The document discusses various options trading strategies, including: 1) Buying call options to profit from an expected rise in the market. This strategy has unlimited upside potential but limited downside risk of the premium paid. 2) Buying put options to profit from an expected fall in the market. This also has unlimited upside potential and limited downside risk of the premium. 3) Holding stock and selling covered calls to generate income from the stock holding when a neutral market is expected. This caps upside potential in exchange for the option premium received. The document explains the mechanics and risk-reward profiles of these and other options strategies through the use of diagrams and payoff tables.

1. - Pavan Makhija

2. Options are derivative products which, if you buy, give you certain
rights
Investors use options for two primary reasons -- to speculate and to
hedge their risk
Call Options give you a right to buy a share (at a certain specific
price)
Put Options give you a right to sell (again at a predefined price)
The cost you pay for obtaining such rights is the premium (also
called price or option value)
Options will (like Futures) expire on the last Thursday of every
month

3. Option Buyer (Option Holder)
Party that purchases and holds the options contract
Option Seller
Party that writes, or creates, the options contract.
Strike Price
The price at which the option seller agrees to buy or sell a certain stock
in the future
Expiration Month
The month in which the option will expire
Expiration Date
This is always the third Friday of the month in which the option is
scheduled to expire

4. Option Contract
Each options contract represents an interest in 100 shares of a certain
underlying stock
Put Option
This type of option gives the option holder the right, but not the
obligation, to sell
Call Option
This type of option gives the option holder the right, but not the
obligation, to purchase
In the money
Situation in which an option's strike price is below the current market
price of the underlier (for a call option) or above the current market
price of the underlier (for a put option)

5. Out of the money
A call option whose strike price is higher than the market price of the
underlying security, or a put option whose strike price is lower than
the market price of the underlying security
Naked Option Writing
When an investor writes an option on a stock he/she does not own, it is
referred to as writing a “naked” options contract

6. European option
An option that may only be exercised on expiration
American option
An option that may be exercised on any trading day on or before
expiration
Bermudan option
An option that may be exercised only on specified dates on or before
expiration
Barrier option
Any option with the general characteristic that the underlying
security's price must reach some trigger level before the exercise can
occur.

7. Strategy: Buy a Call Option
Strategy View (Bullish)
Investor thinks that the market will rise significantly in the short-term. .
Strategy Implementation
Call options are bought with a strike price of a. The more bullish the investor is, the
higher the strike price should be.
Upside Potential
Profit potential is unlimited and rises as the market rises.
Downside Risk
Limited to the premium paid - incurred if the market at expiry is at, or below, the strike
a.
Comment
If the market does little then the value of the position will decrease as the option time
value falls.

8. (Payoff Table)
Market Profit/
Price Premium Call Loss
100 -5 -5 a
110 -5 -5
120 -5 -5
125 -5 5 0
130 -5 10 5
140 -5 20 15
Strike Price (Call Option): 120
Premium: 5
Strike Price: Break-Even:

9. Strategy: Buy a Put Option
Strategy View (Bearish)
Investor thinks that the market will fall significantly in the short-term. .
Strategy Implementation
Put option is bought with a strike price of a. The more bearish the investor is, the lower
the strike price should be.
Upside Potential
Profit potential is unlimited (well, not really unlimited of course as the market can not
fall below zero).
Downside Risk
Limited to the premium paid - incurred if at expiry the market is at or above the strike a.
Comment
If the market does little then the value of the position will decrease as the option time
value falls.

10. (Payoff Table)
Market Profit/
Price Premium Put Loss
100 -5 30 25
a
110 -5 20 15
120 -5 10 5
125 -5 5 0
130 -5 -5
140 -5 -5
Strike Price (Put Option): 130
Premium: 5
Strike Price: Break-Even:

11. Strategy: Hold the stock and buy call options.
Strategy View (Bearish)
An investor holds stock but does not think the stock will rise in the short term, or that the
stock will be neutral, income can be gained by selling call options against the stock
holding.
Strategy Implementation
Call options are sold. The number of call options sold will be determined by the investor's
market view and the size of the stock holding.
Upside Potential
Limited - by selling calls, the investor is writing off the potential prfit of the stock
position. Maximum profit is the strike minus the market price plus the premium received.
Downside Risk
Large: Similar to that incurred with ordinary stock ownership, only off-set partially by
the (fixed) option premium received. Main loss could be the opportunity loss if the
market rises strongly.

