Options trading can be very involved and complicated, but basic option strategy falls into a few main categories. To understand these strategies, it’s important to have a grasp of the possible positions a trader can hold in the options market, and what type of strategy they can execute.

In order to understand option strategy, it’s important to understand what types of transactions are possible. The two types of options transactions at the simplest level are called calls and puts. When a buyer purchases a call, they are buying the right to purchase the underlying asset at a pre-determined price at any time during the agreed upon period of time. When purchasing a put, on the other hand, you are buying the right to sell at a pre-determined price. Both calls and puts can be either long or short; and these terms determine a trader’s position. Buyers are said to be in long positions, while sellers are in short positions.

Option strategy can be derived in multiple ways from these basic positions. The common strategies include hedging, and bullish or bearish strategies. These can be very complex, but there are some simple ways to understand them.

An option strategy that uses hedging tends to carry less risk, but also has less potential for profit. This is because the trader takes positions likely to move in different directions. Much like the term “hedging your bets” this strategy protects you from major losses by holding positions that might even each other out.

An strategy that is bullish is used when the price of the underlying asset is expected to rise. There are many types of bull strategies, ranging from the simple long call that most beginners use to trade options, to bull spreads. Bull spreads combine long and short calls and puts for what is known as a moderately bullish option strategy.

An option strategy using a bearish approach is the opposite of the bull strategy. It is employed when the price is expected to go down. Again, there are simple versions of this strategy using short puts, and far more complex bear spreads.

Option strategy can be extremely complex, so beginners are advised to stick to the simplest of strategies in order to keep from getting in over their heads. As you become more adept at trading and start to understand the options market better, you will be able to use more advanced strategies to spread your risk and see more profit.