Options Strategies Explained
Aries offers a range of options strategies for eligible accounts. Below is an overview of each strategy, including potential gains, potential losses, breakeven points, and the options level required to trade.
Options are not suitable for all investors. Options trading involves significant risk and can result in the loss of your entire investment.
LEVEL 1 STRATEGIES
Covered Call
A covered call involves selling a call option while owning at least 100 shares of the underlying stock per contract. This strategy is typically used to generate income when the investor has a neutral to slightly bullish outlook. Because you are selling a call against shares you own, your upside is capped if the stock rises above the strike price. Requires Level 1 options approval.
Max Gain: Limited to the premium received plus any stock appreciation up to the strike price Max Loss: Substantial. If the stock price declines significantly, losses on the stock position can far exceed the premium received. The stock could decline to zero. Breakeven: Stock purchase price minus premium received
Cash-Secured Put
A strategy where you sell a put option while holding enough cash in your account to buy the underlying stock at the strike price if assigned. This is typically used by investors willing to purchase the stock at a lower price. Because your cash is held as collateral, your buying power is reduced while the position is open. Requires Level 1 options approval.
Max Gain: Limited to the premium received Max Loss: Substantial. If the stock declines to zero, you would lose the full strike price minus the premium received. Breakeven: Strike price minus premium received
LEVEL 2 STRATEGIES
Long Call or Long Put
A straightforward strategy that involves buying a single call or put option. Buying a call gives you the right to purchase the stock at the strike price, while buying a put gives you the right to sell. These strategies offer defined risk because the most you can lose is the premium paid. However, options are a wasting asset — their value declines over time due to time decay, and many options expire worthless. Requires Level 2 options approval.
Max Gain: Potentially unlimited for long calls (as the stock can rise indefinitely); for long puts, gain is limited to the strike price minus the premium paid (if the stock falls to zero) Max Loss: The entire premium paid. This loss occurs if the option expires out of the money. Breakeven: For calls, strike price plus premium paid; for puts, strike price minus premium paid
Straddle
Involves buying a call and a put at the same strike price and expiration date. This strategy is used when an investor expects a significant price move but is unsure of the direction. Because you are purchasing two options, the cost is higher than a single-leg trade and the stock must move enough to overcome the combined premium paid. Requires Level 2 options approval and a margin account.
Max Gain: Potentially unlimited on the call side; limited to the strike price minus total premium on the put side Max Loss: The total premium paid for both options, which occurs if the stock closes exactly at the strike price at expiration Breakeven: Upper breakeven is strike price plus total premium paid; lower breakeven is strike price minus total premium paid
Strangle
Similar to a straddle but uses different strike prices for the call and put, making it less expensive to enter. However, the stock must move further in either direction before the position becomes profitable. Requires Level 2 options approval and a margin account.
Max Gain: Potentially unlimited on the call side; limited to the put strike price minus total premium on the put side Max Loss: The total premium paid for both options Breakeven: Upper breakeven is call strike price plus total premium paid; lower breakeven is put strike price minus total premium paid
Collar
Involves holding the underlying stock, buying a protective put, and selling a covered call. This strategy limits both downside risk and upside potential. The premium received from the call can partially or fully offset the cost of the put. The trade-off is that your gains are capped at the call strike price. Requires Level 2 options approval.
Max Gain: Limited to the call strike price minus the stock purchase price, adjusted for the net premium paid or received Max Loss: Limited to the stock purchase price minus the put strike price, adjusted for the net premium paid or received Breakeven: Stock purchase price adjusted for the net premium paid or received
Covered Put
A covered put combines a short stock position with a short put option. This is an advanced strategy with unlimited risk because the stock can rise indefinitely. The premium received from selling the put provides a small buffer but does not limit the potential for significant loss. Requires Level 2 options approval and a margin account.
Max Gain: Limited to the distance between the short stock entry price and the put strike price, plus the premium received Max Loss: Potentially unlimited if the stock rises significantly, reduced only by the premium received Breakeven: Short stock entry price plus premium received
LEVEL 3 STRATEGIES
Vertical Spreads
Credit Spread
A defined-risk strategy created by selling an option and buying an option of the same type (both calls or both puts) with the same expiration but different strike prices, for a net credit. Profit is maximized if the spread expires out of the money. While risk is defined, the maximum loss can be significantly larger than the maximum gain. Requires Level 3 options approval and a margin account.
Max Gain: The net premium received Max Loss: The difference between strike prices minus the net premium received Breakeven: For call credit spreads, short call strike plus net premium received; for put credit spreads, short put strike minus net premium received
Debit Spread
A defined-risk strategy created by simultaneously buying and selling options of the same type with the same expiration but different strike prices, for a net debit. This reduces the cost of a directional trade but also caps the potential profit. Requires Level 3 options approval and a margin account.
