MajorWager School Level 2: Basic Option Strategies

Why Use Strategies Instead of Just Buying Options?

• Options strategies help traders manage risk, improve reward potential, and enhance consistency.
• Instead of purely buying calls or puts, traders combine different option positions for specific market outlooks.

Types of Option Strategies

• Single-Leg Strategies (Basic buying/selling calls and puts)
• Multi-Leg Strategies (Spreads, straddles, iron condors, etc.)
• Income Strategies (Covered calls, cash-secured puts)

What is a Covered Call?

A covered call involves owning shares of a stock and selling a call option on those shares. This strategy allows investors to generate income while limiting upside potential.

Example of a Covered Call

Stock: AAPL, owned at $150 per share

Sell a Call Option: Strike price of $160, expiring in 30 days, premium received: $5 per share

Possible Outcomes:

• If AAPL stays below $160 → The trader keeps the $5 premium and retains the shares.
• If AAPL rises above $160 → The trader sells shares at $160, keeping the premium but capping gains.
• If AAPL drops → The premium helps reduce losses.

Why Use Covered Calls?

• Generates passive income on owned stock
• Lowers cost basis
• Works well in neutral or mildly bullish markets

What is a Cash-Secured Put?

A cash-secured put is when a trader sells a put option while holding enough cash to buy the stock if assigned.

Example of a Cash-Secured Put

Stock: TSLA, trading at $200Sell a Put Option: Strike price of $190, expiring in 30 days, premium received: $6 per share

Possible Outcomes:

• If TSLA stays above $190 → The trader keeps the $6 premium with no obligation.
• If TSLA drops below $190 → The trader buys the stock at $190 (effective cost basis = $184 due to premium received).

Why Use Cash-Secured Puts?

• Allows traders to buy stocks at a discount
• Generates income if the stock remains above the strike price
• Works well in neutral to mildly bullish markets

What is a Debit Spread?

A debit spread involves buying an option and selling another option at a different strike price at the same expiration.

Bull Call Spread (For Bullish Markets)

Buy a call option (lower strike price)

Sell AAPL $160 Call for $3

Limits risk but also caps profit potential

Example:

• Buy AAPL $150 Call for $6
• Sell AAPL $160 Call for $3
• Net Cost (Debit): $3
• Max Profit: $7 (if AAPL is above $160 at expiration)

Bear Put Spread (For Bearish Markets)

Buy a put option (higher strike price)

Sell a put option (lower strike price)

Limits risk but also caps profit potential

Example:

• Buy TSLA $200 Put for $8
• Sell TSLA $190 Put for $4
• Net Cost (Debit): $4
• Max Profit: $6 (if TSLA is below $190 at expiration)

What is a Credit Spread?

A credit spread involves selling an option and buying another option at a different strike price to limit risk. Traders receive a credit upfront.

Bull Put Spread (For Bullish Markets)

Sell a put option (higher strike price)

Buy a put option (lower strike price)

Collects a premium and profits if the stock stays above the strike

Example:

• Sell AAPL $150 Put for $5
• Buy AAPL $140 Put for $2
• Net Credit Received: $3
• Max Profit: $3 (if AAPL is above $150 at expiration)
• Max Loss: $7 (if AAPL is below $140 at expiration)

Bear Call Spread (For Bearish Markets)

Sell a call option (lower strike price)

Buy a call option (higher strike price)

Collects a premium and profits if the stock stays below the strike

Example:

• Sell TSLA $200 Call for $6
• Buy TSLA $210 Call for $3
• Net Credit Received: $3
• Max Profit: $3 (if TSLA is below $200 at expiration)
• Max Loss: $7 (if TSLA is above $210 at expiration)

Stock prices change based on:

• Company performance (earnings reports, new product launches, leadership changes)
• Market sentiment (investor optimism or fear)
• Economic factors Measures how much an option price moves relative to the stock price.
• Supply and demand dynamics (interest rates, inflation, job reports)