What are common option strategies (straddle, strangle, spread, butterfly, etc.)?

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HomeFrequently Asked Questions (FAQs)Trading GuideMarket sessionsWhat are common option strategies (straddle, strangle, spread, butterfly, etc.)?

Option strategies are combinations of buying and/or selling Call and Put options on the same or different strike prices to benefit from expected market movements, volatility, or time decay.

Here are some of the most common ones:

1. Straddle (Long / Short Straddle)

  • Structure: Buy (or sell) one Call and one Put of the same strike price and expiry.
  • Long Straddle: Buy both Call & Put → used when you expect a big move (up or down).
  • Short Straddle: Sell both Call & Put → used when you expect the market to stay stable.

Example: Buy Nifty 22,000 Call + Buy Nifty 22,000 Put → Profit if Nifty moves sharply either way.

2. Strangle (Long / Short Strangle)

  • Structure: Buy (or sell) one Call and one Put of different strike prices but same expiry.
  • Long Strangle: Buy both → expect high volatility.
  • Short Strangle: Sell both → expect low volatility.

Example: Buy Nifty 21,900 Put + Buy Nifty 22,100 Call.

3. Spread Strategies

Used when you expect limited movement or want to reduce cost/risk.

Types include:

  • Bull Call Spread: Buy one Call at lower strike, sell another Call at higher strike → Used when you expect moderate rise.
  • Bear Put Spread: Buy one Put at higher strike, sell another Put at lower strike → Used when you expect moderate fall

4. Butterfly Spread

  • Structure: Combines Bull and Bear spreads with 3 strike prices.
  • Used when you expect the market to stay range-bound.

Example: Buy 1 Call (low strike) + Sell 2 Calls (middle strike) + Buy 1 Call (high strike).

5. Covered Call / Protective Put

  • Covered Call: Hold stock + Sell a Call option → Earn premium if stock doesn’t rise much.
  • Protective Put: Hold stock + Buy a Put option → Protects downside risk.

In short:

  • Straddle/Strangle: For volatility.
  • Spreads: For limited gain/loss trades.
  • Butterfly: For stable markets.
  • Covered/Protective: For hedging.

Option strategies are combinations of buying and/or selling Call and Put options on the same or different strike prices to benefit from expected market movements, volatility, or time decay.