12. (Payoff Table)
Market Short Profit/
Price Premium Call Stock Loss
100 30 -20 10
110 30 -10 20
120 30 0 30 a
125 30 -5 5 30
130 30 -10 10 30
140 30 -20 20 30
Strike Price (Short Call): 120
Stock Price: 120
Premium: 30
Strike Price: Break-Even:

13. Strategy: Buy and sell Call Options with different strike prices.
Strategy View (Bullish)
Investor thinks that the market will not fall, but wants to cap the risk. Conservative
strategy for one who thinks that the market is more likely to rise than fall.
Strategy Implementation
Call option is bought with a strike price of a and another call option sold with a strike of b,
producing a net initial debit,
Upside Potential
Calls: difference between strikes minus initial debit
Maximum profit if market at expiry is above the higher strike.
Downside Risk
Calls: net initial debit
Maximum loss if at expiry market is below the lower strike.
Comment
Time value erosion not too significant due to the balanced position. .

14. (Payoff Table)
Market Call Call Profit/
Price Premium (120) (150) Loss
100 -11 -11
110 -11 -11
a
120 -11 -11
b
125 -11 5 -6
131 -11 11 0
140 -11 20 9
150 -11 30 19
Strike Price (Long)-a: 120
160 -11 40 -10 19 Strike Price (Short)-b: 150
Premium long call: 16
Strike Price: Break-Even:
Premium short call: 5

15. Strategy: Buy a call option and a put option with the same strike prices.
Strategy View (Neutral)
Investor thinks that the market will be very volatile in the short-term.
Strategy Implementation
Call option and put option are bought with the same strike price a - usually at-the-money.
Upside Potential
Unlimited Breakeven Point at Expiry
Lower point is the strike minus the two premiums paid, and the upper is the strike plus
the two premiums.
Downside Risk
Limited to the two premiums paid. [If the investor would like to decrease the premium
paid, a buy strangle might be interesting]
Comment
Position loses value with passage of time as time value decreases on options.

16. (Payoff Table)
Market Profit/
Price Premium Call Put Loss
100 -11 30 19
a
110 -11 20 9
119 -11 11 0
130 -11 0 -11
141 -11 11 0
150 -11 20 9
160 -11 30 19
Strike Price (Long Call): 130
Strike Price (Long Put): 130
Premium long call: 5
Strike Price: Break-Even:
Premium short call: 6

17. Strategy: Buy a call option and a put option with the different strike prices.
Strategy View (Neutral)
Investor thinks that the market will be very volatile in the short-term [this is similar to the
buy straddle but the premium paid here is less]
Strategy Implementation
Put option is bought with a strike a and a call option is bought with a strike b.
Upside Potential
Unlimited - should the market fall or rise greatly.
Downside Risk
Limited to the two premiums paid. [If the investor would like to reduce the premiums paid
still further, a short butterfly might be interesting].
Comment
Position loses value with passage of time as time value decreases on options.

18. (Payoff Table)
Market Profit/
Price Premium Call Put Loss
100 -11 20 9
109 -11 11 0 a b
120 -11 -11
130 -11 -11
140 -11 -11
151 -11 11 0
160 -11 20 9
Strike Price (Long Call): 140
Strike Price (Long Put): 120
Premium long call: 5
Strike Price: Break-Even:
Premium long put: 6

19. Strategy: Buy a call option with lower strike price and a higher strike price. Also sell
a call and a put option with a medium (same) strike price.
Strategy View (Neutral)
Investor thinks that the market will not be volatile, but wants to cap the downside risk. .
Strategy Implementation
Put option with low strike b bought and a straddle with medium strike a is sold and call
option with high strike c bought.
Upside Potential
Limited
Downside Risk
Limited.
Comment
Can be difficult to execute such strategies quickly.

20. (Payoff Table)
Market Short Long Long Short Profit
Price Premium Call Call Put Put /Loss
100 13 10 -30 -7 b c
110 13 -20 -7 a
117 13 -13 0
130 13 0 0 0 0 13
143 13 -13 0
150 13 -20 -7 Strike Price (Short Call): 130
160 13 -30 10 -7 Strike Price (Short Put): 130
Strike Price (Long Call): 150
Premium short put: 13 Strike Price (Long Put): 110
Strike Price: Break-Even: Premium long put: 5 Premium long call: 6
Premium short call: 11

21. Strategy: Buy a call option and two put options with the same strike prices and
expiration date
Strategy View
Investor mildly thinks that the market will be volatile but price is likely to decline.
Strategy Implementation
Call option and two put options with strike price „a‟ are bought
Upside Potential
Unlimited.
Downside Risk
Limited.
Comment
May be difficult to execute this strategy quickly.

