Options Trading Strategies Tutorial

A Comprehensive Guide with Real Examples and Visualizations

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Table of Contents

1. Introduction to Options
2. Basic Concepts
3. Single Leg Strategies
4. Multi-Leg Strategies
5. Risk Management
6. Real-World Examples
7. Resources and Further Learning

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1. Introduction to Options

An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before an expiration date. Options are widely used by investors for hedging, income generation, and speculation[1][2].

Why Trade Options?

• Leverage: Control a larger position with less capital
• Flexibility: Multiple strategies for different market outlooks
• Income: Generate premiums through selling options
• Protection: Hedge existing stock positions
• Defined Risk: Know your maximum loss upfront (in many strategies)

Key Statistics

• Retail traders lost over USD 2 billion in options premium from 2019 to 2021[1]
• The most traded stock options are Tesla (TSLA), Apple (AAPL), and Nvidia (NVDA)[1]
• Many out-of-the-money options expire worthless[1]

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2. Basic Concepts

Call Options

A call option gives the buyer the right to purchase an underlying asset at the strike price before expiration[2].

Key Characteristics:

• Buyer pays premium upfront
• Buyer profits if stock price rises above strike + premium
• Seller (writer) profits if stock stays below strike price
• Maximum loss for buyer = premium paid
• Maximum profit for seller = premium received

Real Example - Tesla Call:

• Current TSLA price: $250
• Buy 1 call option: Strike $260, Premium$5 (or $500 per contract)
• Expiration: 30 days
• Break-even at expiration: $265
• Maximum loss: $500
• Maximum profit: Unlimited

Put Options

A put option gives the buyer the right to sell an underlying asset at the strike price before expiration[2].

Key Characteristics:

• Buyer pays premium upfront
• Buyer profits if stock price falls below strike - premium
• Seller profits if stock stays above strike price
• Maximum loss for buyer = premium paid
• Maximum profit for seller = premium received (but limited to strike price)

Real Example - Apple Put:

• Current AAPL price: $230
• Buy 1 put option: Strike $220, Premium$3 (or $300 per contract)
• Expiration: 30 days
• Break-even at expiration: $217
• Maximum loss: $300
• Maximum profit: $20,000 (if AAPL goes to$0)

Greeks: The Risk Metrics

Options prices don't move 1:1 with stock price. Understanding the Greeks helps traders predict price movements:

Greek	Meaning	Impact
Delta	Rate of change in option price vs stock price	0 to 1 (calls), -1 to 0 (puts)
Gamma	Rate of change in Delta	Affects Delta stability
Theta	Time decay (loss per day)	Negative for buyers, positive for sellers
Vega	Sensitivity to volatility changes	Higher IV = Higher option prices
Rho	Sensitivity to interest rates	Less important for short-term trades

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3. Single Leg Strategies (One-Legged)

Strategy 1: Long Call (Bullish)

Outlook: Moderately to very bullish

Description: Buy a call option, expecting the stock price to rise above the strike price plus the premium paid[2].

Setup:

• Buy 1 call option
• Pay premium upfront
• Choose strike price based on target price

Profit/Loss Profile:

See Chart 1: Long Call Strategy P&L (chart:11)

The chart shows:

• Maximum Loss: Premium paid ($200 in example)
• Maximum Gain: Unlimited
• Break-even: Strike price + Premium paid ($110 +$2 = $112)
• Profit Zone: Stock price above $112 at expiration

Real Example:

• Current price: $100
• Buy 1 call: Strike $110, Premium$2 per share ($200 total)
• Scenario 1: Stock rises to $120 at expiration → Profit:$800
• Scenario 2: Stock stays at $100 → Loss:$200
• Scenario 3: Stock falls to $90 → Loss:$200 (max loss)

When to Use:

• You expect a significant price increase
• Volatility is expected to increase
• You want leveraged exposure with limited downside

Advantages:

• Limited risk (premium paid)
• Unlimited profit potential
• Capital efficient

Disadvantages:

• Time decay works against you
• Requires stock to move above break-even
• Premium paid is lost if stock doesn't rise enough

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Strategy 2: Long Put (Bearish)

Outlook: Moderately to very bearish

Description: Buy a put option, expecting the stock price to fall below the strike price minus the premium paid[2].

