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Option StrategiesOption Strategies
Option strategiesOption strategies
Call optionLong Call
Naked call
Covered call
Put optionLong put
Naked put
Protective put
A long callA long call
Assume we buy one Exxon 26 December $80 call.
C0 = $3
At expiration, our profit/loss will depend on the stock price.
AnalysisAnalysis
Profit/loss is a function of stock price at expiration and the original option premium
Profit/Loss = max [0, (ST-E)] - C0
Break-even stock price = E + C0
We make a profit when the option is in-the-money, and we lose when the
option is out-the-money.
Profit/Loss at expiration: Long callProfit/Loss at expiration: Long call
Price at expiration, ST Call value at expiration Profit/loss
$0 0 -$3
$40 0 -$3
$60 0 -$3
$76 0 -$3
$77 0 -$3
$78 0 -$3
$79 0 -$3
$80 0 -$3
$81 1 -$2
$82 2 -$1
$83 3 0
$84 4 $1
$90 10 $7
$100 20 $17
S
profit
$80
-$3
$83
Profit at expiration from a long callProfit at expiration from a long call
Naked callNaked call
Assume we sell one Exxon 26 December $80 call.
C0 = $3
AnalysisAnalysis
Profit/loss is a function of stock price at expiration and the original option premium
Profit/Loss = - max [0, (ST-E)] + C0
Break-even stock price = E + C0
We make a profit when the option is out of the money, and we lose when the option is in the money.
Profit/Loss at expiration: Naked callProfit/Loss at expiration: Naked call
Price at expiration, ST Call value at expiration Profit/loss
$0 0 $3
$40 0 $3
$60 0 $3
$76 0 $3
$77 0 $3
$78 0 $3
$79 0 $3
$80 0 $3
$81 1 $2
$82 2 $1
$83 3 0
$84 4 -$1
$90 10 -$7
$100 20 -$17
S
profit
$80
$3
$83
Profit at expiration from a naked callProfit at expiration from a naked call
Covered callCovered call
Assume we have purchased one Exxon share for $78 and at the same time we sell one Exxon 26 December $80 call for $3
AnalysisAnalysis
Profit/loss is a function of stock price at expiration, The original stock price, and the original option premium
Profit/Loss = (ST- S0) + [C0- max(0, ST - E)]
Break-even stock price = S0 - C0
We make a profit when the option is in the money, but the profit is limited.
The largest loss we can incur = - S0 + C0
Profit/Loss at expiration: Covered callProfit/Loss at expiration: Covered call
Price atexpiration, ST
Call value atexpiration
ST-S0 C0-C Profit/loss
$0 0 -$78 $3 -$75
$40 0 -$38 $3 -$35
$60 0 -$18 $3 -$15
$76 0 -$2 $3 $1
$77 0 -$1 $3 $2
$78 0 0 $3 $3
$79 0 $1 $3 $4
$80 0 $2 $3 $5
$81 1 $3 $2 $5
$82 2 $4 $1 $5
$83 3 $5 0 $5
$84 4 $6 -$1 $5
$90 10 $12 -$7 $5
$100 20 $22 -$17 $5
Profit at expiration from a covered callProfit at expiration from a covered call
S
profit
$80
$75
$5
-$75
Option strategiesOption strategies
Call optionCall optionLong call Long call
Naked callNaked call
Covered callCovered call
Put optionPut optionLong putLong put
Naked putNaked put
Protective putProtective put
Long putLong put
Assume we buy one Exxon 26 December $80 put.
P0 = $4
AnalysisAnalysis
Profit/Loss = max [0, (E- ST)] - P0
Break-even stock price = E - P0
Profit/Loss at expiration: Long putProfit/Loss at expiration: Long put
Price at expiration (ST) Put value at expiration (P) Profit/loss
$0 $80 $76
$40 $40 $36
$60 $20 $16
$76 $4 $0
$77 $3 -$1
$78 $2 -$2
$79 $1 -$3
$80 0 -$4
$81 0 -$4
$82 0 -$4
$83 0 -$4
$84 0 -$4
$90 0 -$4
$100 0 -$4
S
profit
$80
$3$76
Profit at expiration from a long putProfit at expiration from a long put
$76
Naked PutNaked Put
Assume you sell one Exxon 26 December $80 put. P0 = $4
AnalysisAnalysis
Profit/Loss = - max [0, (E- ST)] + P0
Break-even stock price = E - P0
Profit/Loss at expiration: Naked putProfit/Loss at expiration: Naked put
Price at expiration (ST) Put value at expiration (P) Profit/loss
$0 $80 -$76
$40 $40 -$36
$60 $20 -$16
$76 $4 $0
$77 $3 $1
$78 $2 $2
$79 $1 $3
$80 0 $4
$81 0 $4
$82 0 $4
$83 0 $4
$84 0 $4
$90 0 $4
$100 0 $4
Profit at expiration from a naked put
S
profit
$80
$4
$76
-$76
Protective putProtective put
Assume we have purchased one Exxon share for $78 and at the same time we buy one Exxon 26 December $80 put for
$4.
AnalysisAnalysis
Profit/Loss = (ST- S) + [max(0, E- ST) - P0]
Break-even stock price = S + P0
We lose a limited amount when the put is in the money, but there is no limit to the upside gain when the put is out of the money
Profit/loss at expiration: Protective putProfit/loss at expiration: Protective put
Price at expiration (ST) Put value at expiration (P) ST-S0 P-P0 Profit/loss
$0 $80 -$78 $76 -$2
$40 $40 -$38 $36 -$2
$60 $20 -$18 $16 -$2
$76 $4 -$2 $0 -$2
$77 $3 -$1 -$1 -$2
$78 $2 0 -$2 -$2
$79 $1 $1 -$3 -$2
$80 0 $2 -$4 -$2
$81 0 $3 -$4 -$1
$82 0 $4 -$4 0
$83 0 $5 -$4 $1
$84 0 $6 -$4 $2
$90 0 $12 -$4 $8
$100 0 $22 -$4 $18
S
profit
$80
-$2
$82
Profit at expiration from a protective put
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