22. (Payoff Table)
Market Profit
Price Premium Call Puts /Loss
120 -50 180 130
a
160 -50 100 50
190 -50 40 -10
210 -50 0 0 -50
230 -50 20 -30
260 -50 50 0
300 -50 90 40
Strike Price (Long Call): 210
Strike Price (Long Puts): 210
Premium long call: 10
Strike Price: Break-Even:
Premium long put: 20

23. Strategy: Buy two call options and a put option with the same strike prices and
expiration date
Strategy View
Investor mildly thinks that the market will be volatile but price is likely to decline.
Strategy Implementation
Call options and a put option with strike price „a‟ are bought
Upside Potential
Unlimited.
Downside Risk
Limited.
Comment
May be difficult to execute this strategy quickly.

24. (Payoff Table)
Market Profit
Price Premium Call Puts /Loss
150 -30 60 30
a
180 -30 30 0
190 -30 20 -10
210 -30 0 0 -30
230 -30 40 10
250 -30 80 50
280 -30 140 110
Strike Price (Long Calls): 210
Strike Price (Long Put): 210
Premium long call: 5
Strike Price: Break-Even:
Premium long put: 20

25. Strategy: Sell a Call Option.
Strategy View (Bearish)
Investor is certain that the market will not rise and and is unsure/unconcerned whether it
will fall.
Strategy Implementation
Call option is sold with a strike price of a. If the investor is very certain of his view then at-
the-money options should be sold, if less certain, then out-of-the-money ones should be
sold.
Upside Potential
Limited to the premium received - received if the market at expiry is at, or below, the
option strike.
Downside Risk
Unlimited. Losses on the position will worsen as the market rises. [If the investor likes the
idea of the strategy, but not the downside risk, they might be interested in a bear spread].
Comment
If the market does little, and time passes, this helps as the short position gains when the
time value erodes

26. (Payoff Table)
Market Profit/
Price Premium Call Loss
100 5 5
110 5 5
120 5 5 a
125 5 0
130 5 -10 -5
140 5 -20 -15
150 5 -30 -25
Strike Price (Call Option): 120
Premium: 5
Strike Price: Break-Even:

27. Strategy: Sell a Put Option
Strategy View (Bullish)
Investor is certain that the market will not go down, but unsure about whether it will rise.
Strategy Implementation
Put options are sold with a strike price a. If an investor is very bullish, then in-the-money
puts would be sold.
Upside Potential
Profit potential is limited to the premium received. The more the option is in-the-money,
the greater the premium received.
Downside Risk
Loss is almost unlimited ("almost"!). High risk strategy. Potential huge losses incurred if
the market crashes.
Comment
If the market does little, and time passes, this helps as the short position gains when the
time value erodes.

28. (Payoff Table)
Market Profit/
Price Premium Call Put Loss
100 5 -30 -25
110 5 -20 -15
a
120 5 -10 -5
125 5 -5 0
130 5 5
140 5 5
Strike Price (Put Option)-a: 130
Premium: 5
Strike Price: Break-Even:

29. Strategy: Hold Stock and buy put options.
Strategy View (Bearish)
Investor holds stock and is worried about a market fall. Put options can be bought to
protect the value of the stock position, while not preventing the position to benefit in the
event of a market rise.
Strategy Implementation
Put options are bought with a strike price of a.The number of put options bought will
depend on the bearishness of the investor and the size of the stock holding.
Upside Potential
Profit potential is unlimited, being the ordinary return on the stock minus the fixed
premium paid for the put option.
Downside Risk
Potentially limited, (depending on the hedge ratio initially applied). The gains on the put
options - as the market falls - will off-set the stock losses.
Comment
Strategy characteristics are similar to a buy call.

30. (Payoff Table)
Market Long Profit
Price Premium Put Stock /Loss
100 -5 20 -20 15
110 -5 10 -10 5 a
120 -5 0 0 -5
125 -5 5 0
130 -5 10 5
140 -5 20 15
Strike Price (Long Put): 120
Stock Price: 120
Strike Price: Break-Even: Premium: 5

31. Strategy: Buy and sell Put Options with different strike prices.
Strategy View (Bearish)
Investor thinks that the market will not rise, but wants to cap the risk. Conservative
strategy for one who thinks that the market is more likely to fall than rise.
Strategy Implementation
Put option is sold with a stike of a and another put bought with a strike of b, producing a
net initial debit.
Upside Potential
Puts: difference between strikes minus initial debit
Maximum profit if market at expiry is below the lower strike.
Downside Risk
Puts: net initial debit
Maximum loss if at expiry market is above the higher strike.
Comment
Time value erosion not too significant due to the balanced position. .

