Option StrategiesOption StrategiesBullish PatternsBullish PatternsNeutral PatternsNeutral PatternsBearish PatternsBearish Patterns

Bullish PatternsBullish PatternsLong CallsLong CallsCovered CallsCovered CallsBull Call SpreadBull Call SpreadBull Put SpreadBull Put SpreadCall Back SpreadCall Back SpreadNaked PutNaked Put

Neutral PatternsNeutral PatternsThe CollarThe CollarLong StraddleLong StraddleShort StraddleShort StraddleLong StrangleLong StrangleShort StrangleShort StrangleLong ButterflyLong ButterflyLong CondorLong Condor

Bearish PatternsBearish Patterns

Long PutsLong PutsNaked CallsNaked CallsPut Back SpreadPut Back SpreadBear Call SpreadBear Call SpreadBear Put SpreadBear Put SpreadCovered PutCovered Put

Long CallsLong Calls Risk :LimitedRisk :Limited Reward: Potentially Very HighReward: Potentially Very High Description: Simply buying a call optionDescription: Simply buying a call option ExampleExample

Let's say “A’ is trading @ 55, and you think it will rally in the next 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 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 you buy (10) 55 call options for Rs 2.50 (Rs2500) that expire next month.month.

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

Covered CallsCovered Calls Risk:LowRisk:Low Reward:LowReward:Low Description:Selling a out of the money call option(of the stock u Description:Selling a out of the money call option(of the stock u

hold)hold) ExampleExample You have been a long time stockholder of 1000 shares of DIS and 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, 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 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 much in the next few weeks. Sell (10) 27.5 calls that expire next month for Rs0.90 (Rs900). month for Rs0.90 (Rs900).

Bull Call SpreadBull Call Spread

Risk:LowRisk:Low Reward:LowReward:Low Description:buying a call option (preferably in-the-money) and Description:buying a call option (preferably in-the-money) and

selling an out-of-the-money call option. selling an out-of-the-money call option.

This strategy is employed when you are generally bullish but don't This strategy is employed when you are generally bullish but don't think the stock will rally too much. think the stock will rally too much.

Let's say “B” is trading @ 26.85. You are bullish and think the 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 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 higher. You buy the 25 (in-the-money) calls for 2.95 and sell the 30 (out-of-the-money) calls for 0.50.30 (out-of-the-money) calls for 0.50.

Bull Put SpreadBull Put Spread

Risk:LowRisk:Low Reward:LowReward:Low Description:selling in-the-money puts and buying out-of-the-Description:selling in-the-money puts and buying out-of-the-

money puts.money puts. This strategy is employed when you are bullish and like the This strategy is employed when you are bullish and like the

idea of selling puts (rather than buying calls) but would also idea of selling puts (rather than buying calls) but would also like a little downside protection just in case the underlying like a little downside protection just in case the underlying issue drops. issue drops.

ExampleExampleLet's say KO is trading @ 54.14 and you think it will rally. You 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 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 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. want a little downside protection just in case the stock declines. You then buy the 50 puts for $0.85. You then buy the 50 puts for $0.85.

Call Back SpreadCall Back Spread Risk:LowRisk:Low Reward:Potentially HighReward:Potentially High Description:Selling in the money call and buying many out of Description:Selling in the money call and buying many out of

the money callsthe money calls This strategy is employed when you are bullish on a volatile This strategy is employed when you are bullish on a volatile

stock but want to lower your risk. You buy calls because you 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 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 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 rally. Buy (2) 45 calls for 1.05 and then sell (1) 40 call for 4.00. Your credit from initiating the trade is 190.4.00. Your credit from initiating the trade is 190.If the stock closes below 40, all calls will expire worthless and 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 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 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 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 only make money on one of the long calls because the other one will be canceled out by your short call. one will be canceled out by your short call.

Naked PutNaked Put Risk:HighRisk:High Reward:LimitedReward:Limited Description:Selling putsDescription:Selling puts Let's say IBM is trading @ 82.83 and you think a big rally is 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. coming soon. You sell the 80 put options for 5.10.

