Basic Long and Short Option Position Economics
Chapters in this video
What this video covers
- The core rule that long option buyers cap their maximum loss at the premium paid, while short option writers cap their maximum gain at the premium received
- How a long call has unlimited maximum gain, maximum loss equal to the premium, and a break-even of strike price plus premium
- How a short call earns the premium received, and why an uncovered call has unlimited risk while a covered call has capped risk
- How a long put has maximum gain equal to strike price minus premium, because the stock can fall only to zero
- How a short put earns the premium received, has maximum loss equal to strike price minus premium, and reflects a neutral to bullish outlook
- Why long calls and short puts are bullish, while long puts and short calls are bearish
- How to apply the call-up, put-down break-even rule, and why the buyer and seller of the same option share the same break-even point
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