Options Strategies Explained

At Webull, we provide a range of options strategies tailored to your investment objectives. To view the available strategies, please click here. Below is a brief overview of each strategy, including maximum gain, maximum loss, breakeven values, and the required options level for trading:

Covered Call

A covered call is an options strategy in which a call option is written against a long stock optoin. It is primarily used to generate income on portfolio holdings in which the investor has a neutral to slightly bullish outlook on. This strategy requires level 1 options approval.

• Max Gain: Limited to the strike price plus premium received
• Max Loss: If the stock price drops to $0.00, plus the premium received
• Breakeven: Stock purchase price minus premium received

Cash Secured Put

A neutral-to-bullish options strategy where a trader sells a put option while holding enough cash in the account to buy the underlying stock if assigned. It's typically used by investors who are willing to purchase the stock at the strike price. This strategy requires options level 1 approval.

• Max Gain: Limited to the premium received for selling the put.
• Max Loss: Occurs if the stock goes to zero. It is the strike price minus the premium received
• Breakeven: Strike price minus premium received

Long Single-leg Option

A straightforward strategy that involves buying a call or put option. Long options are commonly used for speculation, as they provide the potential for significant gains with a limited loss—the cost of the premium paid for the option. This strategy requires level 2 options approval.

• Max Gain: Unlimited for calls, the strike price minus premium paid for puts
• Max Loss: Premium paid
• Breakeven: Strike price plus premium paid for calls, strike price minus premium paid

Straddle

Involves buying a call and a put at the same strike price and expiration. This strategy is used to profit from significant movement in either direction. Level 2 options approval in a margin account is required to trade this strategy.

• Max gain: Unlimited
• Max Loss: Premium paid
• Breakeven: Upper breakeven is the strike price plus the total premium paid; lower breakeven is the strike price minus the total premium paid.

Strangle

Similar to a straddle but with different strike prices for the call and put, resulting in a less expensive entry, but requiring a greater price movement for profit. This options strategy requires a margin account with options level 2.

• Max Gain: Unlimited
• Max Loss: Premium paid
• Breakeven: Upper breakeven is the strike price plus the total premium paid; lower breakeven is the strike price minus the total premium paid

Collar

Involves holding the underlying stock while buying a protective put and selling a call. This strategy is used to protect against significant losses while limiting potential gains. This options strategy requires options level 2.

• Max Gain: Limited to the difference between the stock price and the strike price of the short call, ± the net premium paid or received.
• Max Loss: Limited to the difference between the stock price and the strike price of the protective put, ± the net premium paid or received.
• Breakeven: Stock purchase price ± the net premium paid or received.

Covered Put

A covered put is an options strategy with undefined risk and limited profit potential that combines a short stock position with a short put option. It is primarily used to generate income on short portfolio holdings. This strategy requires a margin account with options level 2 approval.

• Max Gain: Distance between short stock cost basis and strike price, plus premium received
• Max Loss: Unlimited if the stock rises significantly. Loss is reduced by the premium received.
• Breakeven: Cost basis of the short stock position plus the premium received from selling the put.
• Vertical Spread

Vertical Spread

Credit Spread

A defined-risk, defined-reward strategy set up by selling an option and buying another option of the same type (call or put), with the same expiration date but a different strike price. A put credit spread is set up by selling the higher strike put and buying a lower strike put, while a call credit spread is set up by selling the lower strike call and buying a higher strike call. Vertical credit spreads generate income by collecting a net premium, with profits maximized when the spread expires out-of-the-money. This strategy requires options level 3 in a margin account.

• Max Gain: The net premium received
• Max Loss: The difference between the strike prices minus the net premium received
• Breakeven: Short option strike price plus the premium for calls, minus the premium for puts

Debit Spread

A strategy set up by simultaneously buying and selling options of the same type (calls or puts) with the same expiration date but different strike prices. Vertical debit spreads are used to define risk and reduce the cost of a directional options trade. A call debit spread is set up by buying the lower strike and selling the higher strike. A put debit spread is set up by buying the higher strike and selling the lower strike. This strategy requires options level 3 in a margin account.

• Max Gain: The difference between the strike prices minus the premium paid
• Max Loss: The net debit paid
• Breakeven: Long option strike price plus the premium for calls, minus the premium for puts

Calendar Spread

A strategy that involves buying and selling options of the same type (either calls or puts) with the same strike price but different expiration dates. This strategy is designed to profit from differences in time decay and implied volatility between the short and long options. Calendar spreads are typically used when an investor expects little movement in the underlying asset in the short term but anticipates increased volatility or price movement over the longer term. This strategy requires options level 3 in a margin account.

