Module 6: Option strategies

One option expresses one view. Combining options lets a trader shape the risk: cap the loss, give up part of the gain, or trade a view on volatility instead of direction. This module goes through the common structures one at a time.

01Why combine options

A strategy changes the shape of the payoff. Spreads limit both loss and gain; straddles and strangles respond to the size of a move rather than its direction.

02Bull call spread

Buy a call and sell a higher call. The cost and the maximum profit are both reduced, and the maximum loss is known when you enter.

03Bear put spread

Buy a put and sell a lower put. The mirror of the bull call spread, for a moderate fall.

04Credit spreads

Sell an option and buy a further one for protection. The trader collects a premium and keeps it if price stays away from the sold strike.

05Long straddle and strangle

Buy a call and a put together. The position gains from a large move in either direction and loses to time decay if price stays still.

06Short straddle and strangle

Sell a call and a put together. The position earns time decay in a quiet market and carries large risk in a fast one; it needs strict risk control.

07Iron condor and butterfly

Four-legged structures that profit in a range with defined risk on both sides. They trade some return for a known worst case.

08Calendar spreads

Sell a near expiry and buy a further one at the same strike, to benefit from faster decay in the near contract.

09Choosing a strategy

Start from the view: direction, size of move, time and volatility. The strategy follows from the view, and the maximum loss decides the size.

10Where this leads

On A1Stock, Options Lab draws the payoff of any of these structures at expiry and today before you place it, and paper trading lets you run them on live prices.