Option Selling Strategies

Introduction to Option Strategies

The various Option Strategies serve as vital tools for traders and investors, enabling them to adapt to the ever-changing market landscape. Knowing a variety of these strategies – and how they work – empowers investors to tackle different financial scenarios with some level of improved confidence.

As they say, you want to have the right tool for the job. One of the main benefits of options contracts is that they can be combined to create new and unique financial instruments (tools) – each with a variety of parameters and use cases.

Learning about and mastering these Option Strategies is crucial because it allows traders to select the right tool for the right situation to mitigate risks, seize market opportunities, and tailor their investment approach to their specific goals and predictions.

This guide unpacks the the main strategies available, offering insights into their mechanics, optimal conditions for use, and the strategic advantages they may provide. Whether seeking to hedge a position, speculate on future price movements, or generate income, understanding Option Strategies is a core building block to improving as a trader or investor.

Key Takeaways of What You Should Learn

• Option Strategies offer a versatile toolkit for navigating diverse market conditions.
• Long and short strategies provide methods for bullish, bearish, or neutral market outlooks.
• Understanding commissions and fees is crucial, as they can significantly affect the profitability of Option Strategies.
• Market conditions dictate the optimal use of various Option Strategies, with different strategies suited to stable, volatile, bullish, or bearish markets.
• Traders use Option Strategies for risk management, to speculate on market movements, or to generate income, each strategy tailored to specific market expectations and risk profiles.
• The complexity and cost of Option Strategies vary, emphasizing the need for a thorough analysis of commissions and fees in relation to overall trade value.

Access to Option Strategies Depends on Your Broker

Access to various Option Strategies often depends on the level of approval you have with your broker, as well as the state of your account balance or access to margin. Brokers typically categorize options trading into levels, with more complex strategies requiring higher levels of approval. This is because such strategies can carry greater risks or require a more in-depth understanding of the market. To unlock these strategies, traders must demonstrate their knowledge and experience, or meet certain financial criteria, such as maintaining a specific account balance or having margin access. Essentially, the ability to engage in advanced Option Strategies is not just about having the know-how but also about meeting the prerequisites set by your broker, ensuring that traders are prepared for the complexities and risks involved.

Read our article on Option Levels.

Long Options Verses Short Options

Going long on options means purchasing an option, such as a call or a put, with the expectation that the underlying asset’s price will move in a favorable direction in a favorable amount of time – so that the option contracts price increases during the trade or at expiration. It is a leveraged bet that the stock will go somewhere, and go somewhere fast.

On the other hand, going short on options involves selling an option you do not own with the goal being to profit from the premium received from the sale. When you sell an option, or a short option strategy, you are believing that the option will decrease in value or expire worthless. This allows the seller to keep the premium as profit. It is a leveraged bet that the stock will not move as much as the option prices are currently indicating.

We will produce a full length article on Expected Move.

A Non Exhaustive List of the Top 100 Option Strategies to Know

1. Covered Call
2. Protective Put
3. Long Call
4. Long Put
5. Short Call (Naked Call)
6. Short Put (Naked Put)
7. Bull Call Spread
8. Bear Put Spread
9. Bear Call Spread
10. Bull Put Spread
11. Iron Condor
12. Iron Butterfly
13. Straddle
14. Strangle
15. Butterfly Spread (Call/Put Butterfly)
16. Calendar Spread
17. Diagonal Spread
18. Credit Spread
19. Debit Spread
20. Condor Spread
21. Collar
22. Synthetic Long Stock
23. Synthetic Short Stock
24. Synthetic Long Call
25. Synthetic Short Call
26. Synthetic Long Put
27. Synthetic Short Put
28. Risk Reversal
29. Ratio Spread
30. Backspread
31. Box Spread
32. Jelly Roll
33. Long Combo
34. Short Combo
35. Straddle Strip
36. Strangle Strap
37. Guts
38. Ladder
39. Albatross Spread
40. Seagull Spread
41. Christmas Tree Spread
42. Butterfly on a Stick
43. Condor on a Stick
44. Double Diagonal
45. Triple Diagonal
46. Call Ratio Backspread
47. Put Ratio Backspread
48. Iron Albatross Spread
49. Iron Seagull Spread
50. Omega Spread
51. Covered Strangle
52. Naked Strangle
53. Married Put
54. Fiduciary Call
55. Protective Collar
56. Bullish Put Ladder
57. Bearish Call Ladder
58. Calendar Straddle
59. Calendar Strangle
60. Diagonal Straddle
61. Diagonal Strangle
62. Double Butterfly Spread
63. Double Iron Butterfly
64. Double Iron Condor
65. Reverse Iron Condor
66. Reverse Iron Butterfly
67. Variable Ratio Write
68. Static Option Strategy
69. Dynamic Option Strategy
70. Stock Repair Strategy
71. Ratio Call Write
72. Ratio Put Write
73. Put Ladder
74. Call Ladder
75. Short Straddle
76. Short Strangle
77. Long Straddle
78. Long Strangle
79. Bull Spread
80. Bear Spread
81. Vertical Spread
82. Horizontal Spread
83. Market Neutral Strategy
84. Delta Neutral Strategy
85. Gamma Scalping
86. Vega Neutral Strategy
87. Theta Positive Strategy
88. Leveraged Covered Call
89. Poor Man’s Covered Call
90. Jade Lizard
91. Twisted Sister
92. Big Lizard
93. Lazy Boy Spread
94. Tarzan Loves Jane Spread
95. Rhino Spread
96. Elephant Spread
97. Moose Spread
98. Turtle Spread
99. Dragonfly Spread
100. Phoenix Spread
101. Make something up, give it a name, we will add it here.

If you haven’t figured it out by now, the options are endless – no pun intended.

Commissions and Fees (and Slippage!) with Option Strategies

Navigating the waters of multi-leg complex Option Strategies also entails an understanding of the costs of trading each one. “Costs” are not risks – they are a relatively fixed attribute of a strategy and they represent the financial friction of getting in and out of a trade. This is the cost of doing business with a particular strategy.

Unpopular opinion: these costs likely have a bigger impact on your PnL than your trading skill (or lack there of). No amount of skill or luck can overcome a prohibitively expensive asset to trade.

Generally, Option Strategies involving multiple legs, such as spreads or combinations, incur higher transaction costs due to the multiple contracts involved. Assuming a fee of $1 per leg, a four-leg strategy like an iron condor would cost $4 for an entry trade and $4 for an exit trade. If the value of the trade is only $100 you are giving away 8% immediately and have to overcome that hurdle to be profitable.

When and Why Traders Use Option Strategies

Traders turn to Option Strategies for their versatility and capacity to tailor risk and reward profiles to match market conditions and investment objectives.

• In stable or sideways markets, strategies like iron condors or butterflies can capitalize on low volatility.
• In bullish or bearish markets, vertical spreads allow traders to express a directional view with limited risk.
• For income generation, selling options through strategies like covered calls or cash-secured puts provides a stream of premium income.
• There are limitless reasons and combinations of strategies – and even more will be developed in the future.

Investors use Option Strategies aiming to manage risk, leverage market movements, or enhance portfolio returns. The underlying principle is to anticipate market conditions and choose strategies that align with expectations for volatility, direction, and time decay.

Conclusion

You don’t need to know or practice all of the Option Strategies presented but you should develop an understanding of 3-5 of the most popular so you can bring them out of the toolkit when necessary. For those looking to further their journey in options trading, engaging with a community of like-minded individuals can provide additional support and insight. We encourage readers to reach out to us on Discord for more guidance and to become part of a network committed to learning more about options trading.