Option Strategies

1. Option Strategies

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

3. A long call Assume we buy one Exxon 26 December $80 call. C0 = $3 At expiration, our profit/loss will depend on the stock price.

4. Analysis 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.

5. Profit/Loss at expiration: Long call

6. -$3 Profit at expiration from a long call profit $80 $83 S

7. Naked call Assume we sell one Exxon 26 December $80 call. C0 = $3

8. Analysis 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.

9. Profit/Loss at expiration: Naked call

10. $3 Profit at expiration from a naked call profit $80 $83 S

11. 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

12. Analysis 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

13. Profit/Loss at expiration: Covered call

14. $5 -$75 Profit at expiration from a covered call profit $75 S $80

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

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

17. Analysis Profit/Loss = max [0, (E- ST)] - P0 Break-even stock price = E - P0

18. Profit/Loss at expiration: Long put

19. $3 Profit at expiration from a long put profit $76 $80 S $76

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

21. Analysis Profit/Loss = - max [0, (E- ST)] + P0 Break-even stock price = E - P0

22. Profit/Loss at expiration: Naked put

23. -$76 Profit at expiration from a naked put profit $4 $76 S $80

24. 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.

25. Analysis 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

26. Profit/loss at expiration: Protective put

27. -$2 Profit at expiration from a protective put profit $80 $82 S