32. (Payoff Table)
Market Put Put Profit/
Price Premium (120) (150) Loss
100 -11 -20 50 19
110 -11 -10 40 19
b
120 -11 30 19
a
125 -11 25 14
139 -11 11 0
145 -11 5 -6
150 -11 -11
Strike Price (Short)-a: 120
160 -11 -11 Strike Price (Long)-b: 150
Premium long put: 16
Strike Price: Break-Even: Premium short put: 5

33. Strategy: Sell a call option and put option with the same strike price.
Strategy View (Neutral)
Investor is certain that the market will not be very volatile (will neither go up nor down
very much).
Strategy Implementation
A call option and a put option are sold with the same strike price a.
Upside Potential
Limited to the two premiums received - will be realized if market at expiry is exactly at the
strike price level.
Downside Risk
Unlimited - should the market fall or rise greatly.
Comment
If the market does little then the value of the position will benefit as the short positions gain
when the option time value falls.

34. (Payoff Table)
Market Profit/
Price Premium Call Put Loss
100 11
-
110 11 130 -110
- a
119 11 130 -119
130 11 0 0 11
-
141 11 130
-
150 11 130
Strike Price (Short Call): 130
160 11 Strike Price (Short Put): 130
Premium long call: 5
Strike Price: Break-Even:
Premium short call: 6

35. Strategy: Sell a put option at a given strike price and a call option with higher strike
price.
Strategy View (Bearish)
The investor thinks that the market will not be volatile within a broad band.
Strategy Implementation
Put option is sold with a strike price of a and a call option is sold with the higher strike
price b
Upside Potential
Limited to the two premiums received.
Downside Risk
Unlimited - should the market fall or rise greatly. [If the investor likes the strategy, but not
the downside risk, a long butterfly might be interesting].
Comment
If the market does little then the value of the position will benefit as the short positions gain
when the option time value falls.

36. (Payoff Table)
Market Profit
Price Premium Call Put /Loss
100 11 -20 -9
109 11 -11 0
a b
120 11 11
130 11 11
140 11 11
151 11 -11 0
160 11 -20 -9
Strike Price (Short Call): 140
Strike Price (Short Put): 120
Premium long call: 5
Strike Price: Break-Even:
Premium short call: 6

37. Strategy: Buy a call option and a put option with the different strike prices.
Strategy View
Investor mildly thinks that the market will be volatile.
Strategy Implementation
Put option is sold with strike b, a straddle is bought with strike a and a call option is sold
with strike c
Upside Potential
Limited.
Downside Risk
Limited.
Comment
May be difficult to execute this strategy quickly.

38. (Payoff Table)
Market Short Long Long Short Profit
Price Premium Call Call Put Put /Loss
100 -13 30 -10 7
a
110 -13 20 7
b c
117 -13 13 0
130 -13 0 0 0 0 -13
143 -13 13 0
150 -13 20 -7
160 -13 -10 30 7
Premium short put: 5
Strike Price: Break-Even: Premium long put: 13

39. Strategy: Sell a call option and put options with the same strike price and expiration
date.
Strategy View
Investor is certain that the market will not be very volatile but price is likely to rise
Strategy Implementation
A call option and put options are sold with the same strike price „a‟.
Upside Potential
Limited to the three premiums received - will be realized if market at expiry is exactly at the
strike price level.
Downside Risk
Unlimited - should the market fall or rise greatly.
Comment
If the market does little then the value of the position will benefit as the short positions gain
when the option time value falls.

40. (Payoff Table)
Market Profit
Price Premium Call Put /Loss
120 50 -180 -130
160 50 -100 -50
190 50 -40 10 a
210 50 0 0 50
230 50 -20 30
260 50 -50 0
300 50 -90 -40 Strike Price (Short Call): 210
Strike Price (Short Puts): 210
Premium long call: 10
Strike Price: Break-Even:
Premium short call: 20

41. Strategy: Sell two call options and put option with the same strike price and expiration
date.
Strategy View
Investor is certain that the market will not be very volatile but price is likely to decline
Strategy Implementation
A call option and put options are sold with the same strike price „a‟.
Upside Potential
Limited to the three premiums received - will be realized if market at expiry is exactly at the
strike price level.
Downside Risk
Unlimited - should the market fall or rise greatly.
Comment
If the market does little then the value of the position will benefit as the short positions gain
when the option time value falls.

42. (Payoff Table)
Market Profit
Price Premium Call Put /Loss
150 30 -60 -30
180 30 -30 0
190 30 -20 10 a
210 30 0 0 30
230 30 -20 10
250 30 -40 -10
280 30 -70 -40 Strike Price (Short Calls): 210
Strike Price (Short Put): 210
Premium long call: 5
Strike Price: Break-Even:
Premium short call: 20