Options Strategies

The Bible of Options Strategies by Guy Cohen (2005) lists about 64 separate options strategies in its table of contents. Many with esoteric names like skip strike butterfly, inverse skip strike butterfly, along with a gaggle of condors, strangles and straddles of every variety. Mastering them all is an occupation for somebody with seven figures of buying power and plenty of time.

Many of the complex option strategies are designed to benefit from directionless and range-bound markets or hedging and improving the return of stock ownership. The swing trader is a more simple fellow. He wants to catch the ride as early as possible when the market moves fast and hard in a specific direction and then jump off with his bag of gold when the ride is over.

For every options strategy you can be the buyer or the seller. Options are a bag full of opposites. For some pricing characteristic that helps the seller that same characteristic must also hurt the buyer. Time decay is a good example. Changes in implied volatility is another. Keep these opposites in mind when you evaluate different strategies.

Bullish Options Strategies

Buy a Call

  • Risk limited to amount of purchase (debit).
  • Reward unlimited.
  • Time decay works against you. Buy 3 months or more to expiration and close out in the last month.
    Buy Delta 70 or higher. Deeper in-the-money the more the strategy is a substitute for buying the stock.

Sell a Put

  • Risk is 1:1 below the Strike Price. Big hit on buying power. Possibility of exercise.
  • Reward is the premium received.
  • Time decay works for you, especially 45 days or less to expiration.

Buy a Call Debit Spread

  • Buy the Delta 70 and Sell the Delta 30 with same expiration date.
  • Risk limited to net debit paid.
  • Reward is the difference between long and short Strikes less the amount paid. Breakeven price is lower than a long call position.
    Time decay works for you if the position is in profit and against you if it the position is in a loss.
  • bull call spread

    Call Debit Spread

Bearish Options Strategies

Buy a Put

  • Risk limited to amount of purchase (debit).
  • Reward unlimited.
  • Time decay works against you. Buy 3 months or more to expiration and close out in the last month.
    Buy Delta -70 or lower. Deeper in-the-money the more the strategy is a substitute for selling the stock short.

Sell a Call

  • Risk is 1:1 above the Strike Price. Big hit on buying power. Possibility of exercise. Selling naked calls is a big no-no around earnings and for any stock that could be in play as an acquisition or merger candidate. Never-ever sell a call in VXX or other volatility products.
  • Reward is the premium received.
  • Time decay works for you, especially 45 days or less to expiration.

Buy a Put Debit Spread

  • Buy the Delta -70 and Sell the Delta -30 with same expiration date.
  • Risk limited to net debit paid.
  • Reward is the difference between long and short Strikes less the amount paid. Breakeven price is higher than a long put position.
    Time decay works for you if the position is in profit and against you if it the position is in a loss.

This blog post, My Strategy For Debit Spreads, gets deeper into the details of this options strategy.

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