Conclusion - Option Strategies

Conclusion

In this course, we’ve expanded on the four basic single-leg option strategies: long call, long put, short call, and short put. We discussed how you can take these individual option strategies and combine them into two and four-leg strategies to profit from directional movement in the underlying asset as well as non-directional movement. Furthermore, we also described how you can combine the underlying asset with options, both long and short, to either capture a fixed return in exchange for upside gain or protect against downside movement.

Here is a quick summary of these strategies.

The 14 option strategies and 3 equity + option strategies that we covered will allow you to take advantage of a vast number of different market scenarios. Adding these to the 4 basic strategies, this means that you have 21 trading strategies at your disposal thus far. As you can see from the table above, we have discussed 2-leg, 4-leg, as well as single-leg strategies.

What we haven’t covered are three-leg strategies. Three-leg option strategies are commonly referred to as ‘ratio’ strategies, and they let you further refine your risk-reward profile to your preference. For example, a strap is similar to a straddle and involves the purchase of a long call and a long put. The difference is that a strap requires you to purchase 2 calls for every 1 put purchased. So this strategy is still a non-directional trade, but it has an upward bias.

In addition to this, all of the strategies covered have involved using the same expiration date across the contracts purchased or sold. You can trade strategies across expiries. For example, you can short a call for the current expiry and long a call at a further out expiry. This is known as a calendar or a horizontal spread. This lets you take advantage of near-term higher implied volatility.

Ratios and Calendars are types of advanced option strategies, and they will be discussed in our next course.