TC2000 Help SiteTrading Stocks & Options Trading OptionsUnderstanding The Option Strategy Menu

Understanding The Option Strategy Menu

The Option Strategy menu presents both a graphical display of the options strategies offered and serves as the launching pad from which those strategies are placed on the chart for trading. This menu offers a picture of where the potential gains or losses are with each strategy. Below is a brief and basic introduction to the strategies and a few steps to implementing them on the charts. Links for further study are provided for each strategy.

There are three basic categories of options strategies presented:

  1. Bullish--strategies that are potentially profitable if the stock goes up.
  2. Bearish--strategies that are potentially profitable if the stock goes down.
  3. Volatility--strategies that are potentially profitable if the stock goes up, down or sideways.
    • High Volatility: potential profit if the stock moves significantly in either direction
    • Low Volatility: potential profit if the stock does not move significantly in either direction

Click the Opt (Option) button at the bottom of the price pane to open the Option Strategy window

Always remember that each stock option contract normally controls 100 shares of the underlying stock.

1. The Bullish Strategies: A brief introduction

Long Call: Gives the buyer the right, but not the obligation, to buy the underlying stock at the specified strike price anytime before the expiration date. Calls are often used as an alternative to buying the underlying equity (lower initial outlay of funds, ie. the premium). They also limit the downside risk (if not exercised) to the premium + commission. A long call is normally used when it is believed the stock price will rise significantly. The option can be held, traded or exercised any time prior to expiration.

More on a Long Call

Short Put: Gives the seller the obligation to buy the underlying stock at the specified strike price anytime before the expiration date if the owner of the put desires. Short puts are sometimes used as an alternative to buying the underlying equity. They generate income (the premium) but they expose the seller to substantial risk (e.g. if the stock goes to zero). A short put is normally used when it is believed the stock price will rise significantly. It can also be used as an alternative way to enter a stock if the seller is bullish on the stock but believes the price of the stock may fall in the short-term. This option (also known as a Naked Put) can be held, traded or exercised any time prior to expiration.

More on a Short Put

Stock + Covered Call: This stock/option combination is created when a Call(s) is sold and the equivalent amount of stock is purchased simultaneously. The stock owned covers the option(s) sold. The option generates income (the premium), but at least through the expiration date, the upside gains are limited to the strike price minus the premium plus any gain in the equity price. The position is subject to substantial loss (e.g. if the stock goes to zero).

More on a Covered Call

Stock + Married Put: This stock/option combination is created when a Put(s) is bought and the equivalent amount of stock is purchased simultaneously. The stock owned covers the option(s) bought. The option creates a hedge (a max loss) against a falling stock price through the option expiration date. The position provides unlimited potential gain while limiting loss to the premium minus the strike price.

More on a Married Put

Stock + Collar: This stock/option position is sometimes referred to as a "hedge wrapper" since the collar creates a protective hedge if a long stock position moves down rapidly. An out of the money put is bought and an out-of-the-money call is sold. The two-sided hedge limits both the potential loss and potential profit of the equity (as can be seen in the P&L Zones).

More on a Stock + Collar

Long Call Spread: A two-legged bullish option strategy involving the sale of one Call and the purchase of another Call with a lower strike price. Both options share the same expiration date. This position is bullish, creating profit when the stock moves up. Above the break-even line there is increasing profit until maximum potential profit is reached at the upper strike price. Below the break-even line there is increasing loss until maximum potential loss is reached at the lower strike price. This is a debit spread in that the premium paid for the long Call exceeds the premium received for the short Call.

More on a Long Call Spread

Long Call Backspread: This two-legged bullish option strategy requires selling a Call(s) and simultaneously buying twice the number of Calls at a higher strike price. There is unlimited potential gain to the upside once the stock price passes the upper break-even point. Maximum loss occurs if the stock closes at the upper strike price at expiration. From the upper strike price there is lessening loss until it reaches the upper break-even point where potential profits begin. Below the lower strike price there is lessening loss to the downside until it reaches the lower strike price. Below the lower strike price, the gain locked in is the net premium received. This is a credit spread since the premium received for the short Call exceeds the premium paid for the long Calls.

Short Put Spread: A two-legged bullish option strategy involving the sale of one Put and the purchase of another Put with a lower strike price. Both options share the same expiration date. This position is bullish, creating profit when the stock moves up. Above the break-even line there is increasing profit until maximum potential profit is reached at the upper strike price. Below the break-even line there is increasing loss until maximum potential loss is reached at the lower strike price. This is a credit spread in that the premium received for the short Put exceeds the premium paid for the long Put.

