Option Strategies Option strategies Call option Long Call Naked call Covered call Put option Long put Naked put Protective put

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Text of Option Strategies Option strategies Call option Long Call Naked call Covered call Put option Long...

  • Option Strategies

  • Option strategiesCall optionLong CallNaked callCovered call

    Put optionLong putNaked putProtective put

  • A long callAssume we buy one Exxon 26 December $80 call.

    C0 = $3

    At expiration, our profit/loss will depend on the stock price.

  • AnalysisProfit/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 + C0We 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 call

    PRIVATEPrice 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

  • Sprofit$80$83Profit at expiration from a long call

  • Naked call

    Assume we sell one Exxon 26 December $80 call.

    C0 = $3

  • AnalysisProfit/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 + C0We 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 call

    PRIVATEPrice 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

  • Sprofit$80$83Profit at expiration from a naked call

  • Covered 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

  • AnalysisProfit/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 - C0We 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 call

    PRIVATEPrice at expiration, ST

    Call value at expiration

    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 callSprofit$80$75

  • Option strategiesCall optionLong call Naked callCovered call

    Put optionLong putNaked putProtective put

  • Long put

    Assume we buy one Exxon 26 December $80 put. P0 = $4

  • Analysis

    Profit/Loss = max [0, (E- ST)] - P0

    Break-even stock price = E - P0

  • Profit/Loss at expiration: Long put

    PRIVATEPrice 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

  • Sprofit$80$76Profit at expiration from a long put$76

  • Naked Put

    Assume you sell one Exxon 26 December $80 put. P0 = $4

  • Analysis

    Profit/Loss = - max [0, (E- ST)] + P0

    Break-even stock price = E - P0

  • Profit/Loss at expiration: Naked put

    PRIVATEPrice 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 putSprofit$80$4$76

  • Protective 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.

  • AnalysisProfit/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 put

    PRIVATEPrice 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

  • Sprofit$80$82Profit at expiration from a protective put