Your First Option Strategies

So far you’ve met options one at a time: a lone call, a lone put, its premium split into intrinsic and time value, and the six dials that move it. That’s the vocabulary. Now comes the grammar. A strategy is just two or more positions — called legs — bolted together so their payoffs add up into a new shape. Bolt a short call onto stock you already own and you’ve built an income machine. Bolt a put onto it and you’ve bought insurance. Stack two calls and you cap both your cost and your upside. Stack a call and a put and you stop caring which way the stock goes — you only care that it goes.

Each leg is a hockey stick you already know how to read. The trick of every strategy below is simply that payoffs are additive: at any final price, you compute each leg’s profit and sum them. That sum is the new curve. Four classic structures, four views, four payoff shapes — let’s build them.

The Covered Call — Renting Out Your Upside

The view here is mildly bullish-to-neutral: you own a stock, you think it drifts sideways or up a little, and you’d happily collect rent in the meantime. The covered call turns a stock you already hold into a yield-bearing position — at the cost of capping how high you can ride.

How it’s built

Two legs:

• Long 100 shares (the stock you already own — the “covered” part), and
• Short 1 call (you sell a call against those shares, pocketing its premium).

You sell a call whose 100 shares of obligation are covered by the 100 shares you own. If the buyer exercises, you simply hand over stock you already have — no scramble, no naked risk.

Worked example

You own 100 shares bought at $100 each. You sell one $110 call and collect a $3 premium. Walk the final prices:

• Max gain = the $10 of stock appreciation up to the strike plus the $3 premium = $13 per share. Above $110 every extra dollar of stock gain is clawed back by the short call, so it’s flat.
• Max loss = you still own the stock all the way down. If it goes to $0 you lose $100, softened by the $3 you kept — $97 per share. The premium is a cushion, not a floor.
• Breakeven = your cost basis minus the premium = $100 − $3 = $97.

The chart below shows only the short-call leg — the income engine you bolted on. The full covered call is this curve plus a 45° line rising one-for-one with the stock (your shares). Where the short call goes increasingly negative above $110, that loss exactly cancels the rising stock, flattening the combined payoff at the cap.

When to use it

Use a covered call on stock you’re content to hold, when you expect a flat or gently rising market and want income from the time value you’re selling. You’re effectively being paid for the theta decay that normally works against option buyers. Avoid it right before a catalyst you think will send the stock soaring — you’d be capping exactly the move you’re hoping for.

The Protective Put — Buying a Deductible for Your Stock

The view: you’re bullish enough to keep holding, but you want to sleep at night. A nasty crash would hurt, so you buy insurance. The protective put puts a hard floor under your stock while leaving the upside (almost) fully intact.

How it’s built

• Long 100 shares, and
• Long 1 put (you buy a put, paying its premium, as a hedge).

The put gives you the right to sell at the strike no matter how far the stock falls — exactly like an insurance policy that pays out when your asset drops below an agreed value.

Worked example

You own at $100 and buy a $95 put for $2. The put lets you sell at $95 however low the stock sinks:

• Max loss = the $5 drop from $100 down to the $95 strike, plus the $2 premium you paid = $7 per share. Below $95 the put gains a dollar for every dollar the stock loses, so your net is frozen at $-7. That’s your floor.
• Max gain = unlimited, minus the $2 premium. Every dollar of upside is yours except the cost of the insurance.
• Breakeven = cost basis plus premium = $100 + $2 = $102. The stock has to climb $2 just to cover the policy.

Think of the $95 strike as your deductible: you absorb the first $5 of loss yourself (down to the strike), the put covers everything beyond, and the $2 premium is the price of the policy.

The chart shows the long-put leg alone. Add your stock’s 45° line and the put’s left-side gains cancel the stock’s left-side losses below $95 — the combination flattens into a floor on the downside while the upside keeps climbing.

The Bull Call Spread — A Cheaper Bullish Bet

The view: you’re bullish, but a plain long call feels pricey, and you only expect a moderate rise — not a moonshot. A bull call spread keeps the bullish shape, slashes the cost, and in exchange caps your gain at a level you choose.

How it’s built

Two calls, same expiry:

• Long 1 call at the lower strike (your bullish bet — costs premium), and
• Short 1 call at the higher strike (financing — earns premium, caps the upside).

The short call you sell pays for part of the long call you buy. You give up gains above the higher strike to shrink your outlay — a classic “I’ll trade the tail for a discount” deal.

Worked example

Buy the $100 call for $6, sell the $110 call for $2.

• Net cost (debit) = $6 paid − $2 received = $4 per share. That’s also your max loss — if both calls expire worthless below $100, you’re out exactly $4.
• Max gain = the $10 distance between strikes minus the $4 you paid = $6 per share. Above $110 the long call’s gains are matched dollar-for-dollar by the short call’s losses, so the payoff flattens.
• Breakeven = lower strike plus net cost = $100 + $4 = $104. The stock has to clear $104 before you’re in profit.

When to use it

Use a bull call spread when you’re moderately bullish with a price target in mind — you expect the stock around the higher strike, not far beyond it. It costs less than a long call (smaller max loss, higher breakeven trade-offs aside) and it bleeds less time value, because the short leg’s decay works for you while the long leg’s decay works against you.

The Long Straddle — Betting on Chaos

The view is the odd one out: you don’t care about direction at all. You expect a big move — earnings, a court ruling, a Fed decision — but you genuinely don’t know which way. The long straddle profits from magnitude, punishing only one outcome: the stock sitting still.

How it’s built

• Long 1 call and long 1 put, at the same strike and same expiry.

You buy both sides. A big rally cashes in the call; a big crash cashes in the put; in either case one leg pays for the whole position and then some. This is the purest volatility bet you can place with two legs — and it ties straight back to the volatility driver from the previous lesson: you profit when realized movement beats what the premiums priced in.

Worked example

Buy the $100 call for $5 and the $100 put for $5.

• Total cost = $5 + $5 = $10 per share. That’s your max loss, and it strikes at exactly $100 — where both options expire worthless and you eat both premiums.
• Breakevens = strike ± total cost = $100 − $10 = $90 and $100 + $10 = $110. The stock must move more than $10 in either direction before you profit.
• Max gain = unlimited on the upside (the call), and very large on the downside (the put pays until the stock hits $0). The payoff is a V: deepest loss at the strike, climbing away on both sides.

When to use it

Use a long straddle when you expect outsized movement of unknown direction and — crucially — when you think the move will be bigger than the premiums imply. Before a binary catalyst, ask: is the combined cost cheaper than the move I expect? If the market has already priced in the drama (high IV), you may pay too much and lose to the crush even on a real move.

Shaping a Payoff to a View

Step back and the pattern is clean: pick your view, then pick the structure whose payoff matches it. Every strategy here is a different answer to “what do I think the stock will do?”

The map: bullish-and-cautious → bull call spread (cap the cost). Already-long-and-nervous → protective put (cap the downside). Already-long-and-bored → covered call (harvest income). No directional opinion but expecting fireworks → long straddle (cap nothing, bet on size). Each leg you add bends the hockey stick toward the shape your view demands — that’s the entire craft of strategy building.

Wrap-Up

You’ve gone from single legs to your first real toolkit. Each strategy is just legs added together into a payoff that fits a view — and you can now state, with arithmetic, exactly where each one peaks, bottoms out, and breaks even.