Basic Option Strategies

Options come down to four core positions, buying or selling a call, and buying or selling a put. Everything else in options trading is built from these foundations.

Long Call

A long call gives you the right to buy a stock at a specific price (the strike) up to expiration. You would buy a call if you expect the stock price to rise or want leveraged upside with limited risk.

• Profit when the stock rises above the strike price plus the premium paid

• Maximum loss is limited to the premium paid

• Benefits from rising stock prices and higher volatility

• Good when: You anticipate a strong upward move and want leveraged upside with defined risk

• Bad when: The stock moves sideways or declines, since the option’s value decays over time and may expire worthless 

*Payoff charts are simplified, hypothetical illustrations showing how an option or options-based strategy may perform at expiration under certain price scenarios. They do not reflect transaction costs, taxes, early assignment, changes in implied volatility, or the effects of time decay prior to expiration. Certain strategies, including short options and spreads, involve significant risk and may result in substantial or unlimited losses. These illustrations are for educational purposes only and do not represent actual trading results or guarantee any outcome

Long Put

A long put gives the holder the right, but not the obligation, to sell a stock at a specific strike price before or at expiration. Long puts are often used to define downside risk on an existing position or to express a bearish view with limited risk.

• The position benefits when the stock falls below the strike price by more than the premium paid, as the put option increases in intrinsic value.

• Maximum loss is limited to the premium paid, which occurs if the stock remains above the strike price through expiration.

• Long puts generally gain value from declining stock prices and rising implied volatility, both of which increase the option's sensitivity to downside movement.

• Good when: You anticipate the possibility of a meaningful decline or want to establish a defined downside limit while maintaining exposure to the underlying stock.

• Bad when: The stock price rises or remains stable, or when implied volatility decreases; in these cases, time decay and lower volatility can reduce the option’s value, and the put may expire worthless.

*Payoff charts are simplified, hypothetical illustrations showing how an option or options-based strategy may perform at expiration under certain price scenarios. They do not reflect transaction costs, taxes, early assignment, changes in implied volatility, or the effects of time decay prior to expiration. Certain strategies, including short options and spreads, involve significant risk and may result in substantial or unlimited losses. These illustrations are for educational purposes only and do not represent actual trading results or guarantee any outcome

Short Call

A short call obligates you to sell a stock at a specific price if assigned. You would sell a call if you expect the stock price to stay below the strike or want to generate income from the premium received.

• Profit when the stock stays below the strike price, allowing the option to expire worthless and the premium to be kept

• Maximum profit is limited to the premium received

• Exposed to rising stock prices and higher volatility

• Good when: You expect the stock to remain stable or decline and want to collect premium income

• Bad when: The stock rises significantly or volatility increases — and if the call is sold uncovered, losses can be substantial and theoretically unlimited, since the stock price can rise indefinitely

*Payoff charts are simplified, hypothetical illustrations showing how an option or options-based strategy may perform at expiration under certain price scenarios. They do not reflect transaction costs, taxes, early assignment, changes in implied volatility, or the effects of time decay prior to expiration. Certain strategies, including short options and spreads, involve significant risk and may result in substantial or unlimited losses. These illustrations are for educational purposes only and do not represent actual trading results or guarantee any outcome

Short Put

A short put obligates you to buy a stock at a specific price if assigned. You would sell a put if you expect the stock to remain above the strike or want to generate income with the possibility of purchasing the stock at a lower effective price.

• Profit when the stock stays above the strike price, allowing the option to expire worthless and the premium to be kept

• Maximum profit is limited to the premium received

• Exposed to falling stock prices and higher volatility

• Good when: You expect the stock to remain stable or rise and want to collect premium income or potentially buy the stock at a discount

• Bad when: The stock falls sharply or volatility increases, since losses can grow — you may be required to purchase the stock at the strike price even if its market value declines substantially

*Payoff charts are simplified, hypothetical illustrations showing how an option or options-based strategy may perform at expiration under certain price scenarios. They do not reflect transaction costs, taxes, early assignment, changes in implied volatility, or the effects of time decay prior to expiration. Certain strategies, including short options and spreads, involve significant risk and may result in substantial or unlimited losses. These illustrations are for educational purposes only and do not represent actual trading results or guarantee any outcome

Read more about Options

Read more about What Influence’s an Option’s Price

Read more about More Options-based Strategies

Read more about Covered Call vs Put Selling

This material is for educational purposes only and does not constitute investment advice or a recommendation of any security, strategy, or product.

Options involve risk and are not suitable for all investors. Prior to trading options, you should carefully read the Characteristics and Risks of Standardized Options (ODD), available from your broker or at www.theocc.com.

Liquid Strategies, LLC (“Liquid”) is an independent investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply a certain level of skill or training. Additional information about Liquid, including our investment strategies, fees, and objectives, is available in our Form ADV Part 2A and Form CRS.

The information provided in this material is for informational and educational purposes only and should not be construed as investment, tax, or legal advice, nor as an offer to buy or sell any security, strategy, or product. The content is provided on an “as is” basis without warranties of any kind. Although the information has been obtained from sources believed to be reliable, Liquid does not guarantee its accuracy or completeness and it may be superseded by subsequent market events or other circumstances. Liquid undertakes no obligation to update or revise any information contained herein. 

Options involve risk and are not suitable for all investors. Options can be highly volatile, may lower total returns, and even well-structured strategies may result in losses due to market conditions or unforeseen events. Short options strategies involve substantial risk and may expose investors to significant or unlimited losses. Before trading options, investors should carefully review and understand the disclosure document Characteristics and Risks of Standardized Options (ODD), available at www.theocc.com or from your broker.
Educational discussions of strategies—including covered calls, put selling, spreads, protective options, volatility strategies, or execution methods—are intended to illustrate general concepts only. These descriptions are not recommendations, and actual performance will vary depending on market conditions, liquidity, transaction costs, and individual circumstances. Analytical measures and sensitivities  such as delta, gamma, theta, and vega estimate sensitivity to inputs but do not predict future results.

Analogies are simplified illustrations intended to help explain options concepts. They may not reflect all risks, characteristics, or market behaviors associated with actual trading or investment strategies.

Investing involves risk, including the potential loss of principal. Past performance is not indicative of, and does not guarantee, future results. No representation is made that any strategy will achieve profits or prevent losses. Investors should consult with qualified financial, legal, and tax professionals before implementing any investment strategy.

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