Option Strategies

Bullish

Patterns
Neutral Patterns
Bearish Patterns

Bullish Patterns
Long

Calls
Covered Calls
Bull Call Spread
Bull Put Spread
Call Back Spread
Naked Put

Neutral Patterns
The

Collar
Long Straddle
Short Straddle
Long Strangle
Short Strangle
Long Butterfly
Long Condor

Bearish Patterns
Long

Puts
Naked Calls
Put Back Spread
Bear Call Spread
Bear Put Spread
Covered Put

Long Calls
Risk :Limited
Reward: Potentially Very High
Description: Simply buying a call option
Example
Let's say A is trading @ 55, and you think it will rally in the next
few weeks. You could buy 1000 shares for Rs.55,000, but instead
you buy (10) 55 call options for Rs 2.50 (Rs2500) that expire next
month.

If the stock rallies to 57.5, you will break even. For every point
above 57.5, you will profit Rs1,000

Covered Calls
Risk:Low
Reward:Low
Description:Selling a out of the money call option(of the stock u
hold)
Example

You have been a long time stockholder of 1000 shares of DIS and
wish to hold for many more years. DIS is currently trading at 24.4,
and while you are bullish, you don't think the stock will rally too
much in the next few weeks. Sell (10) 27.5 calls that expire next
month for Rs0.90 (Rs900).

Bull Call Spread

Risk:Low
Reward:Low
Description:buying a call option (preferably in-the-money) and
selling an out-of-the-money call option.

This strategy is employed when you are generally bullish but don't
think the stock will rally too much.
Let's say B is trading @ 26.85. You are bullish and think the
stock will rally a few points, but you don't think it will catapult
higher. You buy the 25 (in-the-money) calls for 2.95 and sell the 30
(out-of-the-money) calls for 0.50.

Bull Put Spread

Risk:Low
Reward:Low
Description:selling in-the-money puts and buying out-of-themoney puts.
This strategy is employed when you are bullish and like the
idea of selling puts (rather than buying calls) but would also
like a little downside protection just in case the underlying
issue drops.
Example
Let's say KO is trading @ 54.14 and you think it will rally. You
like the idea of selling puts rather than buying calls so you sell
the 55 puts for $2.55. This is the naked put strategy , but you
want a little downside protection just in case the stock declines.
You then buy the 50 puts for $0.85.

Call Back Spread

Risk:Low
Reward:Potentially High
Description:Selling in the money call and buying many out
of the money calls
This strategy is employed when you are bullish on a volatile
stock but want to lower your risk. You buy calls because you
are bullish, but then you sell a lower strike price call to
lower your risk Let's say IP is trading @ 43.46 and you think
it will rally. Buy (2) 45 calls for 1.05 and then sell (1) 40 call
for 4.00. Your credit from initiating the trade is 190.
If the stock closes below 40, all calls will expire worthless
and you keep the 190.0. Your greatest loss occurs at 45. The
long 45 calls will expire worthless and the 40 calls which
you sold for 4 will need to be bought back at 5. Above 45,
you will only make money on one of the long calls because
the other one will be canceled out by your short call.

Naked Put

Risk:High
Reward:Limited
Description:Selling puts
Let's say IBM is trading @ 82.83 and you think a big rally is
coming soon. You sell the 80 put options for 5.10.
Your max profit is the premium collected from selling the puts.
As long as the stock closes above 80, you keep the entire
premium. Simple as that. Your breakeven point is 74.9 at that
price the 80 puts will be worth 5.10 (80.0 74.9). Below 74.9
you will lose money at the same rate as if you owned the
stock. You will then have to buy the puts at a much higher
price or let the stock be put to you at 80/share and show an
immediate loss. Between 74.9 and 80 you will have a profit but
less than the max.