Your max profit is the premium collected from selling the puts. Your max profit is the premium collected from selling the puts. As long as the stock closes above 80, you keep the entire As long as the stock closes above 80, you keep the entire premium. Simple as that. Your breakeven point is 74.9 – at 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 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 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 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 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 immediate loss. Between 74.9 and 80 you will have a profit but less than the max. but less than the max.

The CollarThe Collar Risk:LimitedRisk:Limited Reward:LimitedReward:Limited buying an out-of-the-money put and selling an out-of-the-buying an out-of-the-money put and selling an out-of-the-

money call of a stock you own and want to hold. money call of a stock you own and want to hold. You own a stock and would like to hold it but would like to You own a stock and would like to hold it but would like to

protect yourself to the downside protect yourself to the downside Let's say you are the proud owner of 100 shares of NTAP which 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 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 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 (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 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 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 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 make money on the long stock position, but above 15 the long stock position will be canceled out by the short call position. stock position will be canceled out by the short call position.

Long StraddleLong Straddle Risk:MediumRisk:Medium Reward:HighReward:High Description:buying at-the-money calls and puts at the same Description:buying at-the-money calls and puts at the same

strike price. strike price. You are not bullish or bearish but you do think a big move is You are not bullish or bearish but you do think a big move is

coming soon.coming soon. Let's say MMM is trading @ 95. You buy the 95 calls and the 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 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 money, the stock must either drop below 81 (95-14) or rally above 109 (95+14). If the stock closes anywhere between above 109 (95+14). If the stock closes anywhere between 81 and 109 you will lose money with your max loss 81 and 109 you will lose money with your max loss occurring at 95. So again, you need a big move one way or occurring at 95. So again, you need a big move one way or the otherthe other. .

Short StraddleShort Straddle Risk:HighRisk:High Reward:MediumReward:Medium Selling at-the-money calls and puts at the same strike price. Selling at-the-money calls and puts at the same strike price. You are not bullish or bearish and you feel fairly certain the You are not bullish or bearish and you feel fairly certain the

stock will not move much from its current position. stock will not move much from its current position. Let's say IBM is trading @ 80. You sell the 80 calls and puts 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, 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 both legs of the straddle will expire worthless and you keep the premium collected from both. To profit the stock must the premium collected from both. To profit the stock must either close above 68 (80-12) or below 92 (80+12). But if either close above 68 (80-12) or below 92 (80+12). But if the stock falls below 68 your naked put position will the stock falls below 68 your naked put position will increase in value point for point as the stock falls, and if the increase in value point for point as the stock falls, and if the stock rallies above 92 your naked call position will increase stock rallies above 92 your naked call position will increase in value point for point as the stock rallies. So you need the in value point for point as the stock rallies. So you need the stock to stay pretty close to homestock to stay pretty close to home. .

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

coming soon. coming soon. Let's say PG is trading @ 65 and you think a big move is coming. 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 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 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 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 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 calls will expire worthless, but your puts will more than make up for it, and you'll turn a profit. for it, and you'll turn a profit.

Short StrangleShort StrangleRisk:HighRisk:HighReward:LimitedReward:LimitedDescription:Selling out-of-the-money Description:Selling out-of-the-money

calls and puts calls and puts You are not bullish or bearish and You are not bullish or bearish and

you feel fairly certain the stock will you feel fairly certain the stock will not move much from its current not move much from its current position. position.

Long ButterflyLong Butterfly Risk:LowRisk:Low Reward:LowReward:Low Description:buying 1 call at a lower strike price, selling 2 calls at a 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. 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 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 (1) 70 call for 0.50, and you sell (2) 65 calls for 2.25 for a net debit of 1.5.. of 1.5.. Max profit occurs when the stock closes at 65 – the short calls Max profit occurs when the stock closes at 65 – the short calls expire worthless; you keep the entire premium; the long 60 call 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 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 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 occur if the stock closes below 60 (all calls expire worthless) or above 70 (long and short calls will all cancel each other out). above 70 (long and short calls will all cancel each other out).

