Option strategies overview

Learn about various options strategies, how and why they are used and the risks associated with each type.

Beginner Beginner strategies
Intermediate Intermediate strategies
Advanced Advanced strategies

When you're exploring option strategies and deciding which are right for your trading plan, there are many factors to take into account. In particular, remember that the option seller (writer) can incur losses greater than the price of the contract. Evaluate both the objectives and risks of each option strategy and make sure you understand the Derivatives Trading Agreement and Derivatives Risk Disclosure Statement. It's explained in our Account Agreements and Disclosures (PDF, 1.3 MB) Opens a new window..

Beginner strategies

Long call

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Strategy type

Bullish

How do I get started?

Create this strategy by buying a call option.

Why use this strategy?

A long call is used to speculate that the price of an underlying stock or ETF will rise within a specific timeframe. Potential profit can be unlimited if the stock price rises infinitely.

Risks

Risk is limited to the premium paid to purchase the option contract.

For more information, check out Lesson 3: Which basic option strategies might make sense for beginners?

Long put

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Strategy type

Bearish

How do I get started?

Create this strategy by buying a put option.

Why use this strategy?

A long put is used to speculate that the price of the underlying stock or ETF will decline within a specific timeframe. Potential maximum profit is the strike price minus the premium paid.

Risks

Risk is limited to the premium paid to purchase the option contract.

For more information, check out Lesson 3: Which basic option strategies might make sense for beginners?

Married put

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Strategy type

Hedge

How do I get started?

Create this strategy by buying the stock and put option(s) on that stock at the same time. If puts are bought for an existing stock position the strategy is known as a protective put.

Why use this strategy?

A married put strategy is used to temporarily protect an unrealized profit or prevent further losses on existing long stock or ETF position.

Risks

Position risk is limited to current stock price minus the put option strike price, plus the premium paid for the option.

For more information, check out Lesson 10: What is a married put strategy?

Long straddle

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Strategy type

Volatility

How do I get started?

Create this strategy by purchasing a call and put option on the same underlying asset at the same strike price and same expiry.

Why use this strategy?

A long straddle is used to speculate that a stock or ETF will have a large price movement in either direction in a given timeframe.

Risks

Risk is limited to the total premium paid for the options contracts purchased.

For more information, check out Lesson 11: What are long straddles and long strangles?

Long strangle

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Strategy type

Volatility

How do I get started?

Create this strategy by purchasing a call and put option on the same underlying asset at different strike prices and same expiry. Put option must have a lower strike price than the call.

Why use this strategy?

A long straddle is used to speculate that a stock or ETF will have a large price movement in either direction in a given timeframe.

Risks

Risk is limited to the total premium paid for the options contracts purchased.

For more information, check out Lesson 11: What are long straddles and long strangles?

Covered call

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Strategy type

Income

How do I get started?

Create this strategy by selling a call option contract on existing long equity or ETF position.

Why use this strategy?

Covered calls are used to generate income on an existing long position.

Risks

Writing a covered call limits upside profit on the existing long stock or ETF position and does not prevent downside risk.

For more information, check out Lesson 9: The covered call

Buy-write

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Strategy type

Income/Moderately bullish

How do I get started?

Create this strategy by buying a long stock or ETF position and simultaneously selling call(s) on the same stock or ETF.

Why use this strategy?

Buy-writes are used to reduce the cost of owning the stock and/or to generate income when little upward price movement in the stock is expected.

Risks

Risk is limited to the cost (net debit) paid to establish the position.

For more information, check out Lesson 9: The covered call

Intermediate strategies

Debit call spread (bull call spread)

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Strategy type

Moderately bullish

How do I get started?

Create this strategy by purchasing a call option at a lower strike price and sell a call option at a higher strike price on the same underlying asset with the same expiry.

Why use this strategy?

Debit call spreads are used to speculate that a stock or ETF will have a moderate price move upwards and likely remain below the strike price of the short call option.

Risks

Risk is limited to the cost (net debit) of the trade.

For more information, check out Lesson 13: What are debit spreads?

Debit put spread (bear put spread)

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Strategy type

Moderately bearish

How do I get started?

