Basic Strategies
Chapters in this video
- 0:00 Long call vs short call: unlimited gain versus unlimited danger
- 1:27 The buyer-seller rule that drives every options question
- 2:42 Long put breakeven: calls add, puts subtract
- 3:22 Short put max loss when the stock crashes to zero
- 4:38 Covered call: cost basis lowered by premium received
- 5:02 Protective put: cost basis raised by premium paid
- 6:49 Rapid-fire exam recap
What this video covers
- Why buyers want an option to have intrinsic value so they can exercise it, while sellers want it to expire worthless so they keep the premium
- How to calculate breakeven for naked calls (strike price + premium) and naked puts (strike price - premium), and why this formula holds whether you are long or short
- The unlimited max loss of an uncovered short call compared to the premium-limited max loss of a long call or long put
- How a short put's max loss equals strike price minus premium when the stock falls to zero, and why the seller is still obligated to buy at the strike
- The covered call breakeven formula: stock purchase price minus premium received, which lowers cost basis because cash is collected
- The protective put breakeven formula: stock purchase price plus premium paid, which raises cost basis because insurance was purchased
- Why a covered call caps upside gain while a protective put caps downside loss, and how to recognize which strategy Sam the student would use
Read the full lesson, free
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