The Collar

Risk:Limited
Reward:Limited
buying an out-of-the-money put and selling an out-of-themoney call of a stock you own and want to hold.
You own a stock and would like to hold it but would like to
protect yourself to the downside
Let's say you are the proud owner of 100 shares of NTAP which
is currently trading @ 12.84. You plan on holding the stock but
think it may fall in the short term. Buy the (1) 10 put for 0.60
(60.0) and sell the (1) 15 call for 0.80 (80.0). The call you sold
pays for the put (i.e. the call pays for downside protection). If
the stock drops below 10 you will lose, but at least your loss
will be minimized by the put option. If the stock rallies, you will
make money on the long stock position, but above 15 the long
stock position will be canceled out by the short call position.

Long Straddle

Risk:Medium
Reward:High
Description:buying at-the-money calls and puts at the same
strike price.
You are not bullish or bearish but you do think a big move is
coming soon.
Let's say MMM is trading @ 95. You buy the 95 calls and the
95 puts for $7 each for a total cost of $14. For you to make
money, the stock must either drop below 81 (95-14) or rally
above 109 (95+14). If the stock closes anywhere between
81 and 109 you will lose money with your max loss
occurring at 95. So again, you need a big move one way or

the other

Short Straddle

Risk:High
Reward:Medium
Selling at-the-money calls and puts at the same strike price.
You are not bullish or bearish and you feel fairly certain the
stock will not move much from its current position.
Let's say IBM is trading @ 80. You sell the 80 calls and puts
for $6 each for a total cost of 12. If the stock closes at 80,
both legs of the straddle will expire worthless and you keep
the premium collected from both. To profit the stock must
either close above 68 (80-12) or below 92 (80+12). But if
the stock falls below 68 your naked put position will
increase in value point for point as the stock falls, and if the
stock rallies above 92 your naked call position will increase
in value point for point as the stock rallies. So you need the
stock to stay pretty close to home.

Long Strangle
Risk:Medium
Reward:Very High
Buying out-of-the-money calls and puts.
You are not bullish or bearish but you do think a big move is
coming soon.

Let's say PG is trading @ 65 and you think a big move is coming.

You buy the 70 calls for 3.9 and the 60 puts puts for 4.1 for a total
debit of 8.0. If the stock rallies above above 78, the puts will
expire worthless, but your calls will more than make up for it, and
you'll profit on the entire trade. If the stock drops below 52, the
calls will expire worthless, but your puts will more than make up
for it, and you'll turn a profit.

Short Strangle
Risk:High
Reward:Limited
Description:Selling

out-of-the-money

calls and puts

You are not bullish or bearish and you
feel fairly certain the stock will not
move much from its current position.

Long Butterfly
Risk:Low
Reward:Low
Description:buying 1 call at a lower strike price, selling 2 calls at a
middle strike price, and buying 1 call at a higher strike price.
Let's say CAT is trading @ 65, and you buy (1) 60 call for 5.5 and
(1) 70 call for 0.50, and you sell (2) 65 calls for 2.25 for a net debit
of 1.5..

Max profit occurs when the stock closes at 65 the short calls
expire worthless; you keep the entire premium; the long 60 call
gets sold for a for a small profit; and the long 70 call expires
worthless. Your max loss is locked in place at the onset and will
occur if the stock closes below 60 (all calls expire worthless) or
above 70 (long and short calls will all cancel each other out).

Long Condor

Risk:Low
Reward:Low
Description:selling calls at two consecutive strike prices (this forms the
body) and then buying a call above and below the body.
You are not bullish or bearish and you feel fairly certain the stock will
not move much from its current position
Let's say IBM is trading @ 75, and you sell the 75 and 80 calls for 2.5
and 1.0, and you buy the 70 and 85 calls for 6.0 and 0.50 for net debit
of 3.0. If the stock closes at 75, the 75, 80 and 85 calls expire worthless
and the 70 calls would be worth 5.0.The 5-point gain vs. the 3-point
debit to initiate the trade gives you a profit of 2.0.
If the stock closes at 80, the 80 and 85 calls would expire worthless, and
the 5 point loss in the short 75 call position would be canceled out with
the 10 point gain of the 70 calls, so your net is still 5.0 and your profit is
still 2.0. This is your max gain. It occurs anywhere between 75 and 80.
Your profit declines above 80 and below 75 with the max loss occurring
above 85 and below 70, but your max loss is locked in as the initial cost
of the trade.

