Futures and Options (F & O) Strategies

Option Strategies
There are various options strategies used in trading.

Long Call

This strategy consists of buying a Call in the hope that the value of the underlying security will increase. Buying a Call allows to buy a determined number of shares (normally, but not always, 100) at a determined price (strike) before (in some cases only at) a set date (expiration day – normally on the Friday following the third Thursday of the month).


Long Put

This strategy consists of buying a Put in the hope that the value of the underlying security will decrease. Buying a Put allows to sell a determined number of shares (normally, but not always, 100) at a determined price (strike) before (in some cases only at) a set date (expiration day – normally on the Friday following the third Thursday of the month).

Covered Call

In this strategy an investor sells a Call while at the same time owning an equivalent number of shares of the underlying stock. The objective is to earn income in neutral markets. If the stock is purchased simultaneously with selling the Call, the strategy is commonly referred to as a "buy-write".

Long Call Spread

This strategy consists of the purchase of a Call on a particular underlying stock, while simultaneously writing a Call on the same underlying stock with the same expiration month, at a higher strike price. Both the buy and the sell are opening transactions, and are always the same number of contracts. This is a moderately bullish strategy used to capitalize on a modest increase in price of the underlying stock. To make the maximum profit on the strategy, both of the options need to be in-the-money at expiration – have intrinsic value.

Short Call Spread

This strategy consists of the purchase of a Call on a particular underlying stock, while simultaneously writing a Call on the same underlying stock with the same expiration month, at a lower strike price. Both the buy and the sell are opening transactions, and are always the same number of contracts. This is a moderately bearish to neutral strategy. To receive the maximum profit on a credit spread, both of the options have to be out-of-the money at expiration – expire worthless.

Long Put Spread

This strategy consists of the purchase of a Put on a particular underlying stock, while simultaneously selling a Put on the same underlying stock with the same expiration month, at a lower strike price. Both the buy and the sell are opening transactions, and are always the same number of contracts. This is a moderately bearish strategy used to capitalize on a modest decrease in price of the underlying stock. To make the maximum profit on the strategy, both of the options need to be in-the-money at expiration – have intrinsic value.

Short Put Spread

This strategy consists of the purchase of a Put on a particular underlying stock, while simultaneously selling a Put on the same underlying stock with the same expiration month, at a higher strike price. Both the buy and the sell are opening transactions, and are always the same number of contracts. This is a moderately bullish to neutral strategy. To receive the maximum profit on a credit spread, both of the options have to be out-of-the money at expiration – expire worthless.

Straddle

This strategy consists of purchasing the same number of Call and Put options at the same strike price with the same expiration date. The objective is to take advantage of any sudden movement in the stock price regardless of direction. The maximum risk is equal to the cost of opening this strategy, the maximum gain is unlimited.

Strangle

This strategy consists of purchasing the same number of Call and Put options at different strike prices with the same expiration date. The objective is to take advantage of any sudden movement in the stock price regardless of direction. The maximum risk is equal to the cost of opening this strategy, the maximum gain is unlimited.

Butterfly

This strategy is made up of three sets of either Puts or Calls having the same expiration date but different strikes. For example, with the underlying asset trading at 100, a long butterfly strategy can be built by buying Calls (or Puts) at 95 and 105, and selling twice as many Calls (or Puts) at 100. The objective is to execute a potentially high yielding trade at a low cost where maximum profits occur where the stock finishes at the middle strike price at expiration. This strategy is often used to take advantage of low volatility stocks.

Condors

A condor consists of four options with four different strikes. The options all have the same expiration, and the strike prices are equal distances apart. Condors can be composed of all calls, all puts, or a combination of calls and puts – the latter referred to as an “iron condor”. A condor is very similar to a Butterfly, but the two options located in the center do not have the same strikes. Having a Strangle at the two middle strike prices widens the area for profit, but also lowers the maximum profit potential.