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