Chapter 6

Strategy: The Basic Options Trades

Thus it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements. One who does not know the enemy but knows himself will sometimes be victorious, sometimes meet with defeat. One who knows neither the enemy nor himself will invariably be defeated in every engagement.

—Sun Tzu * Sun Pin The Art of War

The ultimate goal of your options education should be to change your mind-set from “Should I buy or sell this stock?” to “What strategy would be appropriate for my thesis on this stock?”

You have now reached the point in your analysis where you should be ready to select a strategy. This will occur once you have found an underlying instrument to trade (stock, ETF, index, etc.) and done your homework both on that instrument as well as the overall markets.

Depending on how bullish, bearish, or indifferent you are, you will select the appropriate strategy to employ. Obviously, once you commit and make a trade, then money management, risk control, psychological control, and gut takes over.

In this chapter, I take you through the way I trade basic strategies and review them step by step from my perspective. My explanation of each strategy includes both factual characteristics as well as opinions of how I would personally use each strategy in addition to how I would position strikes, expiration dates, timing, premiums, and risks of each.

Sun Tzu’s 2,500-year-old writings on strategy are not only applicable ...

Get Your Options Handbook: The Practical Reference and Strategy Guide to Trading Options now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.