a debit spread.

A bear put spread makes money when the underlying stock price goes down since the put spread value increases when the stock price decreases. The ideal situation is when the stock price is expected to move lower but not lower than the short put (sale) strike price.

### Straddle Strategy

A straddle strategy involves buying a call option and a put option with the same strike price and expiration date. By buying both options, the trader is betting that the price of the underlying asset will be very volatile and that it may move in either direction.

If the price of the underlying asset increases, the trader can sell the call option at a higher price or exercise the call option to buy the underlying asset at the strike price. If the price of the underlying asset decreases, the trader can sell the put option at a higher price or exercise the put option to sell the underlying asset at the strike price.

The ideal situation is if the price is volatile in both directions, the trader may be able to sell both contracts at a profit prior to the expiration date.

### Strangle Strategy

A strangle strategy is similar to the straddle but the strike prices for the call and put options are different. By buying both options, the trader is betting that the price of the underlying asset will be volatile and that it will move in either direction in a wider trading range. However, because the strike prices are different, the trader is betting that the price of the underlying asset will move more significantly in one direction than the other.

The ideal situation is if the price is highly volatile in both directions, the trader may be able to sell both contracts at a profit prior to the expiration date.

In conclusion, options trading is a powerful tool that can be used to gain exposure to different assets, manage risk and potentially generate income. Different option strategies can help to reduce the cost of trading, reduce risk and maximize profit. However, it is important to understand the different option strategies and when they should be applied.

Whenever you are making investment decisions, it is also important to understand the potential risks and rewards before engaging in any options trading. By understanding the different strategies and the underlying assets that you want to trade, investors can make informed decisions and potentially achieve success in the options market.