Create this strategy by purchasing a put option at a higher strike price and sell a put option at a lower strike price on the same underlying asset with the same expiry.

Why use this strategy?

Debit put spreads are used to speculate that a stock or ETF will have a moderate price move downwards and likely remain above the strike price of the short put option.

Risks

Risk is limited to the cost (net debit) of the trade.

For more information, check out Lesson 13: What are debit spreads?

Credit call spread (bear call spread)

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Strategy type

Moderately bearish

How do I get started?

Create this strategy by purchasing a call option at a higher strike price and sell a call option at a lower strike price on the same underlying asset with the same expiry for a net credit.

Why use this strategy?

Credit call spreads are used to speculate that a stock or ETF will decrease in price or maintain a price below the lower strike option that was sold.

Risks

Risk is limited to the difference in strike prices minus the premium (net credit) received.

For more information, check out Lesson 14: What are credit spreads?

Credit put spread (bull put spread)

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Strategy type

Moderately bullish

How do I get started?

Create this strategy by purchasing a put option at a lower strike price and sell a put option at a higher strike price on the same underlying asset with the same expiry for a net credit.

Why use this strategy?

Credit put spreads are used to speculate that a stock or ETF will increase in price or maintain a price above the higher strike option that was sold.

Risks

Risk is limited to the difference in strike prices minus the premium (net credit) received.

For more information, check out Lesson 14: What are credit spreads?

Calendar (horizontal) spread

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Strategy type

Moderately bullish/bearish

How do I get started?

Create this strategy by purchasing and selling option contracts of the same type (put or call) with the same strike prices but different expiries simultaneously. Long option contract must be the longer expiry.

Why use this strategy?

Calendar spreads are used to predict that a stock may go up or down after a certain date but before a date further away.

Risks

Risk is limited to the cost (net debit) of the trade.

Diagonal spread

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Strategy type

Moderately bullish/bearish

How do I get started?

Create this strategy by purchasing and selling option contracts of the same type (put or call) with different strike and different expiries simultaneously. Long option contract must be the longer expiry.

Why use this strategy?

Diagonal spreads are used to predict a stock may go up or down after a certain date but before a date further away.

Risks

Risk is limited to the cost (net debit) of the trade.

Advanced strategies

Short (naked) call

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Strategy type

Bearish

How do I get started?

Create this strategy by selling a call option on an underlying stock or ETF you do not own to collect a premium.

Why use this strategy?

Short calls are used when a trader expects the price of a stock or ETF to decline moderately before a certain date and/or if they wish to initiate a short equity position at the strike price of the call option sold.

Risks

Risk is unlimited as the market price of the underlying could theoretically go to infinity.

For more information, check out Lesson 8: Selling uncovered options

Short (naked) put

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Strategy type

Bullish

How do I get started?

Create this strategy by selling a put option on an underlying stock or ETF you do not own to collect a premium.

Why use this strategy?

Short puts are used when a trader expects the price of a stock or ETF to increase moderately before a certain date and/or if they wish to initiate a long equity position at the strike price of the put option sold.

Risks

Risk is limited to the strike price minus the premium received for writing the put.

For more information, check out Lesson 8: Selling uncovered options

Short straddle

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Strategy type

Volatility

How do I get started?

Create this strategy by selling a (short) call and put option on the same underlying asset at the same strike price and same expiry.

Why use this strategy?

Short straddles are used to speculate that a stock will have minimal price movement and/or option pricing will decline over a set timeframe.

Risks

Risk is unlimited as the market price of the underlying could go theoretically go to infinity.

For more information, check out Lesson 12: What are short straddles and short strangles?

Short strangle

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Strategy type

Volatility

How do I get started?

Create this strategy by selling (short) a call and put option on the same underlying at different strike prices and same expiry. The put option must have a lower strike price than the call.

Why use this strategy?

Short strangles are used to speculate that a stock or ETF will have minimal price movement and/or option pricing will decline over a set timeframe.

Risks

Risk is unlimited as the market price of the underlying could go theoretically go to infinity.

For more information, check out Lesson 12: What are short straddles and short strangles?

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