Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Covered Straddle

Risk: limited but very big
Reward: limited

General Description
Entering a covered straddle entails selling a straddle (sell equal number of calls and puts at the same strike and expiration month) on a stock you own. It's similar to a covered strangle expect the same strike is used for the options rather than consecutive strikes. Also, it can be thought of as a combination of covered call and naked put, which have the same risk profile. Hence, it's like employing two covered calls or two naked puts.

(draw a covered straddle risk diagram here)

The Thinking
You're moderately bullish and are confident a stock's downside is limited. This strategy is a combination of a covered call and naked put, which have the same risk profile. If the stock trades flat, you keep most of the call and put premiums and may or may not keep the stock depending on where the stock closes relative to the strike. If the stock moves up, you keep the option premiums, and the stock will most likely get "called" from you. If the stock moves down, you'll again keep the option premiums, but you'll get "put" the stock, so you'll now be long twice as many shares.


XYZ is at $52. You're confident the stock will bounce around in a small range or move up slightly. To profit, you buy 100 shares of the stock at $52.00 and sell (1) 50 call for $4.00 and (1) 50 put for $1.50. The net credit is $5.50 plus the cost of the stock.

If the stock closes above $50, you'll keep the option premiums for a $5.50 profit, and the stock will get called away (bought at $52.00, sold at $50.00 for a $2.00 loss). The net of this is a $3.50 profit.

If the stock closes below $50, your loss can add up fast. You’ll lose money with both the long stock position and the short put. For example, at $40 you’ll be down 12 bucks with the stock and $8.50 with the put (you sold it for $1.50, now it’s worth $10). You do have a little extra buffer from the $4.00 collected from selling the call.

The PL chart below graphically shows where this trade will be profitable and at a loss.