Following are ten great trading option strategies. The common thread here is that they have limited risk and are alternatives for you to consider. The unlimited-risk or limited-but-high risk strategies they could potentially replace are provided with the strategy summary.
Married put
A married put combines long stock with a long put for protection. The position is created by purchasing the stock and put at the same time, but the key is creating put protection and managing the risk of stock ownership. Buying a put for existing stock or rolling out an option to a later expiration month remains true to that strategy goal. Long out-of-the-money (OTM) options should be sold 30–45 days before expiration.
| Strategy | Outcome |
|---|---|
| Components | Long Stock + Long Put |
| Risk/Reward | Limited risk, unlimited reward |
| Replaces | Long stock with limited but high risk |
| Max Risk | [(Stock Price + Put Price) – Put Strike Price] × 100 |
| Max Reward | Unlimited |
| Breakeven | Stock Price + Put Price |
| Conditions | Bullish, low IV |
| Margin | Not typically required — check with broker |
| Advantages | Changes limited but high risk to limited risk |
| Disadvantages | Increases cost of position by option premium |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659ac_472414.image0.jpeg)
Collar
A collar combines long stock with long put protection and a short call that reduces the cost of protection. The call premium is a credit that offsets, at least partially, the cost of the put. Timing this strategy’s execution is a worthy goal.
An optimal scenario occurs when you can buy the stock and long put during low volatility conditions, allowing you to buy longer-term protection. Calls are sold as volatility increases, and there are 30–45 days to expiration, so that time decay accelerates short call gains.
| Strategy | Outcome |
|---|---|
| Components | Long Stock + Long Put + Short Call |
| Risk/Reward | Limited risk, limited reward |
| Replaces | Long stock with limited but high risk |
| Max Risk | [Stock Price + (Option Debit) – Put Strike Price] × 100 |
| Max Reward | [(Call Strike Price – Stock Price) + (Option Debit)] × 100 |
| Breakeven | Stock Price + (Option Debit) |
| Conditions | Bullish, low IV that increases |
| Margin | Not typically required — check with broker |
| Advantages | Changes limited but high risk to limited risk |
| Disadvantages | Replaces unlimited reward with limited reward |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659b9_472415.image1.jpeg)
Long put trader
A long put is a limited-risk, bearish position that gains when the underlying declines. This is a much better bet than an unlimited-risk, short stock position that requires more capital to establish. The bearish move must occur by option expiration, and out-of-the-money (OTM) puts should be exited 30–45 days prior to expiration.
| Strategy | Outcome |
|---|---|
| Components | Long put |
| Risk/Reward | Limited risk, limited but high reward |
| Replaces | Short stock with unlimited risk |
| Max Risk | Put Premium: (Put Price × 100) |
| Max Reward | (Put Strike Price – Put Price) × 100 |
| Breakeven | Put Strike Price – Put Price |
| Conditions | Bearish, low IV that increases |
| Margin | Not required |
| Advantages | Changes unlimited risk to limited risk |
| Disadvantages | Time constraints for move to occur due to expiration |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659c8_472416.image2.jpeg)
LEAPS call investor
A Long-term Equity AnticiPation Security (LEAPS) call option reduces the cost and risk associated with a long stock position. The position is best established when implied volatility (IV) is relatively low. One drawback is that the LEAPS owner doesn’t participate in dividend distributions, which reduce the stock value. At the same time, the amount risked in the position will be less than owning the stock outright.
| Strategy | Outcome |
|---|---|
| Components | Long call with expiration greater than nine months |
| Risk/Reward | Limited risk, unlimited reward |
| Replaces | Long stock with limited but high risk |
| Max Risk | Call Premium: (Call Price × 100) |
| Max Reward | Unlimited |
| Breakeven | Strike Price – LEAPS Price |
| Conditions | Bullish, low IV that increases |
| Margin | Not required |
| Advantages | Changes limited but high risk to limited risk |
| Disadvantages | Pay for time value that erodes and misses dividends |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659bc_472417.image3.jpeg)
Diagonal spread
A diagonal spread combines a short near-month option with a long later-month option of the same type. When the strike prices are the same, it is referred to as a calendar spread. A near-term neutral view allows you to sell the short option to offset the long option costs.
A call diagonal is described here, but a put diagonal works equally well when you’re bearish longer term.
| Strategy | Outcome |
|---|---|
| Components | Long Lower Strike Call + Short, near month call |
| Risk/Reward | Limited risk, potential unlimited reward* |
| Replaces | Long call |
| Max Risk | (Long Call Price – Short Call Price) × 100 |
| Max Reward | * Unlimited when short call expires worthless |
| Breakeven | Detailed |
| Conditions | Neutral with IV time skew, then trending |
| Margin | Required |
| Advantages | Reduces cost of long option |
| Disadvantages | A fast, bullish move results in limited reward |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659af_472418.image4.jpeg)
Bear call credit spread
A bear call spread combines a short, lower strike price call and a long, higher strike price call expiring the same month. It creates a credit and replaces a short call with unlimited risk. Again, timing is important in the deployment of this strategy. It’s best applied when IV is high and there are fewer than 30 days to expiration.
