Options strategies range from basic positions to complex setups. Understanding how different options trading strategies work — and how much risk each carries — is essential before executing your first order. Here’s a breakdown of nine popular options strategies for beginners, ranked from lower to higher risk.
Core options trading terminology
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Contract size: Standard equity options contracts represent 100 shares of the underlying stock. So, for example, a quoted price of $2 per share translates to a total contract cost of $200 ($2 × 100 shares).
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Call option: A contract that gives you the right to buy 100 shares at a specified price. You’d buy a call if you expect the stock price to rise.
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Put option: A contract that gives you the right to sell 100 shares at a specified price. You’d buy a put if you expect the stock price to fall or if you want to protect your existing shareholdings.
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Strike price: The guaranteed price at which you can buy or sell the underlying stock if you exercise the options contract.
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Expiration date: The final day the contract remains valid. After this date, it expires and becomes worthless.
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Premium: The up-front cash fee paid by the buyer to the seller for the rights provided by the options contract.
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In the money (ITM): An option that has built-in intrinsic value. A call option is ITM if the stock price is above the strike price, and a put option is ITM if the stock price is below the strike price.
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At the money (ATM): When the strike price is identical (or extremely close) to the current stock price.
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Out of the money (OTM): An option that has no intrinsic value. A call option is OTM if the stock price is below the strike price, and a put option is OTM if the stock price is above the strike price. OTM options expire worthless if the stock price stays there through expiration.
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Naked (uncovered) option: Selling a call or put option without holding a corresponding position in the underlying stock or setting aside cash to cover the obligation.
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Options strategies ranked by risk level
Different options trading strategies offer distinct risk-and-reward profiles. Some setups cap your maximum potential loss at the premium, while others carry substantial downside exposure if the market moves against your position. Here they are, ranked by risk.
Lower-risk options strategies
Lower-risk options trading strategies generally involve holding the underlying asset alongside the options contract or setting aside cash to cover obligations. These setups focus on income generation or risk mitigation rather than aggressive speculation.
Covered call
A covered call involves selling a call option while simultaneously owning 100 shares of the underlying asset for each contract sold. The premium collected from selling the call provides immediate cash income.
If the stock stays below the strike price through the expiration date, you keep your shares and the full premium. If the stock price rises above the strike price, you must sell your shares at that agreed-upon price, which caps your upside gains.
Cash-secured put
A cash-secured put involves selling a put option while setting aside enough cash in your trading account to buy 100 shares at the strike price if the option is assigned. Investors often use this approach to generate income or to set a target buy price for a stock they want to own. If the stock price remains above the strike price, the option expires worthless, and you keep the premium.
Protective put
A protective put involves buying a put option for shares you already own. The put contract acts as a price floor, giving you the right to sell 100 shares at the strike price regardless of how far the stock price drops. This strategy limits your downside risk to the cost of the options premium while preserving full upside potential if the stock continues to rally.
Moderate-risk options strategies
Moderate-risk options trading strategies combine multiple contracts (also known as multi-leg trades) to limit both maximum loss and maximum gain. These setups enable you to target specific price ranges while keeping your trading costs somewhat predictable.
Collar
A collar strategy protects existing stock holdings by combining a protective put with a short call. You buy an out-of-the-money put option to set a downside price floor and sell an out-of-the-money call option at the same time.
The premium collected from selling the call helps offset the cost of buying the put, reducing your out-of-pocket expense. In exchange for this lower cost, you accept a cap on your maximum stock profits if the price surges past the call option’s strike price.
Vertical spread
A vertical spread involves buying and selling two options of the same type (two calls or two puts) with the same expiration date but different strike prices:
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Bull call spread: You buy a call at a lower strike price and sell a call at a higher strike price to lower the net cost of a bullish trade.
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Bear put spread: You buy a put at a higher strike price and sell a put at a lower strike price to lower the net cost of a bearish trade.
By combining long and short contracts, vertical spreads define both your maximum profit and your maximum risk before you enter the trade.
Higher-risk options strategies
Higher-risk options trading strategies carry greater exposure to factors like market volatility and can lead to a total loss of capital.
Long call
A long call involves buying an outright call options contract because you believe the stock price will rise significantly above your strike price before the expiration date.
While a long call carries capped risk (you can’t lose more than the up-front premium paid), it falls into the higher-risk category for beginners due to what’s called “time decay.” If the stock price fails to rise far enough past the strike price to cover the cost of the option before expiration, the contract expires worthless, resulting in a 100% loss of your initial investment.
Long put
A long put involves buying an outright put option contract because you expect the stock price to drop well below your strike price before the expiration date.
Like a long call, a long put limits your maximum potential loss strictly to the up-front premium paid. However, because option contracts have fixed lifespans, they lose value every day the market remains flat or moves up. If the stock doesn’t fall far enough below the strike price before the expiration date, the option expires worthless, and you lose your full initial outlay.
Iron condor
An iron condor is a four-leg, market-neutral strategy designed to profit when an underlying stock experiences low volatility and trades within a specific price range. It combines a bear call spread and a bull put spread with four distinct strike prices.
You’d capture maximum profit if the stock price remains between the two inner strike prices until expiration. However, if the stock breaks out sharply in either direction, the trade reaches its maximum defined loss limit.
Straddle
A straddle involves buying a call option and a put option on the same stock with the exact same strike price and expiration date. This trade doesn’t require you to predict which direction the stock will move. Instead, you profit if the stock moves sharply in either direction, such as following a major earnings report or regulatory announcement.
Because you’re paying premiums for two separate contracts, straddles require significant price movement just to break even. If the stock remains flat, both contracts lose value quickly due to time decay, leading to a substantial loss on the combined position.
How to choose an options strategy
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Assess your market outlook: Decide whether you expect the underlying asset to rise (bullish), fall (bearish), or move sideways (neutral). Bullish traders might look at covered calls or long calls, while neutral traders might evaluate cash-secured puts or collars.
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Determine your account size: Some strategies require holding 100 shares of stock or keeping substantial cash reserves (such as covered calls or cash-secured puts). Defined-risk spreads (like vertical spreads) generally require less capital to open.
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Check approval levels: Brokerages assign options trading levels (typically levels 1 through 4) based on your investment experience and financial resources. Basic strategies like covered calls require lower approval levels, while multi-leg spreads or naked options require higher account permissions.
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Account for time decay and volatility: Options contracts carry fixed lifespans. Every day that passes without a market move reduces the time value of an option contract. Make sure you understand how time decay and volatility shifts impact your trade before placing an order.
Options trading strategies FAQs
What’s the safest options trading strategy for beginners?
All trading is inherently risky. However, the covered call and the cash-secured put are widely considered two of the lowest-risk entry points for beginners. Both strategies involve owning the underlying asset or holding cash to back up the trade obligations, which eliminates the risk of unexpected margin calls or unlimited losses.
How much money do you need to start trading options?
You can start trading single options contracts with a few hundred dollars, as some low-cost options trade for small premiums. However, strategies that involve holding underlying shares (like covered calls) require enough capital to buy 100 shares of the stock. Many brokerage apps allow you to trade basic options with low or zero account minimums.
Why do options expire worthless?
Options carry an expiration date. If a call option’s strike price is higher than the current stock price at expiration (or a put option’s strike price is lower), the contract has no intrinsic value. Because no trader would exercise a contract at a disadvantageous price, the option ends up worthless and closes without value.
Do I need a margin account to trade options?
Not always. Basic options strategies, such as buying long calls, buying long puts, or selling cash-secured puts, can usually be executed in a standard cash trading account. However, trading multi-leg spreads or selling naked options requires a margin account and higher options trading approval from your broker.