Option Strategies and the Use of Options
Jim Graham

One of the great things about options is that you can use them for a very wide range of strategies, and each of these strategies has a different risk/reward profile. Some are high-risk, like the speculative buying of call and put options; others are designed to profit if specific future expectations are met. 
People who are unfamiliar with options usually think about them only in this way, and overlook the potential for more conservative methods of (a) protecting portfolio positions, (b) spreading and hedging risk, and (c) generating additional income on your stock holdings. These strategies make options one of the more interesting ways to invest, and they are especially useful dealing with the challenges of volatile market conditions.
Non-Directional Strategies
One of the significant advantages of options is their flexibility. When you own stock, you make a profit only if one thing happens: the stock’s price moves above its current trading range. But options are so flexible that you can even make a profit if a stock stays within a limited trading range. Calendar spreads and short straddles are some of the strategies designed to produce profits if the stock price doesn’t move. This means an option position can be profitable even if the stock shows very little movement in the period of time you have the position open.
Other strategies are designed to create profits if the stock price moves in either direction, such as long straddles. In this case, you don’t really care what direction the stock price moves, as long as it does move. Because options can be used in so many combinations, their applications are rich. Once you understand how to use time as the key element in creating option profits, you will be well on your way to developing strategies that work for you.
Using Options for Insurance
Options can also be used to “insure” your position. For example, if you buy one put option for every 100 shares of stock you own, it gives you downside protection. As the stock price drops, the put goes up in value. And no matter how far the stock price drops, you have the right to sell your stock at the strike price specified by the put option.
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