Bearish Strategies

Long Puts

Risk:Limited
Reward:Very big
Description:buying put optionspreferably ones that are inthe-money.
Let's say CSCO is trading @ 16.07, and you think it will
suffer a big drop in the next few weeks. You could short
1000 shares for $16,070, but instead you buy (10) 15 put
options for $0.55 ($550) that expire next month
If the stock drops to 14.45, you will break even. For every
point below 14.45, you will profit $1,000, so a huge collapse
would bring you a huge profits

Naked Calls

Risk:High
Reward:Limited
Description:Entering a naked call position entails selling
calls.
This strategy is employed when you are very bearish. If the
stock closes below the strike price on expiration day, you
keep the entire premium. But if the stock rallies, you have
unlimited loss potential to the upside

If the stock closes below 90 on expiration day you keep the

entire premium and your max profit scenario will be
realized. A stock price between 90.0 and 91.35 (90.0 +
1.35) will get you some, but not all of your money back.
Above 91.35, your loss grows as the stock moves up.

Put Back Spread

Risk:Low
Reward:Moderate
Description:selling a put at a higher strike price and buying a
greater number of puts at a lower strike price.
Let's say INTC is trading @ 30.06 and you think the stock will drop.
Buy (2) 30 puts for 1.25 and then sell (1) 32.5 put for 2.70. Your
net credit from initiating the trade is 0.20.

If the stock closes above 32.5, all puts will expire worthless and
you keep the $20. Your greatest loss is $230 and occurs at 30. This
is where the long 30 puts will expire worthless (a $250 loss) and
your 32.5 put will be worth $20 (sold it for 2.7 and bought it back
2.5). Below 30 you will start getting some of your money back and
below 27.7 your profit increases to a max when the stock drops to
zero.

Bear Call Spread

Risk:Low
Reward:Low
Description:Selling at-the-money calls and buying out-of-themoney calls.
This strategy is employed when you are generally bearish but
want a little upside protection
Let's say QQQQ is trading @ 30.11. You are bearish and think the
stock will fall, but want some upside protection just in case it
doesn't. Sell the 30 calls (you are naked); then buy the 32 calls for
some upside protection.

Bear Put Spread

Risk:Low
Reward:Low
Description:buying in-the-money puts and selling out-of-the-money
puts.
This strategy is employed when you are bearish but don't think the
stock will crash. Essentially you are buying puts as you normally
would in a long put play, but since you don't think the stock will
crash, you sell out-of-the-money puts for a little extra cash.
Let's say MO is trading at @ 56.89, and you buy the 60 puts for 3.5
(because you think the stock will move down) and then sell the 50
puts for 0.50 (because you don't think the stock will fall below this
level). If the stock falls as you expect, you will make money on the
60 puts, and as long as the stock stays above 50, you keep the
entire premium for selling the 50 puts. Your max profit occurs at 50
and below; this is where the long and short positions cancel each
other out. Your max loss occurs above 60 all puts will expire
worthless and your loss will be the initial capital necessary to enter
the position.

Covered Put
Risk:Low
Reward:Low
Description:Selling out-of-the-money put options on stocks that
you are short.
You are short 1000 shares of DELL @ 38 and plan on holding
because you think the stock has a long ways to go on the
downside. But while you are waiting, you'd like to earn a little
residual income from your holding. You sell the (10) 32.5 puts.
As long as the stock closes above 32.5, the puts expire worthless
and you keep the entire premium collected. But if the stock closes
below 32.5, the stock will be put to you. You will then be long
and short the same stock, and they will cancel each other out.