Let's look at a typical long call. Let's say it is 1 MNO May 100 call @ 3; essentially the spot rate for the stock has to rise above $103 ($100 strike price plus $3 premium) to be in the money. In fact, the option begins life at $3 out of the money because of the premium.
 

This graph reflects the point of view of the buyer. The view of the writer - who goes short when she sells a call - is a mirror image:
 

Long and Short Put Positions
Now let's look at puts. This example is a long put - a put from the perspective of the buyer. Similar to the previous example, let's say it is 1 MNO May 100 put @ 3; so essentially the spot rate for the stock has to sink below $97 ($100 strike price minus $3 premium) to be in the money. It does not matter how far above the strike price the spot price goes; if the option is going to cost the buyer more than the premium, he will simply let it expire unexercised.
 

Again, the writer's perspective - the short position - is just the flip-side of the buyer's perspective:

One quick point about premiums: by figuring them in, you determine the profit or loss from an option. This is different from the payoff. To figure the payoff, simply assume the premium equals $0.



Managing Risk with Options Strategies: Covered Calls and Protective Puts

Related Articles
  1. Trading

    Prices Plunging? Buy A Put!

    You can make money on a falling stock. Find out how going long on a put can lead to profits.
  2. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  3. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  4. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  5. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  6. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  7. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  8. Trading

    Solving Mixed Options Problems On The Series 7

    Learn to ace the questions that involve both options contracts and stock positions.
  9. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  10. Trading

    Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
Frequently Asked Questions
  1. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
  2. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ...
  3. Do I have to complete all exams within a certain period of time to receive the CFA charter?

    According to the CFA Institute, a candidate can take as much time as necessary to complete all three levels of the CFA program.Therefore, ...
  4. What is a reasonable amount of debt?

    It really depends on numerous factors - what stage of life you are at, your spending and saving habits, the stability of ...
Trading Center