Chapter 10 · Option Strategies
Option strategies and their payoff shapes
Combinations built to express a specific view, with capped risk, capped reward, or both.
17 of 66 · 10 min
Every strategy is a combination of the four basic positions — long call, long put, short call, short put. The combination shapes the payoff.
A bull call spread
| Strategy | Built from | View |
|---|---|---|
| Covered call | Own shares + sell a call | Mildly bullish; income |
| Protective put | Own shares + buy a put | Bullish but want insurance |
| Bull call spread | Buy a call, sell a higher call | Moderately bullish |
| Bear put spread | Buy a put, sell a lower put | Moderately bearish |
| Collar | Own shares + buy put + sell call | Protect, funded by capping upside |
| Iron condor | Sell a call spread and a put spread | Expect a range |
| Butterfly / Iron fly | Three strikes combined | Expect price to pin a level |
| Calendar spread | Same strike, different expiries | Expect time decay to differ |
A long straddle
Straddle — buy a call and a put at the same strike. Profits from a large move either way; the worst outcome is no movement at all. A strangle is the same idea with different strikes, cheaper and needing a larger move.
Bull call spread, worked
Buy the 500 call at Rs 28, sell the 540 call at Rs 12.
- Net cost = 28 − 12 = Rs 16 — this is the maximum loss
- Maximum gain = (540 − 500) − 16 = Rs 24
- Break-even = 500 + 16 = Rs 516
- Risk-to-reward = 16 : 24, or 1 : 1.5
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