Types of Option Strategies

Option strategy is the purchase and/or sale of one or various option positions and possibly an underlying position. Options strategies can favor movements in the underlying that are bullish, bearish or neutral. The option positions used can be long and/or short positions in calls and/or puts at various strikes. Let us have a look at the various types of option strategies that are available at our disposal.

A straddle is one of the most popular trading strategies. This spread strategy involves purchasing a put and a call as opposed to one or the other. When you buy an options put call to hedge your risk, it is called a long straddle, whereas if you sell an options put call it is called a short straddle. A straddle is therefore the simultaneous buying or selling of a combination of puts and calls. The purpose of the straddle strategy is to hedge your risk in a market. A long straddle is established by buying both a put and call on the same security at the same strike price and with the same expiration. The short straddle options strategy is the opposite of the long straddle. It lets you take advantage of, instead of being shorted by, the time value as the expiration date approaches. If the options are not exercised then you keep the premium amounts.

Vertical Spread is one of the simplest option strategies where you buy and sell different options with the same strike prices and with the same expiration dates. In other words, you buy a put and a call at the same strike price which is near in the money. It involves the buying of options and the writing of other options with different strike prices, but with the same expiration dates. Another example of simpler option strategies is the bull spread which involves being long on a closer expiration date and short on an expiration date farther away. You can also purchase an option with a lower strike price and sell an option with a higher strike price with both options having the same expiration date. A bullish spread increases in value as the stock price increases. A bullish spread as compared to a bearish spread increases in value as the stock price increases. The bearish spread increases in value as the stock price decreases. In general, the writing of options helps to purchase long option positions.

Another one of the option strategies is the calendar spread where you buy options with the same strike price but with different expiration dates. This strategy is also called a time spread. A time spread, or calendar spread, involves buying and writing options with different expiration dates. A horizontal spread is a time spread with the same strike prices. A diagonal spread has different strike prices and different expiration dates. The purpose of the calendar spread is to take advantage of the fact that the time value of an option will decay at a more rapid rate the closer the expiration date approaches. For example, you might write a put or call that has an expiration date in the near term. Then you would simultaneously buy a put or call with an expiration date that is further away.

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