(PAID) RESOURCE 17 — SERIES 06 / OPTIONS TRADING
Eight core strategies. One framework for choosing between them.
Options strategies are not complex arrangements to memorize. Each one is a specific combination of Greeks exposures — a way of expressing a market view about direction, volatility, and time. Once you understand the Greek profile of a strategy, the strategy itself becomes intuitive.
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01 / LONG CALL & LONG PUT
The simplest directional strategies. Limited risk, leveraged upside. The Greeks: long Delta, long Gamma, long Vega, short Theta.
A long call is a bullish bet. You pay a premium for the right to buy 100 shares at the strike price. If the stock rises above the strike plus the premium paid (the break-even point), the position is profitable at expiration. Your maximum loss is the premium paid. Your maximum profit is theoretically unlimited. A long put is the bearish mirror: you pay a premium for the right to sell 100 shares at the strike. If the stock falls below the strike minus the premium, the position is profitable. Maximum loss is the premium. Maximum profit is the difference between the strike and zero (or the strike minus premium for practical purposes). When to use a long call: when you expect a significant upward move in a specific timeframe AND implied volatility is relatively low (so you are not overpaying for the move expectation). Use calls with enough DTE to survive slower-than-expected moves — generally 30–60 DTE for swing trades, longer for trend positions. When to use a long put: when you expect a significant downward move AND IV is not already elevated from market fear (high VIX makes puts expensive). Protective puts (buying puts against an existing stock position) are a valid insurance use of long puts even in high-IV environments. Sizing long options: the most common mistake is using leverage to buy more contracts than the equivalent stock position would warrant. A general guideline: position size long options such that the total premium at risk (contracts × premium × 100) is no more than your standard risk per trade (typically 1–2% of account). Never allocate more to a long options position than you would be comfortable losing entirely.
WATCH FOR THIS
Buying more contracts than your risk model supports because the low per-contract premium makes the position feel small. Total dollar risk = contracts × premium × 100. That is what you can lose entirely.
PRACTICAL EXERCISE
Before each long options purchase: calculate (1) total premium at risk = contracts × premium × 100, (2) your account's 1% risk limit, (3) whether the total premium at risk is within that limit. If the position would require more than your risk limit to buy even one contract, that option is too expensive relative to your account size — use a different strike, further expiration, or a spread.
02 / COVERED CALL
Sell a call against shares you own to generate income. Caps your upside in exchange for premium. Best in flat-to-slightly-bullish markets.
A covered call is created by holding 100 shares of a stock and selling one call option against those shares. The short call is 'covered' because your stock holding satisfies the obligation to deliver shares if the call is exercised. The premium received from selling the call is income that partially offsets the cost of holding the stock. Risk/reward profile: the covered call reduces the effective cost basis of the stock by the premium received. If the stock rises above the call's strike, the stock is called away at the strike price, capping the upside to strike price + premium received. If the stock falls, the premium received provides a small cushion but the stock position still declines — the covered call does not provide significant downside protection. When to use: when you already own stock you plan to hold, the stock is trading in a range or recovering slowly, and you are willing to have it called away at the strike price. The key requirement is genuine comfort with having the stock called away — do not sell covered calls on positions you would not want to exit at the strike. Strike selection: selecting a higher OTM strike (0.20–0.30 delta) reduces the probability of the stock being called away but produces lower premium income. Selecting a closer-to-ATM strike produces more income but higher probability of call-away. Most covered call strategies use 0.20–0.35 delta monthly calls, targeting 1–3% monthly income on the stock position.
WATCH FOR THIS
Selling covered calls on a stock position you are strongly bullish on with a high conviction for near-term price increases. The covered call caps your upside precisely in the scenario you expect. If you want the full upside, do not sell the call.
PRACTICAL EXERCISE
Identify one stock position (actual or paper) you would be comfortable holding for the next 30 days. Find the 0.25-delta call with approximately 30 DTE. Calculate: (1) premium income as a percentage of stock value, (2) the maximum profit if called away (strike price − cost basis + premium), (3) the effective downside protection (premium received ÷ stock price). Assess whether this income profile is attractive for the opportunity cost of capping upside.
03 / CASH-SECURED PUT
Sell a put option and secure it with cash to buy the shares if assigned. Generates income and enables buying stock at a discount.
