At the core of options trading, there are for types of positions you can hold. All other positions are variations and combinations of these four fundamentals.
Buying a call option
Selling a call option
Buying a put option
Selling a put option
In this article we will break down key elements of the four positions above and cover a few powerful and popular variations.
Prefer watching to reading? Check out the video at the bottom of this post.
The Four Types of Options Trades
1. Buying a Call Option
You are bullish, you think the price will go up.
2. Selling a Call Option
You are bearish, you think the price will go down.
3. Buying a Put Option
You are bearish, you think the price will go down.
4. Selling a Put Option
You are bullish, you think the price will go up.
If you enter into just one of the above positions (i.e. you buy a put option, or multiple put options of the same strike price and expiration), you are entering what is called an uncovered or naked position. The downside of these trades is they, theoretically, leave you with unlimited risk. The first variation we will help limit our risk.
If you're interested in a more in-depth walkthrough of options basics, book a one-on-one session with on our our experts, Guillermo or John!
Verticals (Spreads)
A vertical or spread is a combination of buying and selling either calls or puts. It limits your risk and your gain.
If I just sell a call, I'm bearish, and that's an uncovered position with theoretically unlimited risked, as mentioned above. However, if, in addition, I buy a call further out of the money, that acts as insurance and provides protection. The premium (credit) received is lowered, but it also limits my max loss.
There are four types of spreads. Note for each spread you are buying and selling options with the same expiration date.
1. Bull Call Spread
Buy a call + Sell a call at a higher strike price
Net Debit
You want the price to increase (bullish)
2. Bear Call Spread
Sell a call + Buy a call at a higher strike price
Net Credit
You want the price to decrease (bearish)
3. Bull Put Spread
Buy a put + Sell a put at a higher strike price
Net Credit
You want the price to increase (bullish)
4. Bear Put Spread
Sell a put + Buy a put at a higher strike price
Net Debit
You want the price to decrease (bearish)
We walk through an example of a Bear Call Spread in our blog How I Trade SPY & SPX.
Strangles
A strangle consists of selling a call and selling a put at different strike prices. You receive credit from both sides (the call and put), but you also have unlimited risk on both sides. There are ways to reduce risk on strangles utilizing delta, IVR, expected move, etc. However, we won't cover those in this article.
You can also perform a strangle by buying a call and buying a put, but here you have a net debit.
Strangles are directionally bias due to the differing strike prices of the call and put. This allows you to benefit from a significant move in price while still having some coverage on the other side.
To see a strangle in action, check out John trading TSLA in our video Tesla Strangle WIN - Anatomy of a Trade. Remember these are high risk trades.
Straddles
A straddle consists of buying a call and buying a put at the same strike price. Or you can sell a call and sell a put at the same strike price to perform a straddle.
Straddles, like the strangle, allow you to benefit from a significant move in price. Unlike the strangle, the straddle is NOT directionally bias which allows you to benefit from a move up or down. This makes straddles a good strategy for earnings if a large move is expected, but you aren't sure which way the price will go.
Now that you have a brief overview of the basic options positions and common variations, which are you interested in trying out?
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Watch the video of John covering this topic.