Setup:

• Buy 1 put option
• Pay premium upfront
• Choose strike price below current price

Profit/Loss Profile:

• Maximum Loss: Premium paid
• Maximum Gain: (Strike price × 100) - Premium paid
• Break-even: Strike price - Premium paid
• Profit Zone: Stock price below break-even at expiration

Real Example:

• Current price: $100
• Buy 1 put: Strike $95, Premium$2 per share ($200 total)
• Scenario 1: Stock falls to $80 at expiration → Profit:$1,300
• Scenario 2: Stock stays at $100 → Loss:$200
• Scenario 3: Stock rises to $110 → Loss:$200 (max loss)

When to Use:

• You expect a significant price decrease
• You want to bet against a stock
• Market volatility is expected to increase

Advantages:

• Limited risk (premium paid)
• Profit potential if market drops
• Simple to understand and execute

Disadvantages:

• Time decay works against you
• Requires stock to move below break-even
• Expensive to buy protective puts far out-of-the-money

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Strategy 3: Covered Call (Income)

Outlook: Neutral to mildly bullish

Description: Own the stock and sell a call option against it. This generates income (premium) while capping your upside potential[2].

Setup:

• Own 100+ shares of stock
• Sell 1 call per 100 shares
• Call strike is typically above current price (out-of-the-money)

Real Example:

• Own 100 shares of Microsoft at $380
• Sell 1 call: Strike $400, Premium$5 per share ($500 total)
• Scenario 1: Stock stays at $380 or below at expiration
  • You keep the stock and the $500 premium
  • Return on investment: $500 /$38,000 = 1.3%
• Scenario 2: Stock rises to $420 at expiration
  • Your shares get called away at $400
  • Profit: ($400 -$380) × 100 + $500 =$2,500
  • Maximum profit is capped
• Scenario 3: Stock falls to $360 at expiration
  • You keep the stock and the $500 premium
  • This premium helps offset losses

When to Use:

• You own stock long-term and want additional income
• You're willing to sell the stock if it rises significantly
• You expect mild to no price movement
• Market is range-bound

Advantages:

• Generates income from existing holdings
• Reduces cost basis of stock
• Easier to sustain losses through premium collection
• Lower risk than owning stock outright

Disadvantages:

• Caps your upside profit potential
• Still exposed to significant downside losses
• Called away from stock during a strong rally

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4. Multi-Leg Strategies

Strategy 4: Protective Put (Hedging)

Outlook: Neutral to bullish with downside protection

Description: Own stock and buy a put option to protect against significant losses. Also called "married put" or "portfolio insurance"[2].

Setup:

• Own 100+ shares of stock
• Buy 1 put per 100 shares
• Put strike is typically at or near support level

Profit/Loss Profile:

See Chart 2: Protective Put Strategy P&L (chart:12)

The chart illustrates:

• Maximum Loss: (Stock price at purchase - Put strike price) + Put premium paid
• Maximum Gain: Unlimited
• Break-even: Stock purchase price + Put premium
• Protection Floor: Put strike price (can't lose more than put cost below strike)

Real Example:

• Own 100 shares of Apple at $230
• Buy 1 put: Strike $220, Premium$5 per share ($500 total)
• Stock currently trades at $230
• Scenario 1: Stock falls to $200 at expiration
  • Without protection: Loss of $3,000
  • With protection: Loss of $500 (put premium) +$0 (capped by $220 strike)
  • Total loss: Only $500
• Scenario 2: Stock rises to $250 at expiration
  • Profit: ($250 -$230) × 100 - $500 =$1,500
  • Put expires worthless but provided insurance
• Scenario 3: Stock stays at $230
  • Loss: Put premium ($500)
  • Think of it as insurance cost

When to Use:

• You own stock but fear a temporary correction
• You want to preserve gains but stay invested
• Earnings announcement is coming (high volatility risk)
• Market uncertainty is high

Advantages:

• Provides downside protection with defined maximum loss
• Maintains unlimited upside potential
• Peace of mind during volatile periods
• Can enable more aggressive position sizing

Disadvantages:

• Put premium is a sunk cost if stock rallies
• Reduces overall returns in bull markets
• Expensive when volatility is already high
• Ongoing cost if you want continuous protection

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Strategy 5: Bull Call Spread (Bullish with Limited Risk)

Outlook: Moderately bullish

Description: Buy an in-the-money or at-the-money call, then sell a higher-strike out-of-the-money call. This reduces your cost and limits profit potential[2].