A cash-secured put is created by selling a put option and holding enough cash to purchase the shares at the strike price if the put is exercised (assigned). If the stock stays above the strike, the put expires worthless and you keep the premium as income. If the stock falls below the strike and the put is assigned, you purchase 100 shares at the strike price — which is effectively buying the stock at the strike minus the premium received, a potentially attractive entry price. The cash-secured put is strategically equivalent to a covered call when comparing their risk profiles. Both strategies have a defined premium income, similar downside exposure to the stock, and a defined maximum profit. The difference is the starting point: covered calls start with stock ownership, cash-secured puts start with cash. When to use: when you want to own a specific stock but find the current price slightly high. By selling a put at a lower strike, you either collect premium (if the stock stays up) or buy the stock at the lower strike (a price you considered acceptable). This is sometimes called a 'buy-write entry' — using the put to establish a better average entry price. Risk: if the stock falls dramatically below the strike, you own a stock position with a large unrealized loss. The premium provides only minor downside protection. Always sell cash-secured puts only on stocks you genuinely want to own at the strike price.
WATCH FOR THIS
Selling cash-secured puts on stocks you do not actually want to own at the strike price. If the put is assigned, you own the stock. If you would not buy the stock at that price as a regular purchase, you should not sell the put.
PRACTICAL EXERCISE
Choose a stock you would buy on a 5–10% pullback from the current price. Find the put at that price level with 30–45 DTE. Calculate the premium as an annualized return on the cash secured: (premium ÷ strike price) × (365 ÷ DTE). Compare this annualized yield to other cash-equivalent returns. Over 5 iterations, assess whether the risk-adjusted return is attractive relative to simply buying the stock.
04 / VERTICAL SPREADS
A vertical spread is a defined-risk directional trade. Buy one option and sell another at a different strike. The short option partially funds the long, reducing Vega risk and capping max loss.
A Bull Call Spread is constructed by buying a call at a lower strike and selling a call at a higher strike, both with the same expiration. The premium received from the sold call reduces the cost of the bought call. The maximum profit is the difference between strikes minus the net premium paid. The maximum loss is the net premium paid — fully defined at entry. Example: AAPL at $180. Buy the $180 call for $3.50, sell the $190 call for $1.50. Net debit = $2.00 per share = $200 per contract. Maximum profit = ($190 − $180) − $2 = $8.00 per share = $800 per contract if AAPL closes above $190 at expiration. Maximum loss = $200 per contract if AAPL closes below $180. A Bear Put Spread is the bearish equivalent: buy a higher-strike put, sell a lower-strike put. Net debit = maximum loss. Maximum profit = spread width minus net debit. Why vertical spreads are often better than naked long options: (1) the short option reduces Vega exposure — the spread is less sensitive to IV changes than a naked long option; (2) the maximum loss is fixed and known at entry; (3) the cost basis is lower due to the premium received from the short option. The trade-off is that maximum profit is also capped at the spread width. Vertical spreads are the standard structure for directional options trades in moderate-to-high IV environments, where the Vega reduction from the short option provides meaningful protection against IV crush.
WATCH FOR THIS
Choosing a spread width that is too narrow relative to the expected move. If AAPL is expected to move $8 and you are using a $5-wide spread, the maximum profit is capped below the expected move — creating a poor risk/reward profile.
PRACTICAL EXERCISE
Compare three structures for the same directional thesis on a stock: (1) long call, (2) bull call spread with strikes $5 apart, (3) bull call spread with strikes $10 apart. For each: calculate maximum profit, maximum loss, risk/reward ratio, and breakeven price. Which structure has the best risk/reward relative to your expected move? This exercise builds intuition for spread selection.
05 / IRON CONDOR
An iron condor profits when a stock stays within a defined range. Sell both an OTM call spread and an OTM put spread. Pure income in a range-bound market.
An iron condor combines a bull put spread (sell a put, buy a lower-strike put) and a bear call spread (sell a call, buy a higher-strike call) on the same underlying and expiration. The net result: you collect premium from both spreads and profit when the stock stays between the two short strikes through expiration. Structure example: stock at $100. Sell the $95 put, buy the $90 put. Sell the $105 call, buy the $110 call. You collect, say, $1.50 total net premium. Maximum profit: $150 per condor if the stock stays between $95 and $105 at expiration. Maximum loss: $500 minus $150 premium = $350 per condor if the stock moves below $90 or above $110. Greeks profile: short Vega (you want IV to decline after entry), short Gamma (you want the stock to stay put), positive Theta (you profit from time decay). The ideal iron condor environment: after a volatility spike, when IV is elevated and the stock is likely to settle into a range as uncertainty resolves. Management: the standard rule for iron condors is to close the position when you have captured 50% of the maximum possible profit. This means if you collected $150 and the position is now worth $75, close it — do not try to let every last dollar of the remaining $75 decay. The remaining 50% of potential profit requires significantly more time and risk. Early exit preserves the gains and eliminates the tail risk of a late breakthrough of either short strike. For NQ/ES index futures options: iron condors work particularly well around periods of low expected movement (within a clean range), but require discipline to close when breached.
