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