What Makes an Option American?
Start here before the strategy slides.
Exercise Style
An American option can be exercised any time up to expiration. A European option can only be exercised at expiration.
Why it matters: Early exercise and assignment can change your stock position before expiration.
Watch dividends: Short calls on dividend stocks are more exposed to early assignment.
What Drives Option Value?
Intrinsic value: Value already in the option right now.
Time value: Extra value because time remains until expiration.
Implied volatility: Higher expected movement usually raises premiums.
Time decay: Long premium fights theta; short premium often benefits.
Strategy Map
A quick way to organize the rest of the deck.
Income
- Covered Call
- Cash-Secured Put
- Iron Butterfly
- Iron Condor
Protection
- Protective Put
- Collar
Defined Risk
- Bull Call Spread
- Bear Put Spread
- Long Call Butterfly
Volatility
- Long Straddle
- Long Strangle
- Calendar Spread
Stock + Options
- Ratio structures
- Covered Put
- Covered Combination
Parity / Carry
- Conversion
- Reverse Conversion
Covered Call
Position
Long 100 shares + Short 1 call.
When Used
Used when you are mildly bullish to neutral and want to earn option premium from stock you already own.
What You Gain
Premium income and a small cushion against downside.
What You Give Up
Your upside is capped above the short call strike. You still have major downside if the stock falls.
Cash-Secured Put
Position
Sell 1 put and keep enough cash to buy 100 shares if assigned.
When Used
Mildly bullish or willing to buy stock at a lower effective price.
What You Gain
Premium income if the stock stays above the strike.
What to Watch
If the stock drops hard, you may be assigned and still suffer stock downside from the effective entry price.
Protective Put
Position
Long 100 shares + Long 1 put.
When Used
Used when you want upside in the stock but also want a floor under the position.
What You Gain
Defined worst-case downside below the put strike.
Trade-off
The put costs money, so your break-even rises and your upside starts later.
Collar
Position
Long 100 shares + Long put + Short call.
When Used
Used when you want a protected stock position and are willing to cap the upside.
What You Gain
Downside floor from the put, and the short call helps pay for the hedge.
What to Watch
You may be called away on the upside, especially near expiration or before dividends.
Bull Call Spread
Position
Buy lower-strike call + sell higher-strike call, same expiration.
View
Moderately bullish trade with defined risk.
Benefit
Cheaper than buying a naked call.
Risk
Upside capped at the short strike.
Bear Put Spread
Position
Buy higher-strike put + sell lower-strike put, same expiration.
View
Moderately bearish trade with defined risk.
Benefit
Cheaper than buying a naked put.
Risk
Profit is capped if the stock collapses far below the lower strike.
Long Call Butterfly
Position
Buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 higher-strike call.
When Used
Neutral to mildly directional view with the stock expected to finish near the middle strike.
What You Gain
Low-cost way to target a very specific landing zone.
What to Watch
Needs price accuracy and timing accuracy. Too far away from the middle, value fades.
Iron Butterfly
Position
Sell ATM call spread + sell ATM put spread, same center strike.
View
Income strategy that wants price to stay near the center strike.
Benefit
Defined risk because outer wings limit losses.
Risk
Sensitive to large moves and volatility expansion.
Iron Condor
Position
Short OTM put spread + short OTM call spread.
View
Neutral income trade.
Benefit
Defined risk on both sides.
Risk
Works best when the stock stays inside the short strikes.
Long Straddle
Position
Buy 1 call + buy 1 put at the same strike and expiration.
View
Used when expecting a large move but not sure about direction.
Benefit
Needs movement big enough to overcome both premiums.
Risk
Often benefits from rising implied volatility.
Long Strangle
Position
Buy OTM call + buy OTM put.
View
Cheaper than a straddle.
Benefit
Needs a larger move to become profitable.
Risk
Useful when you expect expansion but want lower upfront cost.
Long Stock + 1x2 Call Ratio
Position (example)
Buy 100 shares, buy 1 higher call, sell 2 even higher calls.
When Used
Bullish but with a target zone. You want stock upside, then premium help from selling extra calls higher up.
What Can Work Well
If price rises into the target zone near the short calls, the trade can perform well.
Short Stock + 1x2 Put Ratio
Position (example)
Short 100 shares, buy 1 lower put, sell 2 even lower puts.
When Used
Bearish with a target zone lower, while trying to reduce cost with extra short premium.
What Can Work Well
If price falls toward the intended target zone, the trade can outperform a plain short stock position.
Covered Put
Position
Short stock + short put.
View
Bearish income structure, often described as the mirror of a covered call.
Benefit
Premium helps if the stock drifts lower or sideways.
Risk
Large risk if the stock rises sharply because the short stock loses value.
Covered Combination
Typical Form
Long stock + short call + short put.
View
Generates more premium than a basic covered call.
Benefit
Acts like a stronger commitment to own the stock.
Risk
If the stock drops, the short put can add more long exposure through assignment.
Conversion
Position
Long stock + long put + short call at the same strike and expiration.
View
Synthetic financing structure.
Benefit
At expiration, the payoff behaves like a fixed-value package.
Context
Often discussed in relation to put-call parity and carry costs.
Reverse Conversion
Position
Short stock + short put + long call at the same strike and expiration.
View
Mirror image of the conversion.
Benefit
Another parity-based structure, often used in advanced pricing or carry discussions.
Context
Payoff tends toward a fixed terminal value.
Long Call Calendar Spread
Position
Sell near-term call and buy longer-term call at the same strike.
When Used
Often used when expecting the stock to stay near the strike in the near term, while wanting time value in the farther-dated option.
What Drives It
The short near-term option decays faster than the longer-dated option. That difference is the heart of the trade.
What to Watch
Pin risk, sensitive to implied volatility, assignment risk on the short leg, and the exact stock location as front expiration approaches.
Simple Market Examples
Example tickers from the earlier deck, rewritten with clearer text.
AAPL - Covered Call
Own 100 shares of AAPL, then sell one call above the current price. Good for earning premium if you are comfortable selling the shares at the strike.
SPY - Collar
Own SPY, buy a protective put below price, and sell a call above price. Useful when you want to stay invested but limit downside.
TSLA - Long Call Calendar
Sell a near-term call and buy a longer-term call at the same strike when expecting TSLA to stay near the strike in the near term but remain active later.
TSLA - Long Stock + 1x2 Call Ratio
Used when bullish with a target zone, but only by traders who understand the added risk from selling more upside calls than they buy.
Key Takeaways Before You Trade
Use this as a quick checklist.
- American-style options can be exercised early. Never ignore assignment risk.
- Income trades such as covered calls and iron condors usually exchange upside or flexibility for premium.
- Protection trades such as protective puts and collars usually cost money or cap gains.
- Volatility trades care more about size of move and implied volatility than simple direction.
- Ratio structures and stock-plus-option combinations can look attractive, but some have non-obvious risk tails.