Breakeven option strategy, Identifying Key Underlying Price Points


Traditional investing in the stock market involves buying shares when the price is low and selling them when the price is high. However, there's an alternative way to make money: using stock options. Depending on the option you buy, you could make money when the price goes down or make money when the price goes up. Before you venture into option trading, you need to know how to figure your breakeven point.

Some of them are described below: 1 Bull call spread : Description: This strategy consists of buying one Call option and selling another at a higher strike price to help pay the cost. Payoff: Both the potential profit and work with the binary options market for this strategy are very limited and very well-defined: The maximum profit is limited to the difference between the strikes price, less the debit paid to Put on the position.

Breakeven option strategy Even: This strategy breaks even at expiration if the stock price is above the lower strike by the amount of the initial outlay the debit. Payoff: The potential profit and loss are both very limited. Break Even: The strategy breaks even if at expiration the underlying stock is above the lower strike or below the upper strike by the amount of premium paid to initiate the position.

breakeven option strategy

Payoff: This strategy has an unlimited profit potential, but the potential loss is limited. Break Even: When the stock is above the upper strike by the difference between the strikes the loss has been offset.

breakeven option strategy

To break the stock needs to go still higher by the amount of the debit to reach a complete breakeven. Payoff: This strategy establishes a fixed amount of price exposure for the term of the strategy.

Impact of Options Greeks: Delta : At the initiation of trade, Delta of the Short Put Ladder will be negative, indicating of a decent profit potential if the underlying asset moves lower. Vega: Short Put Ladder has a positive Vega. Therefore, one should initiate Short Put Ladder spread when the volatility is low and expects it to rise. Theta: A Short Put Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

The long Put provides an acceptable exit price at which the investor can liquidate if the stock suffers losses. The premium income from the short Call sets a limit to the upside profit potential.

breakeven option strategy

Payoff: Both the potential profit and loss for this strategy are very limited. Break Even: Consider the strategy at expiration for the breakeven option strategy stock; when the stock is below the lower strike by the difference between the strikes