Lesson 7: Basic Strategies (Risk-Defined First)
Promise: Pick strategies by what you believe (direction, vol) and how you want risk bounded.
Strategy Selection Framework
Before choosing a strategy, answer two questions:
- What's your directional view? Bullish, bearish, or neutral?
- What's your volatility view? Expecting high or low realized vol?
If you can't explain max loss in one sentence, don't place the trade.
Long Call / Long Put
The simplest directional bets with limited risk.
Long Call
- View: Bullish
- Max loss: Premium paid
- Max gain: Unlimited
- Breakeven: Strike + Premium
Long Put
- View: Bearish
- Max loss: Premium paid
- Max gain: K - Premium (if S → 0)
- Breakeven: Strike - Premium
When to use: When you have a directional view and want capped downside.
Vertical Spreads
Spreads cap your upside to reduce premium cost. Great for beginners.
Bull Call Spread
- Buy lower strike call (K1)
- Sell higher strike call (K2)
Bear Put Spread
- Buy higher strike put (K2)
- Sell lower strike put (K1)
"Spreads are training wheels that still go fast."
See Strategy Payoffs
Drag to explore P&L at different spot prices:
Spread Example
Bull Call Spread on BTC:
- Buy BTC-100000-C @ $3,000
- Sell BTC-110000-C @ $1,500
- Net premium: 1,500 = $1,500
Trade-off: Max gain is capped at 1,500 vs $3,000 for a naked long call.
Straddle / Strangle (Volatility Bets)
For when you expect big moves but don't know the direction.
Long Straddle
- Buy ATM call
- Buy ATM put (same strike)
- View: High vol expected, direction unknown
- Max loss: Total premium paid
Long Strangle
- Buy OTM call
- Buy OTM put (different strikes)
- View: High vol expected, cheaper than straddle
- Max loss: Total premium paid
Short straddles/strangles (selling both sides) are capital-intensive and dangerous for beginners. You're betting vol will be low, but if a large move occurs, losses can be significant.
Strategy Chooser Matrix
⚠️ = Margin-intensive, not recommended for beginners
Short Premium Warning
Selling options is NOT "getting paid to wait." You're accepting someone else's convex risk.
Before selling options:
- Understand margin requirements (see Lesson 10)
- Model worst-case scenarios
- Have a risk management plan
- Accept you might be liquidated
Common Mistakes
| Mistake | Correction |
|---|---|
| Selling options "for premium" without modeling worst case | Always calculate max loss. If it's unbounded or larger than you'd accept, don't do it. |
| Building multi-leg positions without understanding net premium | Always know your net debit/credit and max loss before executing. |
| Using straddles without a vol thesis | Straddles lose money if vol is low. You need to believe realized vol will exceed implied vol. |
| Starting with complex strategies | Master single-leg and spreads before attempting anything with 3+ legs. |
💡 Tip: Try answering each question yourself before revealing the answer.
See Also
Navigation: ← Lesson 6: Greeks 101 | Lesson 8: Execution on Orderbook →