Options ABC
 

Breakeven price is the underlying price on option expiry date where investor has no gain or loss. For long call position, breakeven price is the sum of strike price plus premium paid.

 

Breakeven price = Strike Price + Premium paid on call option

  Theoretically the underlying price can go up without boundary. However the probability of large movement is affected by many factors like time and volatility. The probability of extreme movement in shorter time frame and normal volatility is low.  This is restricted to the premium paid.  

Breakeven price is the underlying price on option expiry date where investor has no gain or loss. For short call position, breakeven price is the sum of strike price plus premium paid.

 

Breakeven price = Strike Price + Premium received on call option

  This is restricted to the premium received.  Theoretically the underlying price can go up without boundary. Investor starts to experience loss when the underlying price is above breakeven price. However the probability of large movement is affected by many factors like time and volatility.  

Breakeven price is the underlying price on option expiry date where investor has no gain or loss. For long put position, breakeven price is equal to the strike price minus premium paid.

 

Breakeven price = Strike Price - Premium paid on put option

  Theoretically the underlying price can go down to zero. However the probability of large movement is affected by many factors like time and volatility.  This is restricted to the premium paid.  

Breakeven price is the underlying price on option expiry date where investor has no gain or loss. For short put position, breakeven price is equal to the strike price minus premium received.

 

Breakeven price = Strike Price - Premium received on put option

  This is restricted to the premium received.  Theoretically the underlying price can go down to zero. Investor starts to experience loss when the underlying price is below breakeven price. However the probability of large movement is affected by many factors like time and volatility. The probability of extreme movement in shorter time frame and normal volatility is low. In fact the risk profile of short put is the same as buying a stock.

Chapter 3: Basic option strategies

As we have mentioned in previous sections, options can be bought or sold. Therefore, there are four basic option strategies can be formed for call and put options:

  1. Long call
  2. Short call
  3. Long put
  4. Short put

“Long” is the analogy of “Buy”, while “Short” is the analogy of “Sell”.

1) Long call

A person who bought a call option hopes to profit from the increase in the price of the underlying asset.

As he paid premium to buy the option, the maximum loss is the premium he invested in the option. However he has unlimited upside potential since theoretically the underlying price can go up without boundary.

2) Short call

A person who sold a call option hopes the price of the underlying asset remains at or below the strike price on or before expiry day.

As an option writer, he received premium as a fixed return. However his loss can be unlimited since theoretically underlying price can go up without boundary. Please note that the probability of such large movement is affected by many factors like time and volatility. The probability of extreme movement in shorter time frame and normal volatility is low.

3) Long put

A person who bought a put option hopes to profit from the decrease in the price of the underlying asset.

As he paid premium to buy the option, the maximum loss is the premium he invested in the option. However he has substantial upside potential since theoretically the underlying price can go down to zero.

4) Short put

A person who sold a put option hopes the price of the underlying asset remains at or above the strike price on or before expiry day.

As an option writer, he received premium as a fixed return. However his loss can be substantial since theoretically underlying price can go down to zero. Please note that the probability of such large movement is affected by many factors like time and volatility. The probability of extreme movement in shorter time frame and normal volatility is low. In fact the risk profile of short put is the same as buying a stock.

Summary

Strategy name Breakeven price Profit Loss
Long Call Strike Price + Premium on option Potential Unlimited Limited
Short Call Strike Price + Premium on option Limited Potential Unlimited
Long put Strike Price - Premium on option Potential Substantial Limited
Short Put Strike Price - Premium on option Limited Potential Substantial