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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 Calls and Puts

Involves writing a call or put option while holding a corresponding long or short position in the underlying stock. This options strategy requires options level 1.


  • Max Gain: Limited to the strike price plus premium received for covered calls; limited to the strike price minus premium received for covered puts.
  • Max Loss: Significant if the underlying moves against the stock position; reduced by the premium received.
  • Breakeven: Stock purchase price minus premium received for covered calls; stock sale price plus premium received for covered puts.


Single-leg Option

A straightforward strategy that involves either buying or selling a single option contract, such as a call or a put. This strategy requires options level 2.


  • Max Gain: Unlimited for long calls; limited to the premium received for short calls or puts.
  • Max Loss: Limited to the premium paid for long options; unlimited for short calls, and up to the strike price minus the premium received for short puts.
  • Breakeven: Strike price plus premium paid for long calls; strike price minus premium received for long puts.


Protective Calls and Puts


Protective Call

A strategy where an investor holds a short position in a stock and buys a call option on the same stock. This strategy is used to hedge against potential price increases and limit the cost of buying back the stock if it rises significantly. This options strategy requires options level 2.


  • Max Gain: Unlimited, as the stock price can rise indefinitely.
  • Max Loss: The cost of the stock minus the premium received from selling the call option, plus the cost of buying the call option.
  • Breakeven: The purchase price of the stock plus the premium paid for the call option.

Protective Put

A strategy where an investor holds a long position in a stock and buys a put option on the same stock. This strategy is used to hedge against potential price decreases and limit potential losses. This options strategy requires options level 2.


  • Max Gain: The potential gain is unlimited as the stock price can rise indefinitely.
  • Max Loss: The cost of the stock minus the strike price of the put option, plus the premium paid for the put option.
  • Breakeven: The purchase price of the stock plus the premium paid for the put option.


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 plus the premium received.
  • Max Loss: Limited to the difference between the stock price and the strike price of the protective put minus the premium received.
  • Breakeven: Stock purchase price minus net premium received.


Straddle

A neutral strategy that involves buying or selling both a call and a put with the same strike price and expiration date. This options strategy requires a margin account with options level 2.


  • Max Gain: Unlimited for long straddles; limited to the net premium received for short straddles.
  • Max Loss: Limited to the total premium paid for long straddles; unlimited for short straddles.
  • 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. Used to profit from significant price movement. This options strategy requires a margin account with options level 2.


  • Max Gain: Unlimited for long strangles; limited to the net premium received for short strangles.
  • Max Loss: Limited to the total premium paid for long strangles; unlimited for short strangles.
  • Breakeven: Upper breakeven is the higher strike price plus the total premium paid; lower breakeven is the lower strike price minus the total premium paid.


Vertical Spread


Credit Spread

A strategy involving the simultaneous sale of one option and the purchase of another option of the same type (calls or puts) with the same expiration date but different strike prices. This strategy is designed to limit both potential gains and losses. This strategy requires options level 3.


  • Max Gain: The net premium received from initiating the spread.
  • Max Loss: The difference between the strike prices minus the net premium received.
  • Breakeven: The higher strike price (for call spreads) or the lower strike price (for put spreads) minus the net premium received.

Debit Spread

A strategy involving the simultaneous purchase of one option and the sale of another option of the same type (calls or puts) with the same expiration date but different strike prices. This strategy is used to limit both potential gains and losses while incurring an upfront cost. This strategy requires options level 3.


  • Max Gain: The difference between the strike prices minus the net premium paid.
  • Max Loss: The net premium paid to establish the spread.
  • Breakeven: The lower strike price (for call spreads) or the higher strike price (for put spreads) plus the net premium paid.


Calendar Spread


Credit Spread

A strategy involving the sale of a short-term option and the simultaneous purchase of a longer-term option of the same type (calls or puts) with the same strike price. This strategy benefits from the time decay of the shorter-term option while holding a longer-term option. This strategy requires options level 3.


  • Max Gain: The net premium received from establishing the spread, which occurs if the stock price is at the strike price of the options at expiration of the short-term option.
  • Max Loss: Potentially limited to the difference between the premiums of the long and short options if the stock price moves significantly away from the strike price, with the long option providing some protection.
  • Breakeven: The stock price at which the gains from the net premium received equal the losses from the movement of the stock price away from the strike price.

Debit Spread

A strategy involving the simultaneous purchase of a longer-term option and the sale of a shorter-term option of the same type (calls or puts) with the same strike price. This strategy is designed to profit from the time decay of the shorter-term option while maintaining a longer-term position. This strategy requires options level 3.


  • Max Gain: The potential gain is generally limited and occurs if the stock price is at the strike price of the options at expiration of the shorter-term option. The gain is the net premium received minus the cost of the long option.
  • Max Loss: The net premium paid to establish the spread, which is the cost of the long option minus the premium received from the short option.
  • Breakeven: The stock price at which the gains from the net premium received equal the losses due to the movement of the stock price away from the strike price.


Iron Butterfly

Combines two calls and two puts with three different strike prices, seeking to profit from low volatility. This options strategy requires options level 3.


  • Max Gain: Limited to the net premium received.
  • Max Loss: Difference between the central strike price and either of the outer strike prices minus the net premium received.
  • Breakeven: Lower breakeven is the lower strike price plus the net premium received; upper breakeven is the higher strike price minus the net premium received.


Butterfly

Combines three options of the same type (calls or puts) in a 1-2-1 ratio with different strike prices, aiming to profit from low volatility. This options strategy requires options level 3.


  • Max Gain: Achieved when the underlying price is at the middle strike price at expiration.
  • Max Loss: Limited to the net premium paid.
  • Breakeven: Lower breakeven is the lower strike price plus the net premium paid; upper breakeven is the higher strike price minus the net premium paid.


Condor Spread

A non-directional strategy that utilizes four call options or four put options with varying strike prices. This approach aims to profit from stability in the underlying asset. This strategy requires options level 3.


  • Max Gain: The width of the spread subtracted by the net debit paid in premium, multiplied by 100 and then multiplied by the amount of spreads.
  • Max Loss: Limited to the net premium paid.
  • Breakeven: Lower breakeven is the lower strike price plus the net premium paid; upper breakeven is the higher strike price minus the net premium paid.


Iron Condor

Combines two calls and two puts with four different strike prices, aiming to profit from price stability within a range. This options strategy requires options level 3.


  • Max Gain: Limited to the net premium received.
  • Max Loss: Difference between the two middle strike prices minus the net premium received.
  • Breakeven: The lower breakeven can be calculated by subtracting the credit received from the short put strike price. The upper breakeven can be calculated by adding the credit received to the short call strike price.


Ratio Spread

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 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.


  • Max Gain: The premium received from selling the put option.
  • Max Loss: The strike price of the sold put option minus the premium received, multiplied by the number of shares per contract, with potential losses occurring if the stock price falls significantly below the strike price.
  • Breakeven: The strike price of the sold put option minus the premium received.


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.


  • Max Gain: The premium received from selling the call option.
  • Max Loss: Potentially unlimited, as the stock price can rise indefinitely, causing the loss to increase proportionally.
  • Breakeven: The strike price of the sold call option plus the 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.

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