Building a Strategy

A covered call is owning 100 shares and selling one call option against them. Learn how it works, what it pays, what it gives up, and why the shares can still lose almost everything.

The strike decides how much a covered call pays and where your shares are capped; the expiration decides how long you are committed. Compare four strikes and three expirations on the same 100 shares.

When a covered call is assigned, your 100 shares are sold at the strike price and you keep the premium. Learn when it happens, why it can happen early, and what to do if you want to keep the shares.

Rolling a covered call means buying back the call you sold and selling a new one with a later expiration, a different strike, or both. Work through rolling out, up and out, and down on the same 100 shares.

A buy-write is buying 100 shares and selling a call on them at the same time, as one order with a single net price. Learn how the net debit works, how it compares with buying the shares alone, and what the order can and cannot do.

A cash-secured put is a put you sell while holding enough cash to buy the shares. Learn how it works, what it can earn, what it can lose, and when it fits.

A cash-secured put needs cash equal to the strike price times 100 for each contract. Learn how to work out the amount, the return on it, and why margin changes the cash but not the risk.

The right strike for a cash-secured put is a price you would gladly pay for the stock. Learn how strike and expiration trade premium against the chance of assignment and the risk you carry.

When a cash-secured put is assigned, you buy 100 shares per contract at the strike with the cash you set aside. Learn when it happens, what your account shows, and your choices afterward.

The wheel sells cash-secured puts until shares are assigned, then covered calls until they are called away. Learn one full cycle in dollars, and the risks that the premiums do not cover.

A protective put is long stock plus a long put. Learn what the floor, the deductible and the premium each cost, how a married put differs, and what to do near expiration.

A higher put strike buys a higher floor for a higher premium; a longer expiration costs more in total but less per month. Compare four strikes and five expirations on the same shares.

A collar adds a long put and a short call to shares you own, so the call's premium pays for some or all of the put. Learn its floor, ceiling, break-even and what happens at expiration.

A zero-cost collar picks the call strike whose premium pays for the put. No cash changes hands, but you still pay with a deductible, with the upside above the call, and with fees and spreads.

Hedging with options is worth it when a specific risk, a specific window and a cost you can name all line up. Compare a year of protective puts, a collar and simply selling shares.

A vertical spread buys one option and sells another of the same type and expiration at a different strike, so both the risk and the reward are fixed before you enter. Learn the four verticals and the difference between debit and credit spreads.

A bull call spread buys a call and sells a higher-strike call with the same expiration. It costs less than the call alone and breaks even sooner, in exchange for a capped profit. Learn its max profit, max loss and break-even with a worked example.

A bear put spread buys a put and sells a lower-strike put with the same expiration. It profits from a moderate fall, costs less than the put alone and caps both the gain and the loss. Learn its max profit, max loss and break-even with a worked example.

A credit spread sells one option and buys a further out-of-the-money option of the same type and expiration, so you are paid up front and your loss is capped. Learn how bull put and bear call spreads work, and why they risk more than they can make.

The distance between a vertical spread's strikes sets its maximum loss and, for a credit spread, how much it collects. Learn how to choose a width, why the short leg can be assigned early, and what to do when it is.

Any options position can be summarized at expiration by its maximum profit, its maximum loss (if it has one) and its break-even price. Here is how to find all three for any trade.

The risk-to-reward ratio compares an options trade's maximum loss with its maximum profit. Learn to calculate it both ways, and why it can mislead when you read it on its own.

Probability of profit is a pricing model's estimate of the chance an options position finishes beyond its break-even at expiration. Learn how it is calculated, what it assumes and where it falls short.

Expected value is the probability-weighted average result of a trade across all its possible outcomes. Learn to calculate it for an options spread, and why model-priced trades come out near zero.

A one-page reference for every Course 2 strategy - covered call, cash-secured put, the wheel, protective put, collar and the four vertical spreads - with the formula and a worked number for each one's maximum profit, maximum loss and break-even.

For a defined-risk spread, the number of contracts equals your dollar risk budget divided by one spread's maximum loss, rounded down. Here is how to find that loss and what the size changes.

Covered calls and cash-secured puts can lose almost as much as owning the stock, so size them by the stock you would end up owning, not by the premium or the buying power they use.

How many options positions you can hold depends on your total open risk, not on a fixed count. Correlated positions add up to one bigger bet, so they need a limit of their own.

Diversifying an options portfolio means spreading open risk so that no single stock, sector, expiration date or market move decides most of your results. Here is how, and where it stops helping.

An options portfolio risk check lists every open position's maximum loss, adds them up, finds where risk is concentrated and tests what a market drop would cost. Here is the routine, with a worked example.

An options exit strategy sets, before you open a trade, the price or date at which you will take profits, cut a loss or close for time. Learn how to write exits you can check, using one short put as the example.

Many option sellers buy back a short option before expiration once most of the credit is earned. Learn how profit exits like the 50% rule work, what they give up, and what risk is left in the last weeks.

A stop-loss on an option closes the position once a trigger price is reached. Learn how stop and stop-limit orders work on options, why wide spreads and price gaps make them unreliable, and the stop rules traders use instead.

Rolling options means buying back a short option and selling a new one with more time, a different strike, or both. Learn when to roll options, how rolling out compares with rolling down and out, and what a roll does to break-even and risk.

When a trade is rolled or adjusted, its real result is the sum of every contract in it, not the last one. Learn how to keep a campaign ledger, track the running credit and break-even, and avoid the most common tracking mistakes.

Choosing an options strategy starts with your goal, your view on the stock and what your account can carry. Here is how to match the Course 2 strategies to all three.

Options trading rules are if-then statements, written before you trade, that set when you enter, when you exit and how big you go. Each strategy needs its own set.

A weekly trading review is a fixed routine that checks every open position, totals your risk against your plan's caps, scores the week's closed trades and makes at most one plan change.

A complete example options trading plan for a hypothetical $25,000 account using cash-secured puts, covered calls and bull put spreads, with two trades checked against it.

An options trading checklist is the short list of questions every trade must pass before you place it. Here it is for every Course 2 strategy, with a one-table review of the course.