Max Gain: The difference between strike prices minus the net premium paid Max Loss: The net premium paid Breakeven: For call debit spreads, long call strike plus net premium paid; for put debit spreads, long put strike minus net premium paid
Calendar Spread
Involves buying and selling options of the same type and strike price but with different expiration dates. This strategy is designed to profit from differences in time decay between the two options. The position is most profitable when the stock stays near the strike price through the near-term expiration. Calendar spreads carry the risk of changes in implied volatility that can work against the position. Requires Level 3 options approval and a margin account.
Max Gain: Realized when the stock closes near the strike price at the short option's expiration, allowing the short option to expire worthless while the long option retains value. The exact maximum depends on the remaining time value of the long option. Max Loss: The net premium paid Breakeven: The stock price at which the remaining value of the long option equals the original net debit paid
Diagonal Spread
Combines elements of vertical and calendar spreads by buying a longer-term option and selling a shorter-term option at a different strike price. This allows for a directional bias while benefiting from time decay on the short option. The position can be complex to manage as it involves options with different expirations and strikes. Requires Level 3 options approval and a margin account.
Max Gain: Varies by structure; potentially unlimited for call diagonals if the stock rises significantly after the short option expires Max Loss: Typically limited to the net premium paid, though this varies by structure Breakeven: Varies by structure and the remaining value of the long option at the short option's expiration
Iron Butterfly
A four-leg strategy combining a bull put spread and a bear call spread where the short put and short call share the same strike price. All options have the same expiration. This strategy profits when the stock stays near the short strike but carries risk on both sides if the stock moves significantly. Requires Level 3 options approval and a margin account.
Max Gain: The net premium received Max Loss: The width of the wings (difference between the short and long strikes) minus the net premium received Breakeven: Upper breakeven is the short strike plus net premium received; lower breakeven is the short strike minus net premium received
Butterfly
A three-strike strategy using all calls or all puts with the same expiration: buy one at a lower strike, sell two at a middle strike, and buy one at a higher strike. Strikes are equally spaced. This profits when the stock closes near the middle strike at expiration. Risk is limited but so is the probability of maximum profit, as it requires precise stock placement at expiration. Requires Level 3 options approval and a margin account.
Max Gain: The width between strikes minus the net premium paid, achieved only if the stock closes exactly at the middle strike at expiration Max Loss: The net premium paid Breakeven: Lower breakeven is the lower strike plus net premium paid; upper breakeven is the higher strike minus net premium paid
Iron Condor
A four-leg strategy combining a bull put spread and a bear call spread with all legs having the same expiration but different strikes. This profits when the stock stays within the range of the two short strikes. While risk is defined, the maximum loss on either side can exceed the premium collected. Requires Level 3 options approval and a margin account.
Max Gain: The net premium received Max Loss: The width of either spread (the wider side if unequal) minus the net premium received Breakeven: Lower breakeven is the short put strike minus net premium received; upper breakeven is the short call strike plus net premium received
Condor
A four-leg strategy using all calls or all puts with the same expiration but four different strikes. This profits when the stock stays within the range of the two middle strikes. Similar to a butterfly but with a wider profit zone and lower maximum profit. Requires Level 3 options approval and a margin account.
Max Gain: The difference between adjacent strike prices minus the net premium paid Max Loss: The net premium paid Breakeven: Lower breakeven is the lowest strike plus net premium paid; upper breakeven is the highest strike minus net premium paid
Ratio Spread
A strategy using an unequal number of long and short options of the same type, typically with more short positions than long. The most common structure is a 2:1 ratio. Because you are selling more options than you buy, this strategy can involve significant or unlimited risk on the excess short options if the stock moves sharply against the position. Ratio spreads are complex and should only be used by experienced options traders who understand the risks involved. Requires Level 3 options approval and a margin account.
LEVEL 4 STRATEGIES
Naked (Uncovered) Call
Selling a call option without owning the underlying stock or any offsetting position. This strategy involves unlimited risk because the stock can rise indefinitely, and you would be obligated to sell shares at the strike price regardless of how high the stock has risen. This is one of the highest-risk options strategies available. Requires Level 4 options approval and a margin account.
Max Gain: The premium received Max Loss: Potentially unlimited, as the stock price can rise indefinitely Breakeven: Strike price plus premium received
Naked (Uncovered) Put
Selling a put option without holding the underlying stock or any offsetting position. This strategy carries substantial risk, as you are obligated to purchase the stock at the strike price regardless of how far it has fallen. Requires Level 4 options approval and a margin account.
Max Gain: The premium received Max Loss: The strike price minus the premium received (if the stock falls to zero) Breakeven: Strike price minus premium received
IMPORTANT DISCLOSURES
Options trading involves significant risk and is not appropriate for all investors. You can lose your entire investment in a relatively short period of time. Multi-leg options strategies involve additional risks, including multiple commissions and potential tax complexity, and are intended for experienced investors. The potential for profit is often accompanied by an equal or greater potential for loss.
Before trading options, you must read the Characteristics and Risks of Standardized Options. You must complete an options trading application and receive approval on an eligible account before placing options trades.