1.8 Option Positions & Strategies
This chapter works through the eight option positions you are expected to price on the exam: long and short calls, long and short puts, long and short straddles, and the hedging and income strategies that pair an option with stock. Each lesson fixes the same three numbers, maximum gain, maximum loss and breakeven, so you can recognize a position and calculate its result quickly. The same material tells you which strategies fit an aggressive client and which suit a conservative one.
What each topic covers
Long Call Payoff & Breakeven treats the holder as bullish, with the right to buy at the strike price. Maximum gain is unlimited, maximum loss is the premium, and breakeven is strike plus premium. A call can be in the money and still lose money, which the lesson shows with a $75 strike and a $6 premium.
Short Call Payoff & Breakeven is the other side of the same contract, so the breakeven is also strike plus premium. The writer is bearish, gains at most the premium, and risks an unlimited loss if the call is naked. Long shares, a long call, rights or warrants, and convertible securities cover it.
Long Put Payoff & Breakeven gives a bearish holder the right to sell at the strike price. Breakeven is strike minus premium, and the same expression gives the maximum gain, reached if the stock falls to zero. Maximum loss is the premium.
Short Put Payoff & Breakeven has the writer bullish and obligated to buy at the strike price. Maximum gain is the premium, while maximum loss and breakeven both equal strike minus premium. Only the loss is multiplied by 100. A naked put can be covered by short shares, a long put, or cash equal to the maximum loss, and cash cannot cover a short call.
Long Straddle Payoff & Breakeven pairs a long call and a long put at the same strike and expiration. It bets on volatility rather than direction. Maximum loss is the combined premiums, which occurs at the strike price, and the two breakevens are the strike plus and minus those premiums. Straddles draw about 0 to 2 exam questions.
Short Straddle Payoff & Breakeven is the mirror image. It expects a flat market, earns at most the combined premiums, and has an unlimited loss because of the naked short call. It uses the same two breakevens as the long straddle and suits only aggressive traders with a substantial net worth.
Protective Puts & Protective Calls covers hedges that add a long option to a stock position. A protective put on long stock limits the loss to the premium, and a protective call on short stock caps what would otherwise be an unlimited loss. In both, the premium lowers profit and moves the breakeven.
Covered Calls & Covered Puts covers income strategies that sell an option against a stock position in a flat market. A covered call caps upside, which is the opportunity cost, and the premium cushions the shares only up to its amount. A covered put still has an unlimited maximum loss, because the short stock itself carries unlimited risk.