Options & Derivatives
Core Options Strategies: From Covered Calls to Iron Condors
Six foundational options strategies every options trader should understand — covering directional plays, income generation, and market-neutral approaches.
Key rules
- Covered calls generate income but cap upside — ideal when you're neutral to mildly bullish and willing to sell at the strike
- Cash-secured puts allow you to buy stock at a discount if assigned — only use on stocks you'd genuinely want to own
- Vertical credit spreads define both maximum gain and maximum loss — superior risk management to naked options selling
- Iron condors profit from time decay in sideways markets — use in high IV environments to maximise premium collected
- Always calculate maximum loss before entering any options position — never enter a position where maximum loss is undefined
Options strategies range from simple to complex. These six cover the most important use cases.
**1. Long Call** Buy a call option. Bullish directional bet with defined maximum loss (premium paid). Best in low-IV environments where options are cheap. Choose strikes 10–20% OTM for leverage, or ATM for higher Delta exposure.
**2. Long Put** Buy a put option. Bearish directional bet or portfolio hedge. Maximum loss = premium paid. In low IV, puts are an efficient hedge — far cheaper than shorting stock.
**3. Covered Call** Own 100 shares of stock + sell 1 OTM call against them. Generates income (the collected premium) in exchange for capping upside beyond the strike. Ideal for sideways markets or when you're willing to sell the stock at the strike. Maximum profit = premium + (strike - entry price). Reduces cost basis of the stock over time.
**4. Cash-Secured Put** Sell a put option while holding enough cash to buy the stock at the strike if assigned. Generates income. If assigned, you buy the stock at an effective price of strike - premium = below current market. Popular income strategy in high-IV environments. Often the first step toward a wheel strategy.
**5. Vertical Spreads (Debit and Credit)** Debit spread: buy one option, sell another further OTM in same expiration. Reduces cost of the long option, capping both risk and reward. Bullish debit spread = buy ATM call, sell OTM call. Credit spread: sell the closer option, buy the further one. Collect net credit. Maximum profit = credit collected if both expire worthless. Maximum loss = spread width minus credit. Defined risk.
**6. Iron Condor** Sell an OTM call spread + sell an OTM put spread simultaneously. Four legs. Profits if the underlying stays within a defined range until expiration. Ideal in high-IV environments. Maximum profit = combined credit; maximum loss = spread width minus credit on either side.