Option Strategies

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

A long call Assume we buy one Exxon 26 December $80 call. C 0 = $3 At expiration, our profit/loss will depend on the stock price.

Analysis Profit/loss is a function of stock price at expiration and the original option premium Profit/Loss = max [0, (ST-E)] - C 0 Break-even stock price = E + C 0 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 call

S profit $80 -$3 $83 Profit at expiration from a long call

Naked call Assume we sell one Exxon 26 December $80 call. C 0 = $3

Analysis Profit/loss is a function of stock price at expiration and the original option premium Profit/Loss = - max [0, (ST-E)] + C 0 Break-even stock price = E + C 0 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 call

S profit $80 $3 $83 Profit 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

Analysis Profit/loss is a function of stock price at expiration, The original stock price, and the original option premium Profit/Loss = (ST- S 0 ) + [C 0 - max(0, ST - E)] Break-even stock price = S 0 - C 0 We make a profit when the option is in the money, but the profit is limited. The largest loss we can incur = - S 0 + C 0

Profit/Loss at expiration: Covered call

Profit at expiration from a covered call S profit $80 $75 $5 -$75

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

Long put Assume we buy one Exxon 26 December $80 put. P 0 = $4

Analysis Profit/Loss = max [0, (E- ST)] - P 0 Break-even stock price = E - P 0

Profit/Loss at expiration: Long put

S profit $80 $3 $76 Profit at expiration from a long put $76

Naked Put Assume you sell one Exxon 26 December $80 put. P 0 = $4

Analysis Profit/Loss = - max [0, (E- ST)] + P 0 Break-even stock price = E - P 0

Profit/Loss at expiration: Naked put

Profit at expiration from a naked put S profit $80 $4 $76 -$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.

Analysis Profit/Loss = (ST- S) + [max(0, E- ST) - P 0 ] Break-even stock price = S + P 0 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

S profit $80 -$2 $82 Profit at expiration from a protective put