Trading Options: Using Technical Analysis to Design Winning Trades, + Website

CHAPTER 9

Options Combinations

With a basic understanding of the options building blocks, puts and calls, you can now start to look at how you might combine them to your advantage. Puts and calls can be combined in many different ways to produce combinations that we will use. The combinations are endless. Here is a list of the 13 most popular ones, starting with the most basic and working into more complex combinations. These will cover most of our trades directly or through combining them.

1. Covered call or buy write .

2. Long a put or call.

3. Short a put or call.

4. Long a put spread or call spread.

5. Short a put spread or call spread.

6. Long a ratio put or call spread.

7. Long or short a Calendar.

8. Long or short a Diagonal.

9. Long or short a Butterfly.

10. Long or short a Straddle.

11. Long or short a Strangle.

12. Long or short an Iron Condor.

13. Long or short a Risk Reversal.

Option trading, like any other business, has its own lingo. Once you get to know it, it will become part of your daily vocabulary as well. We will look at each of these combinations with an eye toward when they might be used and how. At the end of this chapter you should be able to define each strategy and have a good understanding of when they might be used. Let’s take a brief look at each of these.

■ Covered Call or Buy Write

The covered call is nothing more than selling a call, usually at a strike above the current stock price, when you already own the stock. It is the most popular options ...