Option Strategies: Every Structure Is a Bet on the Distribution
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Once you can price single options, the next fluency level is combinations — and the organizing idea is that every option structure is a bet on some feature of the return distribution: its width, its direction, its tails, or its timing. Interviewers present a view and ask you to build the trade; this is the dictionary.
Betting on width: straddles and strangles
Long straddle (call + put, same ATM strike): profits if the underlying moves a lot, either way. Delta-neutral at inception, long gamma and vega, bleeding theta — you're long the distribution's width. Breakevens sit a full combined-premium away from the strike, which is exactly the move the options market has priced in. Strangle (OTM call + OTM put): the cheaper, wider-breakeven cousin.
The clean interview application: "You think the earnings move will be bigger than the market expects." Long straddle through earnings — but note the trap: implied vol collapses after the event (the "vol crush"), so you need the realized move to beat what was priced, not just be "big."
Betting on direction, with defined risk: vertical spreads
Bull call spread (buy the low strike, sell the high): directional exposure with both cost and payoff capped. You've sold away the right tail to cheapen the bet — sensible when you expect a move to a level, not through it. Put spreads mirror it downward. Key property: max loss = premium, max gain = strike gap − premium; the ratio is your implied odds, and being able to state it instantly ("risking 2 to make 3 needs a 40% hit rate") is the skill on display.
Betting against movement: butterflies and condors
Butterfly (long , short 2×, long , equally spaced): pays most if the underlying pins the middle strike — a bet on low realized movement, or on the terminal price landing at a specific spot. Its price must be non-negative (the payoff is), which is the no-arbitrage convexity condition from the first lesson — and equivalently, the butterfly's value reads off the risk-neutral probability density around (Breeden–Litzenberger). A butterfly is literally "buying probability mass at a price."
Betting on timing: calendars
Calendar spread (sell near-dated, buy far-dated, same strike): short near-term gamma, long longer-term vega — a bet that nothing happens now but uncertainty persists or grows later. The structure that isolates the term-structure views from the smile lesson.
Betting on the skew: risk reversals
Risk reversal (sell OTM put, buy OTM call, or vice versa): directional and, in vol terms, a trade on the skew — you're selling the expensive side of the smile and buying the cheap one. Quoted constantly in FX ("the 25-delta risk reversal") as the market's asymmetry gauge.
Income with a ceiling: covered calls and protective puts
Covered call = long stock + short call: collect premium, surrender upside — short the right tail. Protective put = long stock + long put: pay premium, floor the downside — insurance, with theta as the premium. Put-call parity says these two are each other's mirror through a bond; noticing that in an interview is worth a smile.
The interview version
The genre: "You believe X — structure a trade." Method: (1) translate X into a distribution statement — direction? width? tail? timing? — (2) pick the structure from this dictionary, (3) state max loss, max gain, breakevens, and the Greek profile, (4) name what kills it (vol crush, pin risk, early assignment on American options). Four beats, thirty seconds each. The candidates who struggle are the ones who memorized payoff diagrams without the distribution reading — the reading is the lesson.