Setup:

• Buy 1 call at lower strike (pay premium)
• Sell 1 call at higher strike (receive premium)
• Both calls expire on same date
• Same underlying asset

Profit/Loss Profile:

See Chart 3: Bull Call Spread P&L (chart:13)

Real Example - Using Tesla:

• Current TSLA price: $250
• Buy 1 call: Strike $250, Premium$12 per share ($1,200)
• Sell 1 call: Strike $260, Premium$7 per share ($700)
• Net Debit: $1,200 -$700 = $500 per spread
• Scenario 1: TSLA stays at $250 at expiration
  • Loss: $500 (premium paid)
• Scenario 2: TSLA rises to $255 at expiration
  • Profit: ($255 -$250) × 100 - $500 =$0 (break-even near)
• Scenario 3: TSLA rises to $260 at expiration
  • Maximum profit: ($260 -$250) × 100 - $500 =$500
• Scenario 4: TSLA rises to $270 at expiration
  • Profit: Still $500 (capped by short call)
  • Excess gains beyond $260 are lost to short call

When to Use:

• You're bullish but want to reduce cost
• You want defined risk and reward
• Capital preservation is important
• You expect moderate price increase

Advantages:

• Lower cost than simple call purchase
• Defined maximum loss (net debit paid)
• Defined maximum profit (width of strikes - net debit)
• Higher probability of profit than long call alone
• Better risk/reward ratio

Disadvantages:

• Profit potential is capped
• More complex than single-leg strategies
• Requires two separate transactions
• May have wider bid-ask spread

Real-World Application: A trader using $5,000 capital could buy 10 spreads instead of 4 long calls, controlling 1,000 shares worth$250,000 with better defined risk.

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Strategy 6: Iron Condor (Income in Range-Bound Market)

Outlook: Neutral to slightly bullish or bearish

Description: Sell both a call spread (above current price) and put spread (below current price) to profit from a stock staying in a range[1].

Setup:

• Sell 1 out-of-the-money call at higher strike
• Buy 1 out-of-the-money call at even higher strike
• Sell 1 out-of-the-money put at lower strike
• Buy 1 out-of-the-money put at even lower strike
• All same expiration

Profit/Loss Profile:

See Chart 4: Iron Condor P&L (chart:14)

Real Example - Using Nvidia:

• Current NVDA price: $100
• Sell call: Strike $110, receive$3 per share ($300)
• Buy call: Strike $115, pay$1 per share ($100)
• Sell put: Strike $90, receive$3 per share ($300)
• Buy put: Strike $85, pay$1 per share ($100)
• Total Credit Received: $300 +$300 - $100 -$100 = $400
• Scenario 1: NVDA stays between $90-$110 at expiration
  • Maximum profit: $400 (all options expire worthless)
• Scenario 2: NVDA rises to $112 at expiration
  • Loss: ($112 -$110) × 100 - $400 = -$200 (loss starts)
• Scenario 3: NVDA falls to $88 at expiration
  • Loss: ($90 -$88) × 100 - $400 = -$200 (loss starts)
• Scenario 4: NVDA rises to $120 at expiration
  • Maximum loss: ($115 -$110) × 100 - $400 =$100
• Scenario 5: NVDA falls to $80 at expiration
  • Maximum loss: ($90 -$85) × 100 - $400 =$100

When to Use:

• Market is expected to stay range-bound
• Implied volatility is high (premiums are fat)
• You want consistent income from a stable stock
• You can actively manage positions

Advantages:

• Profitable in non-moving market (high probability)
• Well-defined risk and reward
• Collect premium from both sides
• Lower margin requirements than naked positions
• Can target 50%+ win rate

Disadvantages:

• Maximum profit is limited to credit received
• Risk can be larger than profit in worst case
• Requires active management near expiration
• Complex position to manage
• May tie up substantial margin/capital

Key Point: Iron condors work best in range-bound markets with high implied volatility at entry.

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5. Risk Management Principles

Position Sizing

Never risk more than 2-5% of your trading capital on a single trade[2]. For a $50,000 account:

• 2% = $1,000 maximum risk per trade
• 5% = $2,500 maximum risk per trade

Using Stop Losses

Set predetermined exit points:

• Close losing positions at 50% of max loss
• Take profits at 50-75% of max profit (don't wait for expiration)
• Use mental or hard stops to enforce discipline

Volatility Considerations

• High Volatility: Premiums are expensive (good for selling options, bad for buying)
• Low Volatility: Premiums are cheap (good for buying options, bad for selling)
• VIX levels: Check the VIX index (volatility index) before entering trades

Expiration Management

• Be aware of time decay as expiration approaches
• Theta (time decay) accelerates in final week before expiration
• Don't wait until last day unless you have a specific plan
• Close positions 1-2 weeks before expiration to avoid assignment surprises

Probability of Profit (PoP)

• Delta approximates PoP - A $50 call with 0.30 delta has ~30% chance of profit at expiration
• Target 60%+ PoP for income strategies
• Accept lower PoP (30-40%) for directional bets if risk/reward is good

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6. Real-World Examples

Example 1: Earnings Hedge

Scenario: You own 100 shares of Apple at $220. Earnings are in 3 days, and implied volatility is expected to crush 50% after earnings.

