Option Strategies

Call, Put, Long, Short, Bull, Bear: Terminology of Option Positions

Terminology of option positions may be confusing. This page may help clarify it. Sometimes people have a long put position (they own puts) and they say they are short. They mean their exposure to the underlying stock’s price movement is similar to a short position in the stock (they expect [more…]

Option Strategy Legs Explained

When talking about option strategies, you often hear the term “leg” or “legs”. This page explains what a leg means. It is very simple. A leg is a single component of an option strategy – typically an option with a particular strike and expiration. An option strategy can be composed [more…]

Call Option Payoff Diagram, Formula and Logic

This page explains call option payoff / profit or loss at expiration. We will look at: A call option’s payoff diagram All the things that can happen when you are long a call option, and your profit or loss under each scenario Exact formulas to calculate a call option’s payoff [more…]

Put Option Payoff Diagram and Formula

This page explains put option payoff. We will look at: A put option’s payoff diagram All the things that can happen with a long put option position, and your profit or loss under each scenario Exact formulas to calculate put option payoff Calculation of put option payoff in Excel Calculation [more…]

Short Call Payoff Diagram and Formula

A short call position is the opposite of a long call option position (the other side of the trade). You sell a call option and receive cash in the beginning. Then you either buy the option back or wait until expiration. The trade is profitable if you buy the option [more…]

Short Put Payoff Diagram and Formula

This page explains short put option payoff. You can find similar pages for the other basic option positions here: long call payoff, short call payoff, long put payoff. Short Put Payoff Diagram A short put option position is a bullish strategy with limited upside and limited (but usually very high) [more…]

Long Call vs. Short Put Differences and When to Trade Which

This page explains differences between long call and short put option positions. Using an example, we will compare their cash flows and payoff profiles. We will conclude with recommendations when to trade which strategy. What Long Call and Short Put Have in Common Long call and short put are among [more…]

Bull Call Spread Payoff, Break-Even and R/R

This page explains bull call spread profit and loss at expiration and the calculation of its maximum gain, maximum loss, break-even point and risk-reward ratio. Bull Call Spread Basic Characteristics Bull call spread, also known as long call spread, is a bullish option strategy, typically done when a trader expects [more…]

Bear Put Spread Payoff, Break-Even and R/R

This page explains bear put spread profit and loss at expiration and the calculation of its maximum profit, maximum loss, break-even point and risk-reward ratio. Bear Put Spread Basic Characteristics Bear put spread is a bearish strategy – it profits when underlying price goes down. The position consists of two [more…]

Bull Put Spread Payoff, Break-Even and R/R

This page explains bull put spread profit and loss at expiration and the calculation of its maximum profit, maximum loss, break-even point and risk-reward ratio. Bull Put Spread Basic Characteristics Bull put spread, also known as short put spread, is a position created with two put options: Buying a put [more…]

Bear Call Spread Payoff, Break-Even and R/R

This page explains bear call spread profit and loss at expiration and the calculation of its maximum gain, maximum loss, break-even point and risk-reward ratio. Bear Call Spread Basic Characteristics Bear call spread, also known as short call spread, is a bearish option strategy using two call options – one [more…]

Long Straddle Payoff, Risk and Break-Even Points

This page explains long straddle profit and loss at expiration and the calculation of its risk and break-even points. Long Straddle Basic Characteristics Long straddle is a position consisting of a long call option and a long put option, both with the same strike and the same expiration date. It [more…]

Long Strangle Payoff, Risk and Break-Even Points

This page explains long strangle profit and loss at expiration and the calculation of its risk and break-even points. Long Strangle Basic Characteristics Strangle is a position made up of a long call option and a long put option with the same expiration date. It is similar to a straddle; [more…]

Short Straddle Payoff and Break-Even Points

This page explains short straddle profit and loss at expiration and the calculation of its break-even points. Short Straddle Basic Characteristics Short straddle is non-directional short volatility strategy. It is composed of a short call option and a short put option, both with the same strike price and expiration date [more…]

Short Strangle Payoff and Break-Even Points

This page explains short strangle profit and loss at expiration and the calculation of its break-even points. Short Strangle Basic Characteristics Short strangle is a position created by selling a higher strike call option and selling a lower strike put option with the same expiration date. It is a non-directional [more…]

Iron Condor Payoff, Break-Even Points and R/R

This page explains iron condor profit or loss at expiration and the calculation of its maximum profit, maximum loss, break-even points and risk-reward ratio. Iron Condor Basic Characteristics Iron condor is a non-directional short volatility strategy with limited risk and limited profit potential. It got its name from the shape [more…]

Iron Butterfly Payoff, Break-Even Points and R/R

This page explains iron butterfly payoff profile and the calculation of its maximum loss, maximum profit, break-even points and risk-reward ratio. Iron Butterfly Basic Characteristics Iron butterfly is a non-directional short volatility strategy, typically used when a trader expects the underlying price to move sideways or stay at approximately the [more…]

Collar Payoff, Break-Even and Risk-Reward

This page explains the payoff profile of collar option strategy – different scenarios at expiration, maximum profit, maximum loss, break-even point and risk-reward ratio. Collar Strategy Basic Characteristics Collar is an option strategy that involves a long position in the underlying, a short call and a long put. The common [more…]