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Advanced · Lesson 6 of 6Choosing a strategy: the decision map
Pick the strategy from two questions: what is your view on direction (up, down, sideways, don't know) and on volatility (rising, falling)?
Bullish with defined risk: long call or bull call spread. Bearish: long put or bear put spread. Protect shares: protective put or collar. Earn income on shares you own: covered call. Expect a big move but unsure of direction: long straddle or strangle. Expect calm: butterfly or calendar (debit versions).
Then choose expiry (more time costs more but decays slower), strike (closer to the money = higher probability, higher cost), and size (risk a small fraction of capital). Write down max loss, max gain and breakeven, and your exit plan, before you trade.
Key takeaways
- Direction + volatility view → strategy.
- Strike and expiry trade cost against probability.
- Plan exits before entering.
Check your understanding
1. You own shares and want income while expecting a flat market. Fitting strategy?
- Long straddle
- Covered call
- Long put
- Naked call
Show the answer
Covered call. Covered calls earn premium in flat markets.
2. You expect a big move but not the direction, with limited risk. Fitting strategy?
- Covered call
- Long straddle
- Iron condor
- Bull put spread
Show the answer
Long straddle. Long straddles profit from large moves either way.
Go deeper
- Wikipedia: Options strategy
- YouTube videos: how to choose an options strategy
- Investopedia: options strategies
- Cboe: strategy
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