Table des matières

If you missed it, here is the first part « Let’s talk about options »

Let us go for some practice. To make things easier I will use the same strike price, the same price paid or the same premium. I will also suppose there are no commissions paid and theses cases are related to **European style** options.

### Buying an option Call.

Suppose the stock of AAA company is trading at 10€. A Call option contract with a strike price of 10€ expiring in a month’s time is being priced at 0.03€. You strongly believe that AAA stock will rise sharply in the coming weeks. So you paid 3€ to purchase a single $10 AAA Call option covering 100 shares.

At expiration, let’s suppose the stock rallies to 12€.

Your profit will be (Current Stock price – Strike price) x100 – premium paid.

Profit : (12€ – 10€) x 100 – 3€ = 197€.

The breakeven is (Strike price + premium paid) = 10€ + 0.03€ = 10.03€.

Lessons learned :

- Your max profit is unlimited.
- Your max loss is limited to the premium paid.
- The breakeven is the sum of the strike price and the premium paid.

### Selling an option Call.

Suppose the stock of AAA company is trading at 9€. A Call option contract with a strike price of 10€ expiring in a month’s time is being priced at 0.03€. You strongly believe that AAA stock will drop sharply in the coming weeks. So you sell an option Call 10€ and you receive a 3€ premium. This example suppose you do not own 100 AAA shares.

At expiration if the AAA stock price is under 10€ the 3€ premium received is your maximum profit.

If the stock rally until 13€ you will have to buy the stocks at 13€.

Your loss is (13€ x 100) – 3€ = 1297€.

The breakeven is (Strike price + premium paid) = 10€ + 0.03€ = 10.03€.

Lessons learned :

- Your max profit is premium received (3€).
- Your loss is potentially unlimited.
- The breakeven is the sum of the strike price and the premium received.

### Buying an option Put.

Suppose the stock of AAA company is trading at 10€. A Put option contract with a strike price of 10€ expiring in a month’s time is being priced at 0.03€. You strongly believe that AAA stock will drop sharply in the coming weeks. So you paid 3€ to sell a single $10 AAA Put option covering 100 shares.

At expiration, let’s suppose the stock drops to 8€.

Your profit will be (Current Stock price – Strike price) x100 – premium paid.

Profit : (10€ – 8€) x 100 – 3€ = 197€.

If the stock price is 10€ or higher your max loss is equal to the premium paid (3€).

The breakeven is the strike price minus the premium paid: 9.97€.

Lessons learned :

- Your max profit is limited to the strike price minus the premium paid.
- Your max loss is limited to the premium paid.
- The breakeven is (Strike price – premium paid).

### Selling an option Put.

Suppose the stock of AAA company is trading at 11€. You believe that AAA stock will continue to rise in the coming weeks. A Put option contract with a strike price of 10€ expiring in a month’s time is being priced at 0.03€. So you decide to sell an option Put with a strike price 10€ and you receive a 3€ premium.

At expiration, let’s suppose the stock price is 12€.

Your profit will be the premium received.

If the stock price is 8€ your loss is equal to (Strike price – Stock price) x 100 + premium received.

Loss : (8€ – 10€) x 100 + 3€ = -197€.

The breakeven is Strike price – premium received: 10€ – 0.03€ = 9.97€

Lessons learned :

- Your max profit is limited to the premium received.
- Your max loss is potentially unlimited.
- The breakeven is the difference between the strike price and the premium received.

#### Options Academy articles

I. Let’s talk about options.

II. 4 basic strategies.

III. Advanced strategies.

IV. Ultimate strategies.

V. When volatility, time & statistics meet.

VI. Option management strategies (Part I).

VII. Option management strategies (Part II).

VIII. How I am trading options.

#### Sources

- The Options Guide,
- tastytrade.com,
- Investopedia,
- The Motley Fool,
- John Hull « Options futures and other derivatives ».

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