WATCH FOR THIS
Holding an iron condor through a breach of one of the short strikes, hoping for a reversal. Once a short strike is breached, the maximum loss scenario is active and holding is speculating on a reversion rather than running an income strategy.
PRACTICAL EXERCISE
Backtest an iron condor on a large-cap ETF (like SPY or QQQ) for the last 12 months: sell 0.20-delta strikes on both sides with 30 DTE, close at 50% profit target or at 200% loss (close when the position has lost twice the premium collected). Calculate monthly win rate, average win, average loss, and net annual P&L. This gives you a realistic baseline for what iron condor income actually looks like.
06 / STRADDLE & STRANGLE
A straddle profits from large moves in either direction. A strangle is the cheaper, wider version. Both require the underlying to move more than the premium paid.
A long straddle buys both an ATM call and an ATM put at the same strike and expiration. If the stock makes a significant move in either direction — up or down — one of the options will profit enough to overcome the total premium paid for both. The trade profits from large, unexpected moves or from IV increases that raise the value of both options. The break-even points of a straddle are the strike price plus the total premium paid (upside break-even) and the strike price minus the total premium paid (downside break-even). A straddle on a $100 stock with total premium of $4.00 needs the stock to be either above $104 or below $96 to break even at expiration. A long strangle buys an OTM call and an OTM put at different strikes — wider apart than the current price. It is cheaper than a straddle (OTM options cost less than ATM) but requires a larger move to break even. The break-even points are wider, and the probability of profit is lower, but the cost to enter is reduced. When to use: when you expect a large move but are uncertain of the direction — typically before a catalyst (earnings, FDA decision, macro data release) where you believe the actual move will exceed the implied move already priced into the options. This is the specific edge: buying a straddle when the actual realized move is historically larger than the implied move. Critical caution: straddles are expensive because ATM options carry maximum extrinsic value. If the stock stays flat after the catalyst and IV collapses, both options lose value simultaneously — producing a double Theta and Vega loss.
WATCH FOR THIS
Buying straddles before earnings without researching whether the historical post-earnings moves have exceeded the implied move. If a stock consistently moves less than its implied move after earnings, buying straddles before earnings is a statistical loser.
PRACTICAL EXERCISE
For 5 upcoming earnings events in your watchlist: find the ATM straddle cost (approximately the implied move). Research the stock's last 8 earnings moves. Calculate the average actual move. If the average actual move exceeds the current straddle cost, buying the straddle has a historical statistical edge. If it is smaller, selling the straddle (via iron condor) has the edge. Track this analysis before each event.
07 / STRATEGY SELECTION FRAMEWORK
The right strategy follows from your market view, the IV environment, and your risk tolerance. Use this decision tree before every options trade.
Step 1: Define your market view. Strongly directional (large move in one direction)? Moderately directional? Neutral (no large move expected)? Uncertain direction but expecting high volatility? Step 2: Check IV rank. High IV (rank > 50%)? Low IV (rank < 30%)? Neutral IV? Step 3: Match view to structure: - Strongly directional + Low IV → Long call or put. Cheap premium + big expected move = optimal for pure directional long options. - Strongly directional + High IV → Debit spread (bull call or bear put). Reduce Vega exposure from high IV environment. - Moderately directional + High IV → Cash-secured put or covered call. Use high IV to collect income with defined directional bias. - Neutral + High IV → Iron condor or iron butterfly. Collect elevated premium from high IV while stock stays in range. - Uncertain direction + Low IV → Long straddle or strangle. Cheap premium + expecting big move = straddle edge. - Uncertain direction + High IV → Pass or wait. High IV straddles are expensive; the trade requires even larger moves to profit. This framework does not guarantee profitability — it aligns your strategy structure with the statistical conditions that favor each structure. Using the wrong structure in the wrong IV environment is the most common cause of options losses that have nothing to do with directional accuracy. The one rule that overrides all of these: only trade strategies you have fully simulated and understand. A strategy you understand in a lower-probability environment will outperform a strategy you do not understand in a higher-probability environment.
WATCH FOR THIS
Selecting a strategy based on which one produced the most profit in a recent example you read about rather than based on current IV conditions and your actual market view. Each strategy has specific conditions under which it has a statistical edge.
PRACTICAL EXERCISE
Print this decision framework. For the next 20 options trades, before entering, work through each step: (1) What is my view? (2) What is IV rank? (3) What is the matched strategy? If the trade you were considering does not match the framework output, either adjust the strategy to match or document why you are deviating. After 20 trades, compare returns of framework-aligned trades vs deviations.
Final Options Resource: Resource 18 — 0 to $100k Trading Options. The complete five-phase roadmap.
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