Question

List and describe briefly 3 Types of Option Strategies:

Answer 1

Options strategies can be divided into three types:

· Add on option strategy: Add on option strategy is when you already own a stock and now you want to buy a option or sell an option because either you want to generate an income or you want to protect your portfolio from the fall in value of an asset. These types of strategies are mainly like covered call, protective put. Covered call is when you already own a stock and you do not expect any major rice movement so you write a call. Protective put is when you want to protect your asset from the fall in the value.

· Spreads: Spreads are a combination of two or more options of the same type, that means either of calls or puts. Spreads are basically used to take the benefit out of different prices at different time periods. Spreads can be either debit spread or credit spread. The major spread option strategies are like calendar spread or butterfly spread. Again, the spreads created can be long or short depending on what your expectation are in the market and how much risk are you willing to take.

· Combination: Combination is a type of option where you use the call option and put option to create a strategy for yourself. The combinations are like straddle, long straddle, short straddle. Combinations are generally used when the volatility is very high in the market and you want to capture that. Long straddle is a combination of long call and long put option, Short straddle is a combination of short call and short put option. These both strategies are used in the case of high volatility but the investor is not sure about the direction of the volatility.