Options Strategies

An options strategy combines positions to change the payoff and sensitivities. Add the signed payoffs and premiums of every leg before interpreting the result.

Vertical spreads

A vertical spread uses the same option type and expiry at different strikes. A bull call spread buys a lower-strike call and sells a higher-strike call with matching size.

At expiry, its maximum gross payoff per unit is the strike difference. Subtract the net premium paid and costs to get profit. The short call reduces the initial cost while capping the payoff. See OIC's bull call spread guide.

The expiry payoff assumes the legs are handled consistently. Exercise, assignment and execution can create additional exposure before that final payoff is realised.

Covered calls

A covered call combines an underlying position with a short call on the corresponding quantity. The premium reduces the position's net cost, while the call gives up upside beyond its strike.

The underlying can still lose much of its value. Covered describes the ability to deliver the underlying; it does not mean that the combined position is protected against a price fall. See OIC's covered call guide.

Straddles

A long straddle buys a call and put with the same strike and expiry. It benefits from a sufficiently large move in either direction, after accounting for both premiums. A small move can leave both premiums unrecovered.

Before expiry, implied volatility and time passing also affect the position. Predicting a direction is different from judging whether movement will be large enough relative to the price paid. See OIC's straddle guide.

Checking the whole position

Record each leg's strike, expiry, quantity, multiplier and settlement rules. Calculate the combined Greeks, not just the first leg's.

Check whether a quoted spread can be executed together or must be traded leg by leg. Partial execution can leave a different risk from the intended strategy. Near expiry, track what remains after one leg is exercised or assigned.

See Options for contract basics and Risk and Position Sizing for exposure measures.