Long CondorLong Condor Risk:LowRisk:Low Reward:LowReward:Low Description:selling calls at two consecutive strike prices (this forms the Description:selling calls at two consecutive strike prices (this forms the

“body”) and then buying a call above and below the body. “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 You are not bullish or bearish and you feel fairly certain the stock will

not move much from its current positionnot move much from its current position Let's say IBM is trading @ 75, and you sell the 75 and 80 calls for 2.5 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 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 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 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. 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 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 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 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. 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 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 above 85 and below 70, but your max loss is locked in as the initial cost of the trade. of the trade.

Bearish StrategiesBearish Strategies

Long PutsLong Puts

Risk:LimitedRisk:Limited Reward:Very bigReward:Very big Description:buying put options…preferably ones that are in-Description:buying put options…preferably ones that are in-

the-money. the-money. Let's say CSCO is trading @ 16.07, and you think it will 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 suffer a big drop in the next few weeks. You could short 1000 shares for $16,070, but instead you buy (10) 15 put 1000 shares for $16,070, but instead you buy (10) 15 put options for $0.55 ($550) that expire next month options for $0.55 ($550) that expire next month

If the stock drops to 14.45, you will break even. For every 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 point below 14.45, you will profit $1,000, so a huge collapse would bring you a huge profits would bring you a huge profits

Naked CallsNaked Calls Risk:HighRisk:High Reward:LimitedReward:Limited Description:Entering a naked call position entails selling Description:Entering a naked call position entails selling

calls. calls.

This strategy is employed when you are very bearish. If the This strategy is employed when you are very bearish. If the stock closes below the strike price on expiration day, you stock closes below the strike price on expiration day, you keep the entire premium. But if the stock rallies, you have keep the entire premium. But if the stock rallies, you have unlimited loss potential to the upside unlimited loss potential to the upside

If the stock closes below 90 on expiration day you keep the If the stock closes below 90 on expiration day you keep the entire premium and your max profit scenario will be entire premium and your max profit scenario will be realized. A stock price between 90.0 and 91.35 (90.0 + 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. 1.35) will get you some, but not all of your money back. Above 91.35, your loss grows as the stock moves up. Above 91.35, your loss grows as the stock moves up.

Put Back SpreadPut Back Spread Risk:LowRisk:Low Reward:ModerateReward:Moderate Description:selling a put at a higher strike price and buying a Description:selling a put at a higher strike price and buying a

greater number of puts at a lower strike price. greater number of puts at a lower strike price. Let's say INTC is trading @ 30.06 and you think the stock will drop. 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 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.net credit from initiating the trade is 0.20.If the stock closes above 32.5, all puts will expire worthless and 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. 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) 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 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 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 back and below 27.7 your profit increases to a max when the stock drops to zero. stock drops to zero.

Bear Call SpreadBear Call Spread Risk:LowRisk:Low Reward:LowReward:Low Description:Selling at-the-money calls and buying out-of-the-Description:Selling at-the-money calls and buying out-of-the-

money calls. money calls. This strategy is employed when you are generally bearish but This strategy is employed when you are generally bearish but want a little upside protection want a little upside protection

Let's say QQQQ is trading @ 30.11. You are bearish and think the 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 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 doesn't. Sell the 30 calls (you are naked); then buy the 32 calls for some upside protection. some upside protection.

Bear Put SpreadBear Put Spread Risk:LowRisk:Low Reward:LowReward:Low Description:buying in-the-money puts and selling out-of-the-money Description:buying in-the-money puts and selling out-of-the-money

puts. puts. This strategy is employed when you are bearish but don't think the This strategy is employed when you are bearish but don't think the stock will crash. Essentially you are buying puts as you normally 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 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. 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 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 (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 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 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 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 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 and below; this is where the long and short positions cancel each other out. Your max loss occurs above 60 – all puts will expire other out. Your max loss occurs above 60 – all puts will expire worthless and your loss will be the initial capital necessary to enter worthless and your loss will be the initial capital necessary to enter the position. the position.

Covered PutCovered Put Risk:LowRisk:Low Reward:LowReward:Low Description:Selling out-of-the-money put options on stocks that Description:Selling out-of-the-money put options on stocks that

you are short. you are short. You are short 1000 shares of DELL @ 38 and plan on holding 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 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 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. “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 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 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 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.and short the same stock, and they will cancel each other out.