Options Strategy Explanation 07 | A Single-Leg Strategy delights Buyers and Steady Gains for Sellers

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Welcome to Options Strategy Explanation 07！

Today, we will present relatively simple options strategies, which are the four common single-leg options strategies. These four strategies are buying call options, buying put options, selling call options, and selling put options.

These four option strategies are relatively simple compared to the combination strategies introduced earlier, making it easy for beginners to get started. However, while they may be easy to start with, if you truly want to make money using these strategies, you still need to delve deeper and study them thoroughly.

1、Four Single-Leg Option Strategies

1.Buying Call Options

The strategy of buying call options is as the name suggests - you directly purchase a call option. If you believe that the underlying asset will rise in the future, there are two ways to profit. First, you can buy the stock directly, or second, you can buy the call option of that stock.

Now, here comes the question: Can you really make money if you buy the call option of a stock that rises in the future? The answer is not always. Options have time value, and if the stock price doesn't rise significantly or remains flat, the time value erosion of the option might exceed the increase in its intrinsic value. For specific reasons, you can refer to “Day 4.Why are options losing money when the stock price remains unchanged?" So, the strategy is straightforward, but how can we operate to profit?

If you expect the stock price to rise moderately, you should avoid choosing deep out-of-the-money options for the strike price. Deep out-of-the-money options have no intrinsic value, and their time value makes up 100% of their premium. When the stock price doesn't experience a significant increase, the time value erosion of deep out-of-the-money options can be substantial, which could lead to losses. For example, Tesla's stock price rose by around 6% in a day, but the call option with a strike price of $325 experienced a drop of 21.43%.

Furthermore, in this situation, it is best to choose day trading or high-frequency trading and avoid holding long positions.

2.Buying Put Options

The strategy of buying put options is similar to buying call options, but in this case, you purchase a put option. This strategy is suitable when you expect the stock to decline in the future. Similarly, when you expect the stock price to decline moderately, you should also avoid choosing deep out-of-the-money put options.

3.Selling Call Options

The strategy of selling call options is suitable when you expect little or no change in the stock price, or when you expect the stock price to decrease. As the seller, you profit from the time value of the option. As long as the stock price doesn't move in an unfavorable direction, the seller can make a profit.

Under this strategy, the only thing to note is that since the seller's profit is limited while the potential loss is unlimited, risk management is essential. In case the stock price moves unfavorably, it's important to implement stop-loss measures in a timely manner.

4.Selling Put Options

The strategy of selling put options is suitable when you expect little or no change in the stock price, or when you expect the stock price to rise. Like selling call options, the seller aims to profit from the time value. Although theoretically the seller's profit is limited and the potential loss is unlimited, since the stock price can only drop to zero, the maximum loss for the seller of a put option is the difference between the stock's current price and the premium received.

Alright, we've covered these four strategies for today.

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