More on a Short Put Spread

Short Put Backspread: This two-legged bullish option strategy requires buying a Put(s) and simultaneously selling twice the number of Puts at a lower strike price. There is unlimited potential loss to the downside once the stock price passes the lower break-even point. Maximum gain occurs if the stock closes at the lower strike price at expiration. From the lower strike price there is lessening gain to the downside until it reaches the lower-break even point. From the lower strike price there is lessening gain to the upside until it reaches the upper strike price. Above the upper strike price, the loss locked in is the net premium paid. This is a debit spread since the premium paid for the long Put exceeds the premium received for the short Puts.

2. The Bearish Strategies: A brief introduction

Long Put: Gives the buyer the option, but not the obligation, to sell the underlying stock at the specified strike price anytime before the expiration date. Puts are sometimes used as an alternative to shorting the underlying equity (lower initial outlay of funds, ie. the premium). They also limit the upside risk (if not exercised) to the premium + commission. A long put is normally used when it is believed the stock price will fall significantly. The option can be held, traded or exercised any time prior to expiration.

More on a Long Put

Short Call: Gives the seller the obligation to sell the underlying stock at the specified strike price anytime before the expiration date if the owner of the call desires. Short calls are sometimes used as an alternative to shorting the underlying equity. They generate income (the premium) but they expose the seller to substantial risk (e.g. if the stock rises substantially). A short call is normally used when it is believed the stock price will fall significantly. This option (also known as a Naked Call) can be held, traded or exercised any time prior to expiration. It is considered a high-risk option strategy.

More on a Short Call

Long Put Spread: A two-legged bearish option strategy involving the sale of one Put and the purchase of another Put with a higher strike price. Both options share the same expiration date. This position is bearish, creating profit when the stock moves down. Above the break-even line there is increasing loss until maximum potential loss is reached at the upper strike price. Below the break-even line there is increasing gain until maximum potential gain is reached at the lower strike price. This is a debit spread in that the premium paid for the long Put exceeds the premium received for the short Put.

More on a Long Put Spread

Long Put Backspread: This two-legged bearish option strategy requires selling a Put(s) and simultaneously buying twice the number of Puts at a lower strike price. There is unlimited potential gain to the downside once the stock price passes the lower break-even point. Maximum loss occurs if the stock closes at the lower strike price at expiration. From the lower strike price there is lessening loss to the downside until it reaches the lower-break even point from which profit begins to be realized. From the lower strike price there is lessening loss to the upside until it reaches the upper strike price. Above the upper strike price, the gain locked in is the net premium received. This is a credit spread since the premium received for the short Put exceeds the premium paid for the long puts.

Short Call Spread: A two-legged bearish option strategy involving the sale of one Call and the purchase of another Call with a higher strike price. Both options share the same expiration date. This position is bearish, creating profit when the stock moves down. Above the break-even line there is increasing loss until maximum potential loss is reached at the upper strike price. Below the break-even line there is increasing gain until maximum potential gain is reached at the lower strike price. This is a credit spread in that the premium received for the short Call exceeds the premium paid for the long Call.

More on a Short Call Spread

Short Call Backspread: This two-legged bearish option strategy requires buying a Call(s) and simultaneously selling twice the number of Calls at a higher strike price. There is unlimited potential loss to the upside once the stock price passes the upper break-even point. Maximum gain occurs if the stock closes at the upper strike price at expiration. From the upper strike price there is lessening gain tot he upside until it reaches the upper-break even point from which loss begins. From the upper strike price there is lessening gain to the downside until it reaches the lower strike price. Below the lower strike price, the loss locked in is the net premium paid. This is a debit spread since the premium paid for the long Call exceeds the premium received for the short calls.

3. The Volatility Strategies: A brief introduction

Long Straddle: A multi-legged, high volatility, long options play profitable when a stock moves significantly in either direction. Both a Call and a Put are purchased with the same strike price and expiration date. There is unlimited profit potential if the stock moves above the upper break-even point and increasing potential profit below the lower break-even point if the stock moves to zero. Maximum loss occurs if the stock closes at the strike price for the two options at expiration.

More about a Long Straddle

Long Strangle: A multi-legged, high volatility, long options play profitable when a stock moves significantly in either direction. A Call is bought simultaneous with buying a Put at a lower strike price. Both contracts share the same expiration date. There is potentially unlimited profit potential if the stock moves above the upper break-even point and increasing potential profit below the lower break-even point if the stock moves to zero. Maximum loss occurs if the stock closes between the strike prices for the two options at expiration.

