Options are commonly used in combinations in order to minimize risks and maximize returns. A combination of options is known as strategies.
A covered call is a strategy where the investor selling call options holds an equal quantity of the underlying assets. To do so, an investor with a long position in an asset writes (sells) call options on that asset to generate an income stream. The investor's long position in the asset serves as the cover since it ensures that the seller can deliver the shares if the buyer of the call option exercises it.
A covered put is a bearish version of a covered call. If you think an asset will decline in price and want to short it, you may combine a short position with a short put position in a covered put. The premium gained from writing the put generates some immediate revenue. It also restricts your potential gain on the short position since if the stock falls below the strike price of the put, you will acquire the shares through an option exercise and end your short position.
In a married put strategy, an investor buys an asset and concurrently buys put options on the same amount of shares. The investor buys an at-the-money put option on the same asset to protect against a fall in prices. Most investors regard this technique to be equivalent to an insurance policy against the stock falling abruptly during the period in which they keep the asset.
In a bull call spread strategy, an investor buys calls at one strike price while concurrently selling the same amount of calls at a higher strike price. The expiration date and underlying asset for both call options will be the same.
This form of vertical spread strategy is frequently utilized when an investor is positive about the underlying asset and anticipates a slight increase in the asset's price. Using this method, the investor can restrict the trade's upside while simultaneously lowering the net premium paid.
The Protective Call strategy is a kind of hedging. In this method, a trader shorts the underlying asset and buys an ATM Call Option to protect against an increase in the underlying's price.
This method is diametrically opposed to the Synthetic Call strategy. It is employed when the trader is bearish on the underlying asset and wants to safeguard the underlying asset's price rise. The strategy's risk is minimal, but the profits are unlimited.
In a long strangle the investor purchases both an out-of-the-money call option and an out-of-the-money put option. The strike price of the call option is greater than the current market price of the underlying asset, whereas the strike price of the put option is less than the asset's market price.
This approach offers a high-profit potential since the call option has theoretically infinite upside if the underlying asset's price rises, whilst the put option can benefit if the underlying asset's price falls. The trade's risk is limited to the premium paid for the two options.
A short strangle is when an investor sells an out-of-the-money put and an out-of-the-money call at the same time. This strategy is a neutral one with low-profit potential. When the price of the underlying stock trades in a small range between the breakeven points, a short strangle profits. The maximum profit is equal to the difference between the net premiums earned for writing the two options, less trading fees.
A long straddle is an options strategy in which the trader buys both a long call and a long put option on the same underlying asset with the same expiration date and strike price. The purpose of a long straddle is to profit from a very big move in either direction by the underlying asset, which is frequently initiated by a newsworthy event. The risk of a long straddle strategy is that the market does not respond strongly enough to the event or news. Additional use of the long straddle strategy may be to capitalize on the projected rise in implied volatility, which would occur if demand for these options increased.
A short straddle is an options strategy that involves selling both a call and a put option with the same strike price and expiration date. It is utilized when the trader feels that the underlying asset will not move considerably higher or lower throughout the term of the options contracts. The maximum profit is equal to the premium earned by writing the options. Because the potential loss is limitless, this is often a strategy for more experienced traders.