Common option strategies

Five strategies in one table

An example with round prices and the result per share at expiry. The stock costs $100, an option with a $100 strike costs $5, and an option with a $90 or $110 strike costs $2.

The last column shows the largest loss per share, at any price. Fees are left out.

How they work

Covered call. You own the stock and write a call with a $110 strike. The premium comes in, but the gain stops at $110. If the stock falls, the loss is almost as large as for someone who only owns it.

Protective put. You own the stock and buy a put with a $90 strike. The loss stops at $12, however far the stock falls. The protection costs the premium, which is lost if the stock does not fall.

Written put. You receive the premium and promise to buy the stock for $90. If the stock stays above that, the premium is the whole gain. If it falls to zero the loss is $88, which is the writer's risk.

Call spread. You buy a call with a $100 strike and write one with a $110 strike. It costs less than the bought call alone, but the gain stops at $110.

Straddle. You buy both a call and a put with a $100 strike. It gains from a large move in either direction and loses if the stock stands still. You pay two premiums.

Prices of real options vary with time and volatility, so these amounts are only examples.