• Max Gain: Theoretically unlimited for call calendars; for put calendars, it’s capped at the strike price minus the premium paid. However, the strategy is primarily designed to profit when the underlying asset closes near the strike price at the short option’s expiration, allowing the short option to expire worthless while the longer-dated option retains time value.
• Max Loss: Net premium paid
• Breakeven: The point at which the value of the long option equals the net debit after the short option has expired

Diagonal Spread

A multi-leg, risk-defined options strategy combining elements of both vertical and calendar spreads. It is set up by buying a longer-term option and selling a shorter-term option at a different strike price. Diagonal spreads can be structured with calls or puts to express either a bullish or bearish directional bias with the added benefit of time decay working in the trader’s favor. This strategy is typicall set up for a net debit and requires options level 3 in a margin account.

• Max Gain: Depending on structure, theoretically unlimited for calls and capped at the strike price minus the premium paid
• Max Loss: Depending on structure, usually the net premium paid
• Break Even: Depending on structure, would be the long call strike price plus premium paid, for puts would be the long strike price minus premium paid

Iron Butterfly

A defined-risk, four-part strategy made up of a bull put spread and a bear call spread, where the short put and short call share the same strike price. All options have the same expiration date, and the strikes are typically spaced evenly to center around the stock price. This strategy is designed to profit from low volatility, where the underlying stock stays near the strike price of the short options. It is set up for a net credit and requires options level 3 in a margin account.

• Max Gain: Net premium received
• Max Loss: Limited to the width of the wings (difference between the short and long strikes) minus the net premium received
• Breakeven: Upper breakeven is the short strike plus the net premium received; lower breakeven is the short strike minus the net premium received.

Butterfly

A risk-defined strategy set up using either all calls or all puts with the same expiration date. It involves buying one option at a lower strike, selling two options at a middle strike, and buying one option at a higher strike. All strike prices are equidistant. This strategy is designed to profit from low volatility and is typically used when the trader expects the stock to stay near the middle strike at expiration. It is entered for a net debit and requires options level 3 in a margin account.

• Max Gain: Achieved if the stock is exactly at the middle strike at expiration and is equal to the width between strikes minus the net premium paid.
• Max Loss: Net premium paid
• Breakeven: Lower breakeven is the lower strike plus the net premium paid; upper breakeven is the higher strike minus the net premium paid

Iron Condor

A neutral, range-bound options strategy set up using four options: a bull put spread and a bear call spread, with all legs having the same expiration but different strike prices. The short call and short put are placed closer to the stock price, while the long call and long put are placed further out-of-the-money, creating a “wingspan” of protection on both sides. This strategy profits when the underlying stays within the range of the short strikes, and carries limited risk and limited reward. This strategy requires options level 3 in a margin account.

• Max Gain: Net premium received
• Max Loss: Limited to the difference between the strike prices of either spread (put or call side), minus the net premium received
• Breakeven: Lower breakeven is the short put strike minus the net premium received, and the upper breakeven is the short call strike plus the net premium received.

Condor

A four-leg, risk-defined strategy that uses either all calls or all puts with the same expiration date but different strike prices. It’s structured by buying one lower strike, selling two middle strikes, and buying one higher strike, forming a "wingspread." This strategy profits from low volatility and is often used when a trader expects the underlying stock to stay within a narrow range.

• Max Gain: The difference between strike prices minus the debit paid
• Max Loss: Net debit paid
• Breakeven: Lower breakeven is the lowest long strike plus the net premium paid, and the upper breakeven is the highest long strike minus the net premium paid.

Ratio Spreads

A ratio spread is a neutral options strategy where an investor maintains an unequal number of long and short options, typically with more short positions than long ones. The most common setup features a 2:1 ratio, meaning there are twice as many short options as long. Although it shares similarities with other spread strategies that involve both long and short positions of the same type (either puts or calls), the key difference is the unequal ratio between the two. To learn more, please visit trading ratio spreads.

Naked Call

A strategy where an investor sells a call option without holding the underlying stock or having any other offsetting positions. This strategy is also known as an uncovered call and involves significant risk since it lacks any protective positions. This options strategy requires options level 4 in a margin account.

• Max Gain: Premium received
• Max Loss: Unlimited, as the stock price can rise indefinitely
• Breakeven: Strike price plus premium received

Naked Put

A strategy where an investor sells a put option without holding the underlying stock or having any offsetting positions. This approach is also known as an uncovered put and involves substantial risk, as there is no protection against adverse price movements. This options strategy requires options level 4 in a margin account.

• Max Gain: Premium received
• Max Loss: The strike price of the sold put option minus the premium received, occurs if the stock price falls to zero
• Breakeven: Strike price minus premium received

Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options and Option Spread Risk Disclosure before trading options.