So @ee2k calls me a retard and @riander5 thinks I poach everything from investopedia. You guys ain't smrter than me - I read the Calgary Sun! The truth is that I only poach the graphs from that site. I will knock it off. Henceforth, ALL illustrations will be done on MS Paint.
In the least pissy manner, I will explain some compound strategies. We're basically using multiple options to build a strategy to fit a desired risk-return profile.
We'll start with SPREADS.
VERTICAL SPREAD : 2 similar options with different strike prices, same expiry date
HORIZONTAL SPREAD : 2 similar options with the same strike price, but different expiry dates
DIAGONAL SPREAD: 2 similar options with different strike prices AND different expiry dates
A common vertical spread is the BULL CALL. This is structured by a LONG CALL at a lower strike price + a SHORT CALL at a higher strike price. You do this because you think the stonk will appreciate higher than the lower strike price, but not the higher strike price - so you use the premium from the higher strike price to lower your breakeven cost. This is an over simplification unless you are super smart option experts like @ee2k and @riander5 . A reminder - I'm just a pot hole spottin' janitor.
For example: PLTR JAN 21 25/35 BULL CALL is asked at $3.30.
You are buying a $25 CALL for $8.30 and selling a $30 CALL at $5.00. The payoff diagram looks like this. Please refer to @ee2k and @riander5 if you have any questions.
A HORIZONTAL SPREAD is also referred to as a Calendar Spread. This is less common and you do this when you have an option on the date and want to reduce your capital at risk.
For Example: PLTR Dec/Jan 25 CALENDAR CALL is offered at $1.70
You are buying a Jan 15, 2021 $25 CALL at $8.30 while selling a Dec 18, 2020 $25 CALL at $6.60. You do this when you believe that the stonk will reach $25 in January, but not in Dec. Rather than a capital outlay of $8.30, you are spending $1.70.
The payoff diagram looks like this.
A DIAGONAL SPREAD combines the two of spreads above, representing all kinds of fuggery. I actually find this useful if you have a good idea of what you want to accomplish.
For Example: PLTR JAN/DEC $25/$30 DIAGONAL goes for $3.60.
This is a purchase of a Jan 21 $25 CALL at $8.30 while selling a Dec 18 $30 CALL at $4.70. You do this when you think that a stonk will appreciate at a lower strike in Jan over a higher strike in Dec.
All of these are reversible and highly modifiable. Using puts instead of calls, reversing the dates for different exposures, etc.
Once again, these are over simplifications because that's all my tardy brain holds for today. Kindly contact @ee2k and @riander5 for more in-depth explanations.