Options trading, in plain English

A call option gives you the right — but not the obligation — to buy 100 shares of a stock at a fixed price (the "strike") any time before the option expires. You pay a small upfront fee called the premium. If the stock rallies above your strike, the call grows in value; if it stays flat or falls, the most you can lose is the premium you paid.

A put option gives you the right — but not the obligation — to sell 100 shares of a stock at a fixed strike price before expiration. You pay a premium upfront. Puts gain value when the stock falls and act like portable insurance: the lower the stock goes, the more the put is worth. Maximum loss is limited to the premium you paid.

A bull call spread is a cheaper way to bet on a moderate rally. You buy a call at a lower strike and sell another call at a higher strike with the same expiration. The short call you sell offsets part of the cost of the long call, which lowers your breakeven — but it also caps your maximum profit at the higher strike.

A bear put spread is the bearish mirror image. You buy a put at a higher strike and sell a put at a lower strike with the same expiration. You profit if the stock falls to the lower strike, and the short put you sold reduces your cost (and your maximum profit).

An iron condor is a four-leg trade that profits when a stock stays inside a range. You sell an out-of-the-money call spread above the stock and an out-of-the-money put spread below the stock — collecting premium from both. As long as price stays between your two short strikes at expiration, you keep the entire credit.

An iron butterfly is a tighter, higher-credit cousin of the iron condor. The short call and short put share the same strike — usually right at the current stock price — and you buy protective wings above and below. You collect a much larger credit, but the profit zone is narrow: the stock basically needs to pin near that center strike at expiration.

A (long) butterfly spread is a low-cost, three-strike bet that a stock will land near a specific price. Using calls: you buy one lower-strike call, sell two middle-strike calls, and buy one upper-strike call (the strikes are equally spaced). Maximum profit happens if the stock closes exactly at the middle strike at expiration.

A cash secured put is how you get paid to wait for a stock to drop to a price you'd love to own it at. You sell a put and set aside enough cash to buy 100 shares at the strike if the stock falls. If the stock stays above the strike, the put expires worthless and you keep the premium. If it drops below, you're assigned the shares — at a discount equal to the premium you collected.

A covered call is the income-generating workhorse for stock investors. You already own at least 100 shares, and you sell one call against them, collecting a premium. If the stock stays below your strike, the call expires worthless and you pocket the premium. If it rallies above the strike, your shares are called away — but at a price you already agreed you'd be happy to sell at.

A long straddle is a bet that a stock will move a lot — in either direction. You buy a call and a put at the same strike (usually the at-the-money strike) with the same expiration. You don't care which way it moves, only that it moves enough to cover the combined premium of both options.

A long strangle is a cheaper, wider version of a straddle. You still buy a call and a put with the same expiration, but at different strikes — a call above the stock and a put below it (both out-of-the-money). The lower premium means you need a bigger move to break even, but the cost of being wrong is smaller.

A calendar spread (also called a time spread) profits from the fact that short-dated options lose value faster than long-dated ones. You sell a near-term option and buy a longer-term option at the same strike, usually at-the-money. As time passes, the short option decays quickly while the long option holds its value, leaving you with a profit if the stock stays near the strike.

A diagonal call spread is like a calendar spread with a directional tilt: you buy a longer-term call at a lower strike and sell a shorter-term call at a higher strike. Because the strikes and expirations differ, you collect time decay from the short call each cycle while your long call benefits if the stock drifts higher. Many traders sell a new short call after each near-term expiration — a "poor man's covered call."

A diagonal put spread is the bearish mirror image: you buy a longer-term put at a higher strike and sell a shorter-term put at a lower strike. The short put decays quickly and finances part of your long put, while the long put profits if the stock falls over time. As with the call version, you can roll the short put forward each cycle to keep collecting premium.