Options trading can be a game-changer for investors seeking to enhance their portfolio performance, hedge against risk, or generate consistent income. However, the complexity and variety of strategies available often leave even experienced investors feeling overwhelmed. In this comprehensive guide, we’ll break down 10 key options strategies, discuss their pros and cons, and help you determine which (if any) might suit your investment goals and risk tolerance.
While some strategies offer versatility and multiple paths to profitability, others may introduce unnecessary complexity or risks that outweigh their potential benefits. By the end of this article, you’ll have a deeper understanding of these strategies and whether they align with your trading philosophy.
1. Covered Call: A Balanced Income Strategy
The covered call is a popular strategy among investors who hold shares of a stock and want to generate additional income. Here’s how it works:
- Setup: You sell call options against shares you already own. For instance, if you own 500 shares of a stock, you sell 5 call option contracts (since each contract represents 100 shares).
- Goal: Generate income from the premium collected while keeping potential upside on the stock - up to a capped level.
- Risks: While it seems conservative, the covered call carries inherent risks, particularly when the stock declines. Your downside risk is unlimited as the stock can fall to zero, but your upside is capped by the strike price of the call option you sold.
- Best Use Case: This strategy works best for dividend-paying stocks, where you can combine income from dividends, option premiums, and stock appreciation (up to the strike price). However, it’s less ideal for investors bullish on significant price gains, as profits beyond the strike price are forfeited.
Why Covered Calls May Not Be for Everyone
The primary drawback is the capital required. For instance, owning 500 shares of a $100 stock means tying up $50,000. If the stock rises significantly, the gains are limited, and if it falls, the potential losses could outweigh the income generated.
2. Married Put: Insurance at a Cost
A married put involves buying a stock while simultaneously purchasing put options for protection. Essentially, it’s like buying insurance for your stock.
- Setup: You buy both the stock and a put option. The put sets a floor for how much you can lose.
- Goal: Provide downside protection while maintaining unlimited upside potential.
- Drawbacks: This strategy can be expensive. For example, if you pay $700 for the put option on top of the stock’s purchase price, those costs eat into your profits and could expire worthless if the stock price rises.
Why Married Puts Are Often Avoided
The video’s presenter strongly advised against this strategy, calling it an inefficient use of capital. Instead of buying the stock and then protecting it with a put, consider buying a long call option instead, which mimics the same risk/reward profile with significantly less capital.
3. Bull Call Spread: Limiting Costs - But at a Price
A bull call spread involves buying an in-the-money call option and selling an out-of-the-money call option to reduce the cost of the trade.
- Setup: For instance, buy a call at a 620 strike price and sell another call at 625.
- Goal: Limit costs while betting on a moderate rise in the stock price.
- Risks: While this approach reduces the upfront cost, it also severely limits upside potential. The spread between the two strike prices caps your gains, often nullifying the benefits of leverage.
Why Bull Call Spreads May Lack Efficiency
The main issue with bull call spreads is the way they reduce delta, which measures an option’s sensitivity to price movement. By selling the higher-strike call, much of the potential upside is lost, undermining the whole point of using options for leverage.
4. Bear Put Spread: Similar Limitations on the Downside
The bear put spread is the bearish counterpart to the bull call spread. Here, you buy an in-the-money put and sell an out-of-the-money put to reduce the trade’s cost. However, just like the bull call spread, this strategy caps both gains and losses, making it less effective for maximizing profits.
5. Protective Collar: A Complicated Hedge
A protective collar combines two actions: buying an out-of-the-money put for protection and selling an out-of-the-money call for income. While this strategy can cap losses and offset costs, it also limits upside potential.
Why Simplicity Wins
The presenter criticized this strategy for its unnecessary complexity. Instead of using protective collars, sticking to straightforward long call or put positions achieves similar goals without the added risk of selling calls.
6. Long Straddle: Big Moves Needed
A long straddle involves simultaneously buying a call and a put at the same strike price. It’s designed for situations where a stock is expected to make a significant move in either direction.
- Setup: Buy an at-the-money call and put.
- Goal: Profit from large price swings, regardless of direction.
- Risks: This strategy is highly expensive due to the high extrinsic value of at-the-money options. Additionally, if the stock doesn’t move significantly, both options could lose value quickly due to time decay and implied volatility crush.
Why Long Straddles Often Disappoint
While the idea of capturing big moves is appealing, the strategy seldom works in practice. For example, buying a straddle before earnings might result in losses even if the stock moves slightly, as implied volatility typically drops after the announcement.
7. Long Strangle: Expensive and Unlikely
The long strangle is a variation of the straddle, but with out-of-the-money options. While cheaper than a straddle, it requires even bigger price moves to generate a profit.
- Setup: Buy an out-of-the-money call and put option.
- Drawbacks: The further out of the money you go, the less likely the stock will hit your strike prices, making this an incredibly challenging trade to win.
8. Butterfly Spread: Pinpoint Precision Required
A butterfly spread involves combining multiple options to profit from a stock landing near a specific price at expiration. While the potential reward can be high, the strategy demands near-perfect timing and price movement, making it impractical for most traders.
9. Iron Condor: A Former Favorite
The iron condor offers the allure of profiting if a stock stays within a specific price range. It’s constructed by selling both a call spread and a put spread, creating a profit zone between the two.
Why Iron Condors Often Backfire
While the strategy seems appealing, the presenter highlighted a key flaw: the risk-to-reward ratio is often skewed. In many cases, one losing trade can wipe out the profits from several winning trades. For instance, a trader might earn $200 on a winning trade but lose $800 on a single losing trade, making it difficult to achieve long-term success.
10. Iron Butterfly: A Risky Sibling to the Butterfly Spread
The iron butterfly combines elements of the iron condor and the traditional butterfly. Like the butterfly spread, it requires precise timing and price targeting, but with additional complexity.
Key Takeaways
- Keep It Simple: Complex strategies often add unnecessary risks without meaningful benefits. Long calls and long puts are simpler, more effective ways to capitalize on leverage.
- Covered Calls Are Best for Income: This strategy is ideal for dividend-paying stocks you plan to hold long term.
- Avoid High-Risk Strategies: Married puts, long straddles, and strangles are expensive and rely on highly unlikely scenarios to succeed.
- Beware of Risk/Reward Ratios: Strategies like iron condors may promise frequent wins but often lead to outsized losses that undermine their profitability.
- Choose Efficiency: Instead of layering multiple trades, focus on maximizing intrinsic value and minimizing extrinsic costs.
- Understand Your Goals: Each strategy has its place but should align with your risk tolerance, market outlook, and capital availability.
Conclusion
After 16 years of trading, the presenter distilled their approach to a simple yet effective philosophy: use long calls and long puts to maximize gains and minimize losses. While the strategies outlined here offer various ways to trade options, simplicity often trumps complexity. By focusing on straightforward, efficient strategies, you can save time, reduce risk, and improve your trading outcomes.
Take the lessons outlined here and apply them to your own trading plan - whether you’re a seasoned investor or just starting your journey into options trading, clarity and simplicity will always be your greatest allies.
Source: "10 Options Strategies Every Investor Should Know" - Christopher Uhl - OVTLYR, YouTube, Aug 13, 2025 - https://www.youtube.com/watch?v=49JVEL3gHuk
Use: Embedded for reference. Brief quotes used for commentary/review.
