BEAUTY OF COMBINATIONAL STRATEGIES

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The reason I’ve sought to bring your attention to the various strategies is to show how each strategy is such a unique tool. Much like hydrogen and oxygen combine to form a unique substance (water), putting options together into various combinations results in some amazingly unique risk/reward profiles.

Buy an at-the-money call or a put and the chances are good that you will loose all your money (stops notwithstanding). However, buy a straddle (both a call and a put at the same strike price and expiration month) and the possibility of losing all your money is practically nil (the underlying would have to finish precisely on the strike price).

Note that no strategy automatically makes money. I once thought that there might be a magical combination that would allow me to consistently produce positive returns. It took a while but I finally realized that, since each (fairly valued) option is a net zero expected return item, you still have a net zero expected return no matter how many you put together .Since no particular strategy is always the correct one the trader needs to be able to apply the best strategy in any given situation. This requires familiarity with the various strategies and how they perform. Tables and diagrams have been constructed to show which option strategies are bullish, bearish, aggressive, moderate, or neutral. 

Many people who know about options but are not truly familiar with them believe that options are inherently risky. While options allow you, and even tempt you, to take speculative risk, it is not true that options are inherently risky. Options are enormously flexible in the ways you can use them, not only to speculate, but also to hedge or even simulate a portfolio, and through combinational strategies, construct a position that closely fits your goals, price predictions, time frame, and the current volatility environment.