Options Strategies

Options Strategies – Each strategy has an accompanying graph showing profit and loss at expiration.• The vertical axis shows then profit/loss scale.

• When the strategy line is below the horizontal axis, it assumes you paid for the position or had a loss. When it is above the horizontal axis, it assumes  you received a credit for the position or had a profit.

• The dotted line indicates the strike price.

• The intersection of the strategy line and the horizontal axis is the break-even point (BEP)not including transaction
costs, commissions, or margin (borrowing) costs.

• These graphs are not drawn to any specific scale and are meant only for illustrative and educational purposes.
• The risks/rewards described are generalizations and may be lesser or greater than indicated.

Break-Even Point (BEP): The stock price(s) at which an option strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Long position: A position wherein an investor is a net holder in a particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security.A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Premium: The price a put or call buyer must pay to a put or call seller (writer) for an option contract. Market supply and demand forces determine the premium.

Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.
Ratio Spread: A multi-leg option trade of either all calls or all puts whereby the number of long options to short options is something other than 1:1. Typically, to manage risk, the number of short options is lower than the number of long options (i.e. 1 short call: 2 long calls).
Short position: A position wherein the investor is a net writer (seller) of a particular options series.

Strike price or exercise price: The stated price per share for which the underlying security may be purchased (in the case of a call)or sold (in the case of a put) by the option holder upon exercise of the option contract.
Synthetic position: A strategy involving two or more instruments that has the same risk/reward profile as a strategy involving only one instrument.
Time decay or erosion: A term used to describe how the time value of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

bull strategy LONG CALL

Example: Buy call
Market Outlook: Bullish
Risk: Limited
Reward: Unlimited
Increase in Volatility:Helps position
Time Erosion: Hurts position
BEP: Strike price plus premium paid

bull strategy BULL CALL SPREAD

Example: Buy 1 call;
sell 1 call at higher strike
Market Outlook: Bullish
Risk: Limited
Reward: Limited
Increase in Volatility:
Helps or hurts depending
on strikes chosen
Time Erosion: Helps or hurts depending on strikes chosen
BEP: Long call strike plus net premium paid

bull strategy BULL PUT SPREAD

Example: Sell 1 put;
buy 1 put at lower strike with
same expiry
Market Outlook:
Neutral to bullish
Risk: Limited
Reward: Limited
Increase in Volatility:
Typically hurts position slightly
Time Erosion: Helps position
BEP: Short put strike minus credit received

bull strategy COVERED CALL/BUY WRITE

Example: Buy stock; sell calls
on a share-for-share basis
Market Outlook: Neutral to
slightly bullish
Risk: Limited, but substantial
(risk is from a fall in stock price)
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Starting stock price minus
premium received

bull strategy PROTECTIVE/MARRIED PUT

Example: Own 100 shares of
stock; buy 1 put
Market Outlook: Cautiously
bullish
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Starting stock price
plus premium paid

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By optionseducation.org