By Joe Duarte

Following are ten great trading option strategies. The common thread here is that they have limited risk and are alternatives for you to consider. The unlimited-risk or limited-but-high risk strategies they could potentially replace are provided with the strategy summary.

Married put

A married put combines long stock with a long put for protection. The position is created by purchasing the stock and put at the same time, but the key is creating put protection and managing the risk of stock ownership. Buying a put for existing stock or rolling out an option to a later expiration month remains true to that strategy goal. Long out-of-the-money (OTM) options should be sold 30–45 days before expiration.

Married Put Summary
Strategy Outcome
Components Long Stock + Long Put
Risk/Reward Limited risk, unlimited reward
Replaces Long stock with limited but high risk
Max Risk [(Stock Price + Put Price) – Put Strike Price] ×
100
Max Reward Unlimited
Breakeven Stock Price + Put Price
Conditions Bullish, low IV
Margin Not typically required — check with broker
Advantages Changes limited but high risk to limited risk
Disadvantages Increases cost of position by option premium
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Collar

A collar combines long stock with long put protection and a short call that reduces the cost of protection. The call premium is a credit that offsets, at least partially, the cost of the put. Timing this strategy’s execution is a worthy goal.

An optimal scenario occurs when you can buy the stock and long put during low volatility conditions, allowing you to buy longer-term protection. Calls are sold as volatility increases, and there are 30–45 days to expiration, so that time decay accelerates short call gains.

Collar Summary
Strategy Outcome
Components Long Stock + Long Put + Short Call
Risk/Reward Limited risk, limited reward
Replaces Long stock with limited but high risk
Max Risk [Stock Price + (Option Debit) – Put Strike Price] ×
100
Max Reward [(Call Strike Price – Stock Price) + (Option Debit)]
× 100
Breakeven Stock Price + (Option Debit)
Conditions Bullish, low IV that increases
Margin Not typically required — check with broker
Advantages Changes limited but high risk to limited risk
Disadvantages Replaces unlimited reward with limited reward
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Long put trader

A long put is a limited-risk, bearish position that gains when the underlying declines. This is a much better bet than an unlimited-risk, short stock ­position that requires more capital to establish. The bearish move must occur by option expiration, and out-of-the-money (OTM) puts should be exited 30–45 days prior to expiration.

Long Put Summary
Strategy Outcome
Components Long put
Risk/Reward Limited risk, limited but high reward
Replaces Short stock with unlimited risk
Max Risk Put Premium: (Put Price × 100)
Max Reward (Put Strike Price – Put Price) × 100
Breakeven Put Strike Price – Put Price
Conditions Bearish, low IV that increases
Margin Not required
Advantages Changes unlimited risk to limited risk
Disadvantages Time constraints for move to occur due to expiration
[Credit: Image by Optionetics]

Credit: Image by Optionetics

LEAPS call investor

A Long-term Equity AnticiPation Security (LEAPS) call option reduces the cost and risk associated with a long stock position. The position is best established when implied volatility (IV) is relatively low. One drawback is that the LEAPS owner doesn’t participate in dividend distributions, which reduce the stock value. At the same time, the amount risked in the position will be less than owning the stock outright.

LEAPS Call Investor Summary
Strategy Outcome
Components Long call with expiration greater than nine months
Risk/Reward Limited risk, unlimited reward
Replaces Long stock with limited but high risk
Max Risk Call Premium: (Call Price × 100)
Max Reward Unlimited
Breakeven Strike Price – LEAPS Price
Conditions Bullish, low IV that increases
Margin Not required
Advantages Changes limited but high risk to limited risk
Disadvantages Pay for time value that erodes and misses dividends
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Diagonal spread

A diagonal spread combines a short near-month option with a long later-month option of the same type. When the strike prices are the same, it is referred to as a calendar spread. A near-term neutral view allows you to sell the short option to offset the long option costs.

A call diagonal is described here, but a put ­diagonal works equally well when you’re bearish longer term.

Call Diagonal Spread Summary
Strategy Outcome
Components Long Lower Strike Call + Short, near month call
Risk/Reward Limited risk, potential unlimited reward*
Replaces Long call
Max Risk (Long Call Price – Short Call Price) × 100
Max Reward * Unlimited when short call expires worthless
Breakeven Detailed
Conditions Neutral with IV time skew, then trending
Margin Required
Advantages Reduces cost of long option
Disadvantages A fast, bullish move results in limited reward
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Bear call credit spread

A bear call spread combines a short, lower strike price call and a long, higher strike price call expiring the same month. It creates a credit and replaces a short call with unlimited risk. Again, timing is important in the deployment of this strategy. It’s best applied when IV is high and there are fewer than 30 days to expiration.