| Strategy | Outcome |
|---|---|
| Components | Short Lower Strike Price Call + Long Higher Strike Price Call (same month) |
| Risk/Reward | Limited risk, limited reward |
| Replaces | Short option |
| Max Risk | (Difference between Strike Prices – Initial Credit) × 100 |
| Max Reward | Initial Credit |
| Breakeven | Short Strike Price + Net Credit |
| Conditions | Bearish, high IV |
| Margin | Required |
| Advantages | Reduces risk from unlimited to limited |
| Disadvantages | Reduces reward from limited-but-high to limited |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659b5_472419.image5.jpeg)
Straddle
A straddle combines a long call with a long put using the same strike price and expiration. It’s created when volatility is low and expected to increase and gains when prices moves strongly up or down. This is a useful strategy to set up before an important announcement such as an earnings or key economic report release. It may be useful with an underlying stock in the former scenario and with an ETF in the latter. Because there are two long options, exit the position with 30–45 days to expiration to avoid time decay.
| Strategy | Outcome |
|---|---|
| Components | Long Call + Long Put (same strike price, month) |
| Risk/Reward | Limited risk, high to unlimited reward |
| Replaces | Single option with directional bias (call or put) |
| Max Risk | Net Debit: (Call Price + Put Price) × 100 |
| Max Reward | Up: Unlimited, Down: (Strike Price – Net Debit) × 100 |
| Breakeven1 | Strike Price + Net Option Prices |
| Breakeven2 | Strike Price – Net Options Prices |
| Conditions | Neutral, low IV with strong moves expected in both |
| Margin | Not required |
| Advantages | Reduces directional risk of single option position |
| Disadvantages | Increases cost of single option position |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659d7_472420.image6.jpeg)
Call ratio backspread
A call ratio backspread combines long higher strike price calls with a lesser number of short lower strike calls expiring the same month. It’s best implemented for a credit and is a limited-risk, potentially unlimited reward position that is most profitable when a strong bullish move occurs.
| Strategy | Outcome |
|---|---|
| Components | Long Calls + Less Lower Strike Short Calls (same month) |
| Risk/Reward | Limited risk, potential unlimited reward |
| Replaces | Bear call credit spread |
| Max Risk | Limited: Detailed, see Chapter 15 |
| Max Reward | Up: Unlimited, Down: Initial Credit |
| Breakevens | Detailed, see strategy discussion in Chapter 15 |
| Conditions | Bullish, IV skew with strong increase in price and IV |
| Margin | Required |
| Advantages | Changes limited reward to unlimited reward |
| Disadvantages | Initial credit less, complex calculations |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659c1_472421.image7.jpeg)
Put ratio backspread
A put ratio backspread combines long lower strike price puts with a lesser number of short higher strike puts expiring the same month. It’s best implemented for a credit and is a limited risk — limited, but a potentially high-reward position. It is most profitable when a strong bearish move occurs.
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659c4_472422.image8.jpeg)
| Strategy | Outcome |
|---|---|
| Components | Long Puts + Less Higher Strike Short Puts (same month) |
| Risk/Reward | Limited risk, limited but potentially high reward |
| Replaces | Bull put credit spread |
| Max Risk | Limited: Detailed, see Chapter 15 |
| Max Reward | Up: Initial Credit, Down: (Long Strike Price + Initial Credit) × 100 |
| Breakevens | Detailed, see strategy discussion in Chapter 15 |
| Conditions | Bearish, IV skew with strong decline and increased IV |
| Margin | Required |
| Advantages | Changes limited reward to limited-but-high reward |
| Disadvantages | Initial credit less, complex calculations |
Long put butterfly
A long put butterfly combines a bull put spread and a bear put spread expiring the same month for a debit. The two short puts have the same strike price and make up the body. The two long puts have different strike prices (above and below the body) and make up the wings. Time decay helps the trade.
| Strategy | Outcome |
|---|---|
| Components | Bear Put Spread + Bull Put Spread (same month) |
| Risk/Reward | Limited risk, limited reward |
| Replaces | Short straddle |
| Max Risk | Net Debit: [(Lowest Strike Put Price + Highest Strike Put Price) – (2 × Middle Strike Put Price)] × 100 |
| Max Reward | [(Highest Strike Price – Middle Strike Price) × 100] – Net Debit |
| Breakeven 1 | Highest Strike Price – Net Debit Price |
| Breakeven 2 | Lowest Strike Price + Net Debit Price |
| Conditions | Sideways to moderately bearish, IV skew |
| Margin | Required |
| Advantages | Changes unlimited risk to limited risk |
| Disadvantages | Trading costs associated with three positions |
![[Credit: Image by Optionetics]](https://cdn.prod.website-files.com/6634a8f8dd9b2a63c9e6be83/6698d08942a2a9c90c2659cf_472423.image9.jpeg)
