Ultimate Options Strategy Guide

Interactive Outline

Ultimate Strategy Guide

Most options traders try to fit 1 or 2 of their favorite strategies into every stock they analyze. But we both know that you can't force a square peg into a round hole. Instead, you need help finding the best options strategy for the exact market setup you're looking at right now.

Choosing which option strategy to use for a trade is a process of elimination, not selection. There are good and bad strategies for each market condition – and now can quickly and easily find the right strategy for the right market. Plus, we'll give you some "best practices" for entering each strategy.

Bullish

If your directional assumption is bullish on the stock's direction and. . .

High IV Rank

Option Bull Spread

Example: Sell 1 put; buy 1 put at lower strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps or hurts depending on strikes chosen

Time Erosion: Helps or hurts depending on strikes chosen

BEP: Short put strike minus net credit

Short Put

Example: Sell 1 put

Risk: Unlimited

Reward: Limited

Increase in Volatility: Hurts position

Time Erosion: Helps position

BEP: Strike price minus credit received

Butterfly

Example: Buy 1 call; sell 2 calls at next higher strike; buy 1 call at next higher strike (can skip strike for BWB)

Risk: Limited

Reward: Limited

Increase in Volatility: Typically hurts position

Time Erosion: Typically helps position

BEP: Two BEPs

1. Lower long call strike plus net debit paid

2. Higher long call strike minus net debit paid

Low IV Rank

Option Bull Spread

Example: Buy 1 call; sell 1 call at higher strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps or hurts depending on strikes chosen

Time Erosion: Helps or hurts depending on strikes chosen

BEP: Long call strike plus net premium paid

Calendar

Example: Sell 1 near-term call; buy 1 long-term call same strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps position

Time Erosion: Typically helps position

BEP: Varies depending on strikes

Call Backspread

Example: Sell 1 call; buy 2 calls at higher strike

Risk: Limited

Reward: Unlimited

Increase in Volatility: Typically helps position

Time Erosion: Typically hurts position

BEP: Two BEPs

1. Short call strike plus net credit received

2. Long call strike plus [(the difference between the long call strike and short call strike) minus credit received]

Neutral

If your directional assumption is neutral on the stock's direction and. . .

High IV Rank

Straddle

Example: Sell 1 call; sell 1 put at same strike

Risk: Unlimited

Reward: Limited

Increase in Volatility: Hurts position

Time Erosion: Helps position

BEP: Two BEPs

1. Call strike plus net credit received

2. Put strike minus net credit received

Iron Condor

Example: Sell 1 call; buy 1 call at higher strike; sell 1 put; buy 1 put at lower strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps or hurts depending on strikes chosen

Time Erosion: Helps or hurts depending on strikes chosen

BEP: Two BEPs

1. Short call strike minus net credit received

2. Short put strike plus net credit received

Strangle

Example: Sell 1 call; sell 1 put at strikes equal from current price

Risk: Unlimited

Reward: Limited

Increase in Volatility: Hurts position

Time Erosion: Helps position

BEP: Two BEPs

1. Call strike plus net credit received

2. Put strike minus net credit received

PASS

Sometimes the best trade is NO trade at all. If IV is low and you are neutral on the stock then your best option is to "pass" on this trade and move onto another trade.

Bearish

If your directional assumption is bearish on the stock's direction and. . .

High IV Rank

Option Bear Spread

Example: Sell 1 call; buy 1 call at higher strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps or hurts depending on strikes chosen

Time Erosion: Helps or hurts depending on strikes chosen

BEP: Short call strike plus net credit

Short Call

Example: Sell 1 call

Risk: Unlimited

Reward: Limited

Increase in Volatility: Hurts position

Time Erosion: Helps position

BEP: Strike price plus credit received

Butterfly

Example: Buy 1 put; sell 2 puts at next lower strike; buy 1 put at next lower strike (can skip strike for BWB)

Risk: Limited

Reward: Limited

Increase in Volatility: Typically hurts position

Time Erosion: Typically helps position

BEP: Two BEPs

1. Higher long put strike minus net debit paid

2. Lower long put strike plus net debit paid

Low IV Rank

Option Bear Spread

Example: Buy 1 put; sell 1 put at lower strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps or hurts depending on strikes chosen

Time Erosion: Helps or hurts depending on strikes chosen

BEP: Long put strike minus net premium paid

Calendar

Example: Sell 1 near-term put; buy 1 long-term put same strike

Risk: Limited

Reward: Limited

Increase in Volatility: Helps position

Time Erosion: Typically helps position

BEP: Varies depending on strikes

Put Backspread

Example: Sell 1 put; buy 2 puts at lower strike

Risk: Limited

Reward: Limited, but substantial

Increase in Volatility: Typically helps position

Time Erosion: Typically hurts position

BEP: Two BEPs

1. Short put strike minus premium received

2. Long put strike minus [(difference between long put strike and short put strike) minus credit received]

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