Advanced Options Strategies
Options offer sophisticated investors powerful tools for hedging risk and generating income. This guide covers advanced strategies beyond simple calls and puts.
Options Refresher
Call Option
Right to BUY stock at strike price by expiration.
Put Option
Right to SELL stock at strike price by expiration.
Key Concepts
- Premium: Price paid for option
- Strike Price: Exercise price
- Expiration: When option expires
- In-the-Money: Option has intrinsic value
Strategy 1: Protective Put
Purpose
Hedge against downside risk in existing stock position.
How It Works
- Own 100 shares of stock
- Buy 1 put option (strike at or below current price)
- Cost: Premium paid for put
Example
- Own: 100 shares @ $150
- Buy: Put with $140 strike, costs $2
- Protection: Stock price drops to $130
- Put value: $10 (can sell @ $140 when market is $130)
When to Use
- Holding profitable position
- Concerned about short-term decline
- Want to hold stock for long-term
Risks
- Cost reduces overall returns
- Time decay works against you
Strategy 2: Covered Call
Purpose
Generate income from stocks you own.
How It Works
- Own 100 shares of stock
- Sell 1 call option (strike above current price)
- Collect premium upfront
Example
- Own: 100 shares @ $100
- Sell: Call with $105 strike, collect $2 premium
- Stock stays below $105: Keep premium + stock
- Stock rises above $105: Sell @ $105, keep premium
Income Potential
- 2-3% per month (24-36% annualized)
- In flat or slightly up markets
Risks
- Limits upside potential
- Still own stock if it drops
Strategy 3: Collar
Purpose
Limit both upside and downside range.
How It Works
- Own 100 shares of stock
- Buy put (protection)
- Sell call (finance the put)
Example
- Own: 100 shares @ $100
- Buy: $95 put @ $2 cost
- Sell: $105 call @ $2 income
- Net cost: $0
Ideal When
- Want cheap protection
- Willing to cap upside
- Near-term concerns
Strategy 4: Cash-Secured Put
Purpose
Generate income while potentially buying stock at lower price.
How It Works
- Sell put option
- Set aside cash to buy stock if assigned
- Collect premium upfront
Example
- Stock trading @ $50
- Sell $45 put @ $1 premium
- Stock stays above $45: Keep $100 profit
- Stock drops to $40: Buy @ $45 (effective cost $44)
When to Use
- Want to own stock at lower price
- Generate income while waiting
- Willing to buy at strike price
Strategy 5: Iron Condor
Purpose
Profit from low volatility in range-bound stock.
How It Works
- Sell out-of-the-money put spread
- Sell out-of-the-money call spread
- Collect net premium
Example
Stock @ $100:
- Sell $95 put @ $1, buy $90 put @ $0.50
- Sell $105 call @ $1, buy $110 call @ $0.50
- Net credit: $1 ($100 profit)
Profit Range
- Max profit: $100 (stock $95-$105)
- Max loss: $400 (stock below $90 or above $110)
Best When
- Expecting low volatility
- Market consolidation
- Before earnings (risky)
Strategy 6: Vertical Spread
Purpose
Limit risk while defining profit potential.
Bull Call Spread
- Buy lower strike call
- Sell higher strike call
- Debit spread (cost money)
Bear Put Spread
- Buy higher strike put
- Sell lower strike put
- Debit spread (cost money)
Example (Bull Call Spread)
Stock @ $50:
- Buy $55 call @ $2
- Sell $60 call @ $1
- Net cost: $1
- Max profit: $4 (stock at $60+)
- Max loss: $1 (stock below $55)
Strategy 7: Butterfly Spread
Purpose
Profit from stock staying near specific price.
Structure
- Buy 1 lower strike call
- Sell 2 middle strike calls
- Buy 1 higher strike call
Example
Stock @ $100:
- Buy 1 $95 call @ $6
- Sell 2 $100 calls @ $3 each
- Buy 1 $105 call @ $1
- Net cost: $1
Max Profit
- When stock = $100 at expiration
- Profit = $4
Risks
- Small profit range
- Requires precision
Strategy 8: Calendar Spread
Purpose
Profit from time decay difference.
Structure
- Sell near-term option
- Buy longer-term option
- Same strike price
Example
- Sell 30-day $100 call @ $3
- Buy 60-day $100 call @ $5
- Net cost: $2
- Goal: Near-term option decays faster
Risk Management
Position Sizing
- Never risk more than 2% per trade
- Account for max loss, not just cost
Stop-Loss Strategies
- Cut losses at 50% of premium paid
- Don't hope losing positions come back
Greeks to Monitor
- Delta: Price sensitivity
- Theta: Time decay
- Vega: Volatility sensitivity
- Gamma: Delta change rate
Common Mistakes
- Over-Leveraging: Using too much margin
- Ignoring Volatility: Not accounting for IV changes
- Holding Too Long: Letting time decay destroy value
- No Exit Plan: Not knowing when to take profits/losses
- Selling Naked Options: Unlimited risk strategies
When NOT to Use Options
- Before earnings (unless designed for it)
- In extremely volatile markets
- Without full understanding of risks
- With money you can't afford to lose
Tax Considerations
- Short-term: Held < 1 year, ordinary income rates
- Long-term: Held > 1 year, capital gains rates
- Wash Sales: 30-day rule applies
- Section 1256: 60/40 rule for regulated futures
Conclusion
Options strategies can enhance portfolio returns and manage risk, but they require thorough understanding and careful risk management. Start with simple strategies, paper trade first, and never risk more than you can afford to lose.
Important: Options involve significant risk and aren't suitable for all investors. Consider consulting a financial advisor before implementing complex strategies.