Derivatives
Options strategies explained
Buying a single call or put is the simplest option trade. But combine options together and you can express a precise view — on direction, on volatility, or on income — with a defined, known risk. Here are the strategies every derivatives desk uses.
Also known as: options strategies: covered calls, spreads, straddles and collars.
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.
Key takeaways
- A covered call earns income from stock you own, capping the upside.
- A protective put is portfolio insurance — it floors your downside.
- A bull call spread is a cheaper, risk-defined bullish bet.
- A straddle profits from a big move in either direction — a bet on volatility.
Common questions
What is a covered call in simple terms?
What is the difference between a straddle and a strangle?
What is a protective put used for?
Why use a bull call spread instead of just buying a call?
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