Options Strategies

Options Trading Guide for Beginners

Each options contract indicates our outlook on an underlying security. It can be described based on how we want the underlying to behave.

An increase in the underlying price – bullish
A decrease in the underlying price – bearish
No change in the underlying price – neutral

Although a single options trade can serve as a standalone strategy, combining different trades (each called a leg) can adjust our risk/reward. When the market changes, we can add or remove options legs mitigate risk or increase earning potential. The more options we have in a particular strategy, the more control we have over our profits and losses.

Therefore, understanding how each leg affects our overall position is essential for successful options trading.

By the end of this section, you will learn to differentiate and understand:

Long and Short Option Positions
Stock, Market, and Contract Position
Single-Leg Options Strategies
Underlying Share Position

Stock Positions

Stock positions, and by extension, options positions, can be classified as ‘long’ or ‘short.’ Although the terms share similarities in both types of trades, it is essential to understand what they mean in the context of stocks first.

Long Position

Taking a long position in stock trading involves buying shares with the intent of reselling at a higher price*. For example:

Buy 100 shares at $10 (Buy to open, +100 shares)
Wait for the stock price to go up (Bullish)
Sell 100 shares at $20 (Sell to close)
Profit: 100 * ( $20 – $10 ) = $2000

Short Position

By initiating a short position on a stock, we initially sell borrowed stock shares, which we ideally pay off by repurchasing at a lower price.

Sell 100 borrowed shares at $100 (Sell to open, Balance: -100 shares)
Wait for the stock price to go down (Bearish)
Repurchase 100 shares at $80 to pay off the stock loan (Buy to close)
Total profit: 100 * ( $100 – $80 ) = $2000

Long vs. Short Positions

The long stock position has two notable features:

buying to open creates a positive balance of stock, indicating ownership
favors upward price movement (bullish) so we can sell at a higher price.

Meanwhile, the short stock position is the opposite:

selling to open creates a negative balance in which we borrow and owe stocks.
favors downward price movement (bearish) so we can buy back at a lower price.

Just as it’s possible to lose money on a long position, it is also possible to lose money on a short position. In the long position, we incur a loss by selling the stock at a lower price than we bought it. In the short position, we must return the shares we borrowed, but at a higher price than which we borrowed them at.

Option Positions

We can also classify options with the terms ‘long’ or ‘short,’ but there is one caveat. Since there are two types of options, we can have long calls, long puts, short calls, and short puts, totaling up to four different positions.

With options, buying to open doesn’t automatically indicate a bullish position, nor does selling to open indicate a bearish position. We must also take into account whether the contract is a call or put.

Although a ‘long’ position for stocks means we’re buying to open and maintain a bullish outlook, it simply means to open a contract in options trading. Similarly, a ‘short’ position indicates we have a negative balance of by selling options we don’t already own.

Options Classification

Option Type	Buy	Sell
Call	Long Call	Short Call
Put	Long Put	Short Put

Options Outlook

Option Type	Buy	Sell
Call	Bullish	Bearish
Put	Bearish	Bullish

In a long call, our profit increases when the underlying stock price rises above the strike price, as long as the difference exceeds the fee (premium) we paid to buy the contract.

In a short put, we sell the contract at a certain strike price for a fee (premium). As long as the underlying price never dips below the strike price, the option will expire worthless and we can keep the entire premium.

Meanwhile, a long put generates more profit the lower the stock price drops. Unlike the long call, this is a bearish position because we are buying the right to sell the stock at a strike price and hoping to buy it at a lower price in the future.

Similarly, a short call is also bearish because it relies on the underlying stock price never exceeding the call price. As long as this doesn’t happen, we can keep the entire premium of selling the call.

Underlying Positions

Our underlying position on an option is sometimes more important than the option contract itself.

When we sell a call or put, we are guaranteeing the underlying asset at a fixed price. If the stock price reaches the strike price, the option holder may exercise and force us to fulfill the trade.

After the contract owner assigns the contract to us, we must fulfill it no matter how unfavorable. The more the underlying moves past the strike price, the more money we lose.

Therefore, naked options – selling contracts without owning the underlying – may even incur infinite losses. We may choose to sell covered options – where we sell both the contract and own the underlying – to reduce this risk.

For example, the underlying of a $100 call could theoretically reach $500 or more. Selling a naked call would result in a total loss of $40,000 ($400 * 100 shares). But if we had owned 100 shares of the underlying stock, we would collect the premium and avoid losing $40,000.