Setup:

• Own 100 AAPL shares
• Buy 1 put: Strike $210, Premium$2.50, 30 days to expiration
• Cost: $250

Expected Outcome:

• If stock stays near $220 before earnings: Premium may rise due to volatility
• If stock drops 10% to $198: Protected by$210 put
• If stock rallies to $240: Participate in gains, only loss is put premium

Result: Define risk while participating in upside

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Example 2: Generating Income on Cash-Secured Puts

Scenario: You have $10,000 in cash and want to generate income.

Setup:

• Sell 1 put: Strike $200, Expiration 30 days, Premium$3 per share ($300)
• Keep $20,000 cash reserved (strike × 100 shares)

Expected Outcome:

• If stock stays above $200: Premium is yours ($300 profit)
• Annualized return: $300 × 12 =$3,600 per $20,000 = 18% return
• If stock falls to $190: Assigned at$200, own stock below market
• Can then sell covered calls on the assigned shares

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Example 3: Bull Call Spread for Limited Capital

Scenario: You have only $2,000 to deploy on Nvidia which trades at$100, but want exposure to 1,000 shares worth.

Setup:

• Buy 10 bull call spreads
• Buy 10 calls: Strike $100, Premium$8 per share ($800)
• Sell 10 calls: Strike $110, Premium$3 per share ($300)
• Net debit: $500 per spread =$5,000 total
  • Actually $5,000 total, not$2,000 - adjust to fit capital

Adjusted Setup (with $2,000):

• Buy 4 bull call spreads
• Buy 4 calls: Strike $100, Premium$8 per share ($3,200)
• Sell 4 calls: Strike $110, Premium$3 per share ($1,200)
• Net debit: $500 × 4 =$2,000

Outcome:

• Max profit: $1,000 (if NVDA reaches$110): $100 × 10 width × 4 spreads -$2,000
• Max loss: $2,000
• Capital efficiency: Control $40,000 notional with$2,000 capital

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7. Common Mistakes to Avoid

1. Buying out-of-the-money options - Low probability, money disappears quickly
2. Holding through expiration - Don't wait; close early to avoid assignment surprises
3. Ignoring Greeks - Delta, Theta, and Vega matter for price predictions
4. Over-leveraging - Risk only 2-5% per trade
5. Not understanding assignment - Short options can be assigned unexpectedly
6. Selling naked calls - Unlimited loss potential; requires portfolio margin
7. Picking earnings plays blindly - Volatility crush is real after earnings
8. Not tracking probability - Use delta as proxy for probability of profit

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8. Key Takeaways

Concept	Key Point
Call Options	Right to buy. Profit from rising prices. Max loss = premium paid
Put Options	Right to sell. Profit from falling prices. Max loss = premium paid
Long Call	Bullish, unlimited profit, limited loss
Protective Put	Hedging strategy, downside protection, costs money
Covered Call	Income from stock ownership, capped upside
Bull Call Spread	Bullish, limited risk and profit, lower cost
Iron Condor	Neutral outlook, range-bound profits, income focused
Risk Management	Risk 2-5% per trade, use stops, monitor Greeks
Time Decay	Works against buyers, for sellers. Accelerates near expiration
Greeks	Delta (direction), Theta (time), Vega (volatility), Gamma (acceleration)

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References

[1] Quantified Strategies. (2024). Options Trading Statistics 2025: Data And Facts. Retrieved from https://www.quantifiedstrategies.com/options-trading-statistics/

[2] Alpaca Markets. (2025). Calls Vs Puts: A Beginner's Guide to Options Trading. Retrieved from https://alpaca.markets/learn/calls-vs-puts-a-beginners-guide-to-options-trading

[3] NerdWallet. (2024). 5 Options Trading Strategies For Beginners. Retrieved from https://www.nerdwallet.com/investing/learn/options-trading-strategies

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Disclaimer: This tutorial is for educational purposes only. Options trading involves substantial risk of loss. Paper trade first, understand your broker's margin requirements, and consult a financial advisor before trading real money. Past performance does not guarantee future results.