Options Trading Education - Options Strategies for Index Options & Equity Options

Welcome to the mysmp Option Trading Education Center. Learn about various options trading strategies and techniques designed for profiting from various types of market conditions. Additionally, you will find definitions for many of the fundamental components of an option such as: calls, puts, expiration date, volatility of options, and more.
Alligator SpreadAn alligator spread refers to the heavy commissions paid by the investor to their broker in initiating a combination of call and put options. The commissions paid become so high that they strip the profit potential out of the trade.
Bull Calendar SpreadBuying a calendar spread involves buying a longer term LEAP call and selling a shorter dated call, resulting in a net debit transaction. The crux of this strategy revolves around the idea that the theta on the shorter term option will increase rapidly as expiration approaches which causes the shorter term option to lose its time value much faster than a longer dated one
Bull Call SpreadThe bullish call spread can be created by buying lower strike calls and selling, or shorting, the same number of higher strike calls with the same expiration. It will cap your profit potential but limit your downside at the same time if the stock does not go up as you expected.
Bull Put SpreadThe bull put spread utilizes one long and one short put to profit from a rising market.
Butterfly SpreadThe butterfly spread is put together to create a low risk, low reward options strategy and is designed to take advantage of a market or stock that is range bound. The butterfly can be created using call or put options.
Call OptionA call option is an agreement between a buyer and a seller that gives the right to the options holder to buy a specified number of shares at a predefined price and within a predefined period of time
Call Ratio BackspreadA call ratio backspread is a good strategy if you have a strong conviction that the security you are buying options on will have a strong upside move.
Call Ratio SpreadA Call Ratio Spread is an options strategy for traders who believe that the stock go sideways to down until expiration of the option. The strategy consists of buying 1 in the money call and selling 2 out of the money calls on the same underlying security and expiration date
Collar Option StrategyA Collar options strategy employs the use of LEAP calls and puts to set up a very low risk/riskless trade.
Condor SpreadThe condor spread takes advantage of a range bound stock which will make very small movements until expiration. The condor spread utilized four options; all calls or all puts.
Covered CallA covered call refers to a situation when one is long the stock and short the call. Covered calls allow the seller to hedge the downside risk of their stock.
Credit Default SwapA credit default swap (CDS) is a credit derivative product which allows the holder of a fixed income security to transfer the credit risk portion associated of that security on to a counterparty for a fee
Implied VolatilityThe term implied volatility refers to an expectation of volatility in the underlying asset from the present till the options expiration, using current options pricing data as a basis
Intrinsic ValueThe intrinsic value of an option is the difference between the strike price of the option and the current price of the underlying. There is only intrinsic value if the option is in the money.
LEAPSLEAPS are long term options used by buyers and sellers who want longer term protection.
Long GutsThe long guts option strategy is a volatility trade that is created when the trader believes that there will be a sharp move up, or down in the underlying. This options strategy involves buying an equal amount of ITM calls and puts, which have the same expiration date.
Long StraddleA straddle is an option strategy that involves buying 2 at the money options, one call and one put with the same strike price.
Married PutsA married put is a hedging strategy used by traders to protect themselves against the downside risk associated with the underlying for a predetermined amount of time. The married put allows a trader to enter a long position in the stock with a predefined risk tolerance; it is a low risk, bullish strategy protecting against short term downside risks
Naked Puts - Bullish Options Trading StrategyA naked put is when an options trader sells the put without holding a short position in the security.
Option GreeksOption greeks measure the options sensitivity to various risk components inherent to the price of an option. Delta, gamma, theta, vega, and rho measure the speed of the underlying securities price movement, interest rate movement, time decay of an option, and volatility.
Options Expiration Week Options in one of four security classes will expire every month; stock options, index options, single stock futures, and stock index futures.
Options MoneynessOptions moneyness refers to the stocks price relative to the options strike price. Options can be In the Money, Out of the Money, or At the Money.
Put OptionA put option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for the put holder to force the seller of the put to purchase the underlying security at the strike price on the options expiration date.
Short StraddleA short straddle is a play on low volatility and theta decay. It involves selling 1 at the money call and put at the same strike price with the expectation that the stock stays within a tight range.
Short StrangleThe short strangle is a medium to high risk, limited reward, low volatility options strategy. The strategy is to sell OTM puts and OTM calls, with the same expiration date but different strike prices, which are equidistant from the current price of the underlying security.
Stock Options IntroductionOptions allow the buyer and seller to hedge their risks or speculate on future moves in the underlying security. Learn about the basics of options at mysmp.com.
StrangleA strangle option strategy is a basic volatility strategy which comes with low risk but will require dramatic price moves to pay out profitably.
Strike Price The strike price of an option is the exercise price of an option at expiration.
Synthetic CallsUse synthetic calls to limit the risk of a stock free falling.
Underlying SecurityThe underlying security is a specific security that is represented by an options of futures contract. It references the actual stock or commodity.
VIX - Volatility Index Definition & Trading StrategiesThe VIX is an index used to track the volatility in the S&P 500, but analyzing the number of put and call options traded in real-time.