Bear Call Credit Spread Summary
Strategy Outcome
Components Short Lower Strike Price Call + Long Higher Strike Price Call
(same month)
Risk/Reward Limited risk, limited reward
Replaces Short option
Max Risk (Difference between Strike Prices – Initial Credit)
× 100
Max Reward Initial Credit
Breakeven Short Strike Price + Net Credit
Conditions Bearish, high IV
Margin Required
Advantages Reduces risk from unlimited to limited
Disadvantages Reduces reward from limited-but-high to limited
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Straddle

A straddle combines a long call with a long put using the same strike price and expiration. It’s created when volatility is low and expected to increase and gains when prices moves strongly up or down. This is a useful strategy to set up before an important announcement such as an earnings or key economic report release. It may be useful with an underlying stock in the former scenario and with an ETF in the latter. Because there are two long options, exit the position with 30–45 days to expiration to avoid time decay.

Straddle Summary
Strategy Outcome
Components Long Call + Long Put (same strike price, month)
Risk/Reward Limited risk, high to unlimited reward
Replaces Single option with directional bias (call or put)
Max Risk Net Debit: (Call Price + Put Price) × 100
Max Reward Up: Unlimited, Down: (Strike Price – Net Debit) ×
100
Breakeven1 Strike Price + Net Option Prices
Breakeven2 Strike Price – Net Options Prices
Conditions Neutral, low IV with strong moves expected in both
Margin Not required
Advantages Reduces directional risk of single option position
Disadvantages Increases cost of single option position
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Call ratio backspread

A call ratio backspread combines long higher strike price calls with a lesser number of short lower strike calls expiring the same month. It’s best ­implemented for a credit and is a limited-risk, potentially unlimited reward position that is most profitable when a strong bullish move occurs.

Call Ratio Backspread Summary
Strategy Outcome
Components Long Calls + Less Lower Strike Short Calls (same month)
Risk/Reward Limited risk, potential unlimited reward
Replaces Bear call credit spread
Max Risk Limited: Detailed, see Chapter 15
Max Reward Up: Unlimited, Down: Initial Credit
Breakevens Detailed, see strategy discussion in Chapter 15
Conditions Bullish, IV skew with strong increase in price and IV
Margin Required
Advantages Changes limited reward to unlimited reward
Disadvantages Initial credit less, complex calculations
[Credit: Image by Optionetics]

Credit: Image by Optionetics

Put ratio backspread

A put ratio backspread combines long lower strike price puts with a lesser number of short higher strike puts expiring the same month. It’s best ­implemented for a credit and is a limited risk — limited, but a potentially high-reward position. It is most profitable when a strong bearish move occurs.

[Credit: Image by Optionetics]

Credit: Image by Optionetics
Put Ratio Backspread Summary
Strategy Outcome
Components Long Puts + Less Higher Strike Short Puts (same month)
Risk/Reward Limited risk, limited but potentially high reward
Replaces Bull put credit spread
Max Risk Limited: Detailed, see Chapter 15
Max Reward Up: Initial Credit, Down: (Long Strike Price + Initial Credit)
× 100
Breakevens Detailed, see strategy discussion in Chapter 15
Conditions Bearish, IV skew with strong decline and increased IV
Margin Required
Advantages Changes limited reward to limited-but-high reward
Disadvantages Initial credit less, complex calculations

Long put butterfly

A long put butterfly combines a bull put spread and a bear put spread expiring the same month for a debit. The two short puts have the same strike price and make up the body. The two long puts have different strike prices (above and below the body) and make up the wings. Time decay helps the trade.

Long Put Butterfly Summary
Strategy Outcome
Components Bear Put Spread + Bull Put Spread (same month)
Risk/Reward Limited risk, limited reward
Replaces Short straddle
Max Risk Net Debit: [(Lowest Strike Put Price + Highest Strike Put
Price) – (2 × Middle Strike Put Price)] ×
100
Max Reward [(Highest Strike Price – Middle Strike Price) ×
100] – Net Debit
Breakeven 1 Highest Strike Price – Net Debit Price
Breakeven 2 Lowest Strike Price + Net Debit Price
Conditions Sideways to moderately bearish, IV skew
Margin Required
Advantages Changes unlimited risk to limited risk
Disadvantages Trading costs associated with three positions
[Credit: Image by Optionetics]

Credit: Image by Optionetics