Option Theory: Rapid Fire

What this video covers

• Why the buyer (long) pays the premium for a right and posts no margin, while the writer (short) receives the premium and takes on an obligation backed by a performance bond
• How exercise of a call delivers a long futures position to the buyer and a short futures position to the assigned writer, with a put doing the exact opposite
• Why the long call has unlimited maximum profit and the long put is capped at strike minus premium, yet both buyers have maximum loss equal only to the premium paid
• How the naked short call carries truly unlimited risk because a future has no price ceiling, while the naked short put is bounded at strike minus premium since a future can only fall to zero
• The breakeven formulas for all four positions: long call and naked short call at strike plus premium; long put and naked short put at strike minus premium
• Why a total loss of the premium is routine, not rare, when an out-of-the-money (OTM) option expires worthless, and why limited risk does not mean safe
• The exam trap of calling a naked short put unlimited risk, and the underlying confusion between futures options and stock options