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Day 3

The document discusses 6 basic options trading strategies: covered call, bull call spread, bear put spread, long straddle, long strangle, and iron condor. For each strategy, it provides a definition and explanation of how and when an investor may use the strategy.

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pk singh
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114 views18 pages

Day 3

The document discusses 6 basic options trading strategies: covered call, bull call spread, bear put spread, long straddle, long strangle, and iron condor. For each strategy, it provides a definition and explanation of how and when an investor may use the strategy.

Uploaded by

pk singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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TRADING MENTORSHIP

PROGRAM WITH
ASEEM SINGHAL

DAY 3
DAY 3 - Basic Options Strategies
1. Covered Call
2. Bull Call Spread
3. Bear Put Spread
4. Long Straddle
5. Long Strangle
6. Iron Condor
1. Covered Call

With calls, one strategy is simply to buy a naked call


option.

You can also structure a basic covered call or buy-write.


This is a very popular strategy because it generates income
and reduces some risk of being long on the stock alone.
The trade-off is that you must be willing to sell your shares at
a set price—the short strike price. To execute the strategy, you
purchase the underlying stock as you normally would, and
simultaneously write—or sell—a call option on those same
shares.
For example,
Suppose an investor is using a call option on a stock that represents 100
shares of stock per call option.
For every 100 shares of stock that the investor buys, they would
simultaneously sell one call option against it.

This strategy is referred to as a covered call because, in the event that a stock price
increases rapidly, this investor's short call is covered by the long stock position.
Investors may choose to use this strategy when
they have a short-term position in the stock and
a neutral opinion on its direction.

They might be looking to generate income


through the sale of the call premium or protect
against a potential decline in the underlying
stock’s value.
2. Bull Call Spread

"In a bull call spread strategy, an investor simultaneously buys calls at a


specific strike price while also selling the same number of calls at a higher
strike price."

Both call options will have the same expiration date and underlying asset.

This type of vertical spread strategy is often used when an investor is


bullish on the underlying asset and expects a moderate rise in the price
of the asset.
Using this strategy, the investor is able to limit
their upside on the trade while also reducing the
net premium spent (compared to buying a naked
call option outright).
3. Bear Put Spread

The Bear Put Spread strategy is another form of vertical spread.


In this strategy, the investor simultaneously purchases put options at a


specific strike price and also sells the same number of puts at a lower strike
price.
Both options are purchased for the same underlying asset and have the
same expiration date.
This strategy is used when the trader has a bearish sentiment about
the underlying asset and expects the asset's price to decline.
The strategy offers both limited losses and limited gains.
4. Long Straddle
Long straddle options strategy occurs when an investor simultaneously
purchases a call and put option on the same underlying asset with the
same strike price and expiration date.

Theoretically, this strategy allows the investor to


have the opportunity for unlimited gains. At the
same time, the maximum loss this investor can
experience is limited to the cost of both options
contracts combined.
5. Long Strangle
In a long strangle options strategy, the investor purchases a call and a put
option with a different strike price : an out-of-the-money call option and an
out-of-the-money put option simultaneously on the same underlying asset
with the same expiration date.
For example, this strategy could be a wager on news
from an earnings release for a company or an event
related to a Food and Drug Administration (FDA)
approval for a pharmaceutical stock. Losses are limited
to the costs–the premium spent–for both options.

Strangles will almost always be less expensive than


straddles because the options purchased are
out-of-the-money options.
An investor who uses this strategy believes the
underlying asset's price will experience a very
large movement but is unsure of which direction
the move will take.
6. Iron Condor
In the iron condor strategy, the investor simultaneously holds a bull put
spread and a bear call spread. The iron condor is constructed by selling
one out-of-the-money (OTM) put and buying one OTM put of a lower
strike–a bull put spread–and selling one OTM call and buying one OTM call
of a higher strike–a bear call spread.
All options have the same expiration date and are on
the same underlying asset.
Typically, the put and call sides have the same spread
width. This trading strategy earns a net premium on the
structure and is designed to take advantage of a stock
experiencing low volatility. Many traders use this
strategy for its perceived high probability of earning a
small amount of premium.
QnA

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