Equity Option Strategies

Question 1

Straddle (Long Straddle)

Answer 1

> You’re betting that SOMETHING BIG WILL HAPPEN, but you’re not sure if it will be good or bad.

• You BUY A CALL and a PUT at the SAME STRIKE PRICE, same expiration.
• You profit if the stock MOVES A LOT (either way), but lose if it STAYS FLAT.

Example: Earnings announcement is coming up-could be great or terrible-you just need a big move.

Question 2

Strangle (Long Strangle)

Answer 2

> You think there will be BIG MOVEMENT, but you’re OKAY BEING A LITTLE WRONG on direction or timing.

• You BUY A CALL ABOVE the current price and a PUT BELOW it (so the strike prices are different).
• Cheaper than a straddle, but you need a BIGGER MOVE to profit

Question 3

Butterfly Spread

Answer 3

> You think the stock will STAY RIGHT AROUND A CERTAIN PRICE-and you’re playing the “no surprise” game.

• You buy 1 LOW STRIKE CALL, sell 2 AT-THE-MONEY CALLS, and buy 1 HIGH STRIKE CALL.
• Very little risk, limited reward.
• Profits most if the stock DOESN’T MOVE MUCH.

Question 4

Iron Condor

Answer 4

> You believe the stock will STAY IN RANGE, and you want to make money off of that stability.

• Sell 1 OUT-OF-THE-MONEY PUT, buy a LOWER STRIKE PUUT, sell 1 OUT-OF-THE-MONEY CALL, and buy a HIGHER STRIKE CALL.
• It’s like two spreads: a BEAR CALL SPREAD + BULL PUT SPREAD.
• You earn income if the stock STAYS BETWEEN TWO PRICES.

Question 5

Protective Put

Answer 5

> You already own the stock and want to BUY INSURANCE in case it drops.

• You BUY A PUT while holding the stock.
• If the stock crashes, your losses are limited.
• Think of it like buying CAR INSURANCE-you hope not to use it, but you sleep better at night.

Question 6

Covered Call

Answer 6

> You own a stock and want to MAKE EXTRA CASH while holding it-but you’re okay if it gets sold.

• You SELL A CALL on the stock you already own.
• You earn income from the premium, but if the stock rises past the strike, you have to sell it at that price.

Question 7

Collar

Answer 7

> You want to PROTECT YOUR STOCK but also want to CUT COSTS.

• You BUY A PUT (for protection) and SELL A CALL (to help pay for it).
• It’s like getting insurance for free by agreeing to sell the stock if it rises.

Question 8

Calendar Spread

Answer 8

> You believe the stock WON’T MOVE MUCH RIGHT NOW, but might move LATER.

• You sell a SHORT-TERM OPTION and buy a LONGER-TERM OPTION at the same strike.
• You make money if TIME DECAY eats the short-term option faster than the long one.