More on a Long Strangle

Long Iron Condor: A multi-legged, high volatility, short options play profitable when a stock moves significantly in either direction. A Call is sold and another call bought at a lower strike price. Simultaneously, a Put is bought at a strike lower than the Calls and another Put sold at an even lower strike price. All four legs have the same expiration date. The current stock price is normally between the two inner strike prices. Max profit occurs at expiration if the stock price is outside of the strike prices for the two short (outer) legs. Maximum loss occurs if at expiration the stock price is between the strike prices of the long (inner) legs.

More on a Long Iron Condor

Long Call Butterfly: A multi-legged, low volatility, long options play profitable when a stock does not move significantly in either direction. A Call is bought and a second call bought at a lower strike price. Simultaneously, two calls are sold with a strike price between that of the two long calls. All four legs have the same expiration date. The two short (inner) strike prices are normally near the current market price with the two long (outer) calls strike prices equidistant from the short calls. Max profit occurs at expiration if the stock price is at the strike price of the two short (inner) legs. Maximum loss occurs if at expiration the stock price is outside of the strike price of the long (outer) legs.

Long Put Butterfly: A multi-legged, low volatility, long options play profitable when a stock does not move significantly in either direction. A Put is bought and a second put bought at a lower strike price. Simultaneously, two puts are sold with a strike price between that of the two long puts. All four legs have the same expiration date. The two short (inner) strike prices are normally near the current market price with the two long (outer) put strike prices equidistant from the short puts. Max profit occurs at expiration if the stock price is at the strike price of the two short (inner) legs. Maximum loss occurs if at expiration the stock price is outside of the strike price of the long (outer) legs.

More on a Long Put Butterfly

Long options strategies create a net debit to the trading account by the amount of the premium being paid.

Short Straddle: A multi-legged, low volatility, short options play profitable when a stock does not move significantly in either direction. Both a Call and a Put are sold with the same strike price and expiration date. There is unlimited loss potential if the stock moves above the upper break-even point and increasing potential loss below the lower break-even point if the stock moves to zero. Maximum gain occurs if the stock closes at the strike price for the two options at expiration.

More about a Short Straddle

Short Strangle: A multi-legged, low volatility, short options play profitable when a stock does not move significantly in either direction. A Call is sold along with a Put at a lower strike price. Both contracts share the same expiration date. There is  unlimited loss potential if the stock moves above the upper break-even point and increasing potential loss below the lower break-even point if the stock moves to zero. Maximum gain occurs if the stock closes between the strike prices for the two calls at expiration.

More on a Short Strangle

Short Iron Condor: A multi-legged, low volatility, long options play profitable when a stock does not move significantly in either direction. A Call is bought and another call sold at a lower strike price. Simultaneously, a Put is sold at a lower strike than the calls and another Put bought at an even lower strike price. All four legs have the same expiration date. The current stock price is normally between the two inner strike prices. Max profit occurs at expiration if the stock price is between the strike prices for the two short (inner) legs. Maximum loss occurs if at expiration the stock price is outside the strike prices of the long (outer) legs.

More on the Short Iron Condor

Short Call Butterfly: A multi-legged, high volatility, short options play profitable when a stock moves significantly in either direction. A Call is sold and a second call sold at a lower strike price. Simultaneously, two calls are bought with a strike price between the two long calls. All four legs have the same expiration date. The two long (inner) strike prices are normally near the current market price with the two short (outer) call strike prices equidistant from the short calls. Max profit occurs at expiration if the stock price is at outside the strike price of either of the two short (outer) legs. Maximum loss occurs if at expiration the stock price is at the strike price of the long (inner) legs.

Short Put Butterfly: A multi-legged, high volatility, short options play profitable when a stock moves significantly in either direction. A Put is sold and a second put sold at a lower strike price. Simultaneously, two puts are bought with a strike price between the two short puts. All four legs have the same expiration date. The two long (inner) strike prices are normally near the current market price with the two short (outer) put strike prices equidistant from the short puts. Max profit occurs at expiration if the stock price is at outside the strike price of either of the two short (outer) legs. Maximum loss occurs if at expiration the stock price is at the strike price of the long (inner) legs.

Short options strategies create a net credit to the trading account by the amount of the premium being received.

4. Placing an option strategy order

Click the Opt (option) button at the bottom of the price pane to open the Option Strategy Window

Click on the name of the strategy to be used (for example, Long Straddle)

This places the strategy on the chart

Select the strike price(s) using the on-chart order lines

Adjust any parameters desired in the order ticket (e.g. 1-expiration date, 2-order type, 3-quantity, 4-duration, etc.)

When order parameters are set, click {Buy} to Open {Strategy} and then Place Order to confirm.

The trading tools work on either a LIVE brokerage account or a PAPER (simulated) trading account. Live market trading requires an account with TC2000 Brokerage (www.TC2000Brokerage.com).