Master Derivative Strategies for Every Market
Options and derivatives are core to our investment approach. From basic covered calls to complex multi-leg strategies, we help clients use these powerful tools for income, protection, and strategic positioning.
Income
Generate premium through option writing
Protection
Hedge downside risk effectively
Directional
Express bullish or bearish views
Volatility
Profit from market uncertainty
Why We Focus on Derivatives
Derivatives aren't speculation - they're strategic tools for managing risk, generating income, and expressing precise market views with defined parameters.
Risk Management
Hedge existing positions, protect against downside, manage portfolio volatility effectively.
Income Generation
Collect premiums through option writing strategies on stocks you own or believe will stay range-bound.
Directional Positioning
Express bullish or bearish views with defined risk and often lower capital requirements than stock.
Leverage & Efficiency
Control larger positions with less capital, improving capital efficiency when used responsibly.
Strategy Customization
Tailor risk/reward profiles to match your specific outlook and risk tolerance.
Volatility Trading
Profit from changes in implied volatility, not just price direction.
12 Core Derivative Strategies We Use
Each strategy serves a specific purpose. Understanding when and how to use them is key to successful derivative trading.
Covered Call Writing
Income GenerationOBJECTIVE
Generate premium income on existing stock positions
HOW IT WORKS
Sell call options against stocks you own, collecting premium while capping upside
BEST USED FOR
Moderate to sideways markets, existing equity holdings
RISK PROFILE
Limited upside (called away), retains downside risk of stock
EXAMPLE
Own 100 shares of stock at $100, sell $110 call for $2 premium. Keep premium if stock stays below $110.
Protective Puts
Portfolio InsuranceOBJECTIVE
Protect stock positions from downside risk
HOW IT WORKS
Buy put options to establish a floor price for your holdings
BEST USED FOR
Uncertain markets, concentrated positions, downside protection
RISK PROFILE
Limits losses below strike, costs premium upfront
EXAMPLE
Own stock at $100, buy $95 put for $2. Maximum loss is $7 per share regardless of how far stock falls.
Bull Call Spread
Directional - BullishOBJECTIVE
Profit from moderate upward price movement with defined risk
HOW IT WORKS
Buy call at lower strike, sell call at higher strike, reducing net cost
BEST USED FOR
Moderately bullish outlook, want to reduce cost vs outright calls
RISK PROFILE
Limited profit (spread width minus cost), limited loss (premium paid)
EXAMPLE
Buy $100 call for $5, sell $110 call for $2. Net cost $3, max profit $7, max loss $3.
Bear Put Spread
Directional - BearishOBJECTIVE
Profit from moderate downward price movement with defined risk
HOW IT WORKS
Buy put at higher strike, sell put at lower strike, reducing net cost
BEST USED FOR
Moderately bearish outlook, hedging, lower cost than outright puts
RISK PROFILE
Limited profit (spread width minus cost), limited loss (premium paid)
EXAMPLE
Buy $100 put for $5, sell $90 put for $2. Net cost $3, max profit $7, max loss $3.
Iron Condor
Neutral IncomeOBJECTIVE
Profit from low volatility and range-bound markets
HOW IT WORKS
Sell out-of-the-money put spread and call spread simultaneously
BEST USED FOR
Low volatility, sideways markets, premium collection
RISK PROFILE
Limited profit (net premium), limited loss (spread width minus premium)
EXAMPLE
Sell $95/$90 put spread and $105/$110 call spread, collect $2 net. Profit if stock stays between $90-$110.
Calendar Spread
Volatility StrategyOBJECTIVE
Profit from time decay differences between expirations
HOW IT WORKS
Sell near-term option, buy longer-term option at same strike
BEST USED FOR
Anticipating volatility increase, neutral short-term outlook
RISK PROFILE
Limited loss (net debit), profits from time decay and vol changes
EXAMPLE
Sell 30-day call at $100 for $3, buy 90-day call at $100 for $5. Net cost $2, profits if stock near $100 at near expiry.
Butterfly Spread
Neutral/Range-BoundOBJECTIVE
Profit from minimal price movement around specific price
HOW IT WORKS
Buy 1 lower strike, sell 2 middle strikes, buy 1 higher strike
BEST USED FOR
Expect stock to remain near specific price, low volatility
RISK PROFILE
Limited loss (net premium paid), limited profit (strike difference minus cost)
EXAMPLE
Buy $95 call, sell 2x $100 calls, buy $105 call. Max profit if stock at $100 at expiration.
Straddle
Volatility PlayOBJECTIVE
Profit from large price movement in either direction
HOW IT WORKS
Buy call and put at same strike and expiration
BEST USED FOR
Expecting big move but uncertain of direction, before major events
RISK PROFILE
Unlimited profit potential, loss limited to premium paid
EXAMPLE
Stock at $100, buy $100 call for $4 and $100 put for $4. Need >$8 move to profit.
Strangle
Volatility PlayOBJECTIVE
Profit from large movement, lower cost than straddle
HOW IT WORKS
Buy out-of-the-money call and put
BEST USED FOR
Expecting volatility, want cheaper premium than straddle
RISK PROFILE
Unlimited profit potential, loss limited to premium paid
EXAMPLE
Buy $105 call for $2 and $95 put for $2. Need move beyond $91 or $109 to profit.
Collar Strategy
Protective IncomeOBJECTIVE
Protect downside while generating income, cap upside
HOW IT WORKS
Buy protective put, sell covered call, often for net zero cost
BEST USED FOR
Want protection without paying premium, okay with capped upside
RISK PROFILE
Limited loss (put strike), limited gain (call strike)
EXAMPLE
Own stock at $100, buy $95 put for $2, sell $110 call for $2. Protected below $95, capped at $110.
Ratio Spread
Advanced DirectionalOBJECTIVE
Bullish or bearish with extra premium collection
HOW IT WORKS
Buy options at one strike, sell more options at another strike
BEST USED FOR
Moderate directional view, comfortable with undefined risk beyond strikes
RISK PROFILE
Can have unlimited risk if position moves against you
EXAMPLE
Buy 1x $100 call, sell 2x $110 calls. Collect premium but exposed if stock rallies hard past $110.
Diagonal Spread
Time & PriceOBJECTIVE
Combine calendar and vertical spread benefits
HOW IT WORKS
Different strikes and different expirations
BEST USED FOR
Directional bias with time decay advantage
RISK PROFILE
Limited loss, profit from direction and time decay
EXAMPLE
Sell near-term $100 call, buy longer-term $105 call. Capture decay on short, maintain upside.
Critical Considerations for Derivative Trading
Derivatives offer powerful benefits but require education, discipline, and respect for risk.
Derivatives are complex instruments requiring education and experience
Options can expire worthless - understand time decay (theta)
Leverage amplifies both gains and losses
Liquidity varies widely - stick to liquid underlyings and strikes
Tax treatment differs (consult tax advisor for specifics)
Start small, paper trade first, never risk more than you can afford to lose
Greeks (delta, gamma, theta, vega) govern option pricing and behavior
Implied volatility significantly impacts option prices
Early assignment risk on short options (especially dividends, deep ITM)
Margin requirements can change, especially during volatile markets
Education First
We don't recommend diving into derivatives without proper education. Start with simpler strategies like covered calls or protective puts. Paper trade before risking real capital. Understand the Greeks. Read the options disclosure document your broker provides.
These strategies are tools, not magic. They require ongoing monitoring, adjustment, and risk management. We're happy to discuss which strategies might fit your situation and help you build competency over time.
Our Derivatives Philosophy
We believe derivatives are essential tools for sophisticated portfolio management. Our focus is on education-first implementation, ensuring clients understand exactly what they're doing and why.
We typically start clients with basic strategies - covered calls on existing holdings, protective puts for concentrated positions. As comfort and knowledge grow, we introduce spreads, collars, and more complex structures that align with specific market views and risk parameters.
Every derivative position should have a clear purpose: generate income, reduce risk, express a directional view with defined risk, or profit from volatility changes. We don't use derivatives to speculate recklessly - we use them strategically as part of comprehensive portfolio management.
Risk management is paramount. Position sizing, stop losses, profit targets, and ongoing monitoring are non-negotiable. Markets change, and derivative positions require active management. We help clients understand these requirements before implementation.
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