Option Strategies

Covered Calls

• Short call options covered by a long position in the underlying stock.
• This protects the call writer (issuer) but upside risk.
• Covered means the call option is protected by the actual stock.
• If the price of the stock increases the gain from the stock cancels out the loss from the option.

Protective Puts

• Long position in the underlying stock protected by a long put option.
• This protects the investor's stock investment from downside risk.

Straddle

Long Straddle

• Long position in both a call and a put with the same strike price and same expiration.
• This produces a profit if the stock price makes a big move either up or down, and loses money if the stock price does not change much.

Short Straddle

• Short position in both a call and a put with the same strike price and same expiration.
• Used when investor believes the stock price will not more significantly, but will lose money if the stock makes a big move either up or down.

Strangles

• Long position in both a call and a put. The strike price of the call option is higher than the strike price on the put option.
• This produces a profit if the stock price makes a big move either up or down, and loses money if the stock price remains between the strike prices.

Short Strangle

• Short position in both a call and a put. The strike price of the call option is higher than the strike price on the put option.
• This produces a profit if the stock price remains between the strike prices, and loses money if the stock price makes a big move either up or down.

Example: Option Strategies