Options strategies explained

Once you understand a basic call and put, the real power of options comes from combining them. Each of the strategies below is just two or three simple options stacked together to shape a specific payoff — for income, for protection, or for a bet on how much (not which way) a price will move.

The covered call: income from stock you own

A covered call means holding a stock and selling a call option against it. You collect the premium from selling the call as income. The trade-off: if the stock rises above the strike, it gets "called away" — you're forced to sell at the strike and miss the gains above it. It's ideal when you own a stock, expect it to trade flat or drift mildly higher, and want to earn income in the meantime — accepting a cap on your upside in return.

The protective put: insurance for your portfolio

A protective put is the mirror image — you own a stock and buy a put to floor your downside. If the stock crashes, the put pays out and limits your loss; if it rises, you keep the upside, minus the premium you paid. It works exactly like insurance: the put premium is the cost of the cover. A higher strike gives more protection but costs more; a lower strike is cheaper but leaves you exposed to a bigger initial drop.

The bull call spread: a cheaper directional bet

A bull call spread combines buying a call at a lower strike and selling a call at a higher strike, same expiry. Selling the higher call helps pay for the one you bought, so the trade is cheaper — but your profit is capped at the higher strike. It's the standard way to take a moderately bullish view with a defined, limited risk: you know your maximum gain and maximum loss before you place it.

Straddles and strangles: betting on a big move

Sometimes you don't know which way a price will move, only that it will move a lot — around earnings, a central bank decision, or a big announcement. A straddle buys both a call and a put at the same strike, so it profits from a large move in either direction. You're buying volatility. The catch: the price has to move enough to cover both premiums, or the position loses. A strangle is a cheaper version using out-of-the-money strikes, but it needs an even bigger move to pay off.