… For example, suppose an investor buys 100 shares of stock and buys one put option simultaneously.

It involves the simultaneous purchase and sale of puts on the same asset at the same expiration date but at different strike prices, and it carries less risk than outright short-selling. While buying the stock will require an investment of $5,000, you can control an equal number of shares for just $300 by buying a call option. By using Investopedia, you accept our

The underlier price at which break-even is achieved for the collar strategy position can be calculated using the following formula. This strategy has both limited upside and limited downside. In the P&L graph above, notice that the maximum amount of gain is made when the stock remains at the at-the-money strikes of both the call and put that are sold. They might be looking to generate income through the sale of the call  When outright calls are expensive, one way to offset the higher premium is by selling higher strike calls against them.

Bull Call Strategy. All options have the same expiration date and are on the same underlying asset. A one-month call option on the stock costs $3.

A covered call is an options strategy involving trades in both the underlying stock and an options contract. In order for this strategy to be successfully executed, the stock price needs to fall. In a long  Maximum loss is usually significantly higher than the maximum gain.

A bear put spread is a bearish options strategy used to profit from a moderate decline in the price of an asset. Because the investor receives a premium from selling the call, as the stock moves through the strike price to the upside, the premium that they received allows them to effectively sell their stock at a higher level than the strike price: strike price plus the premium received. This strategy functions similarly to an insurance policy; it establishes a price floor in the event the stock's price falls sharply.

In the P&L graph above, you can observe that this is a bearish strategy.

Example: Sell a nine-month, $60 call on a $51.50 stock for $4, and your "called away" sales price would be $64, if exercised later. The trade-off is that they may potentially be obligated to sell their shares at $105 if IBM trades at that rate prior to expiry. A call option is an agreement that gives the option buyer the right to buy the underlying asset at a specified price within a specific time period. A short straddle is an options strategy comprised of selling both a call option and a put option with the same strike price and expiration date. The further away the stock moves through the short strikes–lower for the put and higher for the call–the greater the loss up to the maximum loss.

Note that the payoff from exercising or selling the call is an identical net profit of $200.

They will then sell call options (the right to purchase the underlying asset, or shares of it) and then wait for the options contract to be exercised or to expire.

Losses are limited to the costs–the premium spent–for both options. Also note that the breakeven price on the stock trade is $50 per share, while the breakeven price on the option trade is $53 per share (not factoring in commissions or fees).

A bull call spread is an options strategy designed to benefit from a stock's limited increase in price.

The maximum loss occurs when the stock settles at the lower strike or below (or if the stock settles at or above the higher strike call).

Continuing with our example, let's assume that the stock was trading at $55 near the one-month expiration.

Investopedia uses cookies to provide you with a great user experience. In the P&L graph above, the dashed line is the long stock position. With this approach, the profit would also be $200 ($5,500 - $5,000 - $300 = $200). The trader is protected below $95 until the expiration date.

This intuitively makes sense, given that there is a higher probability of the structure finishing with a small gain.

However, the investor will likely be happy to do this because they have already experienced gains in the underlying shares. But in actuality, the With the long put and long stock positions combined, you can see that as the stock price falls, the losses are limited. This could result in the investor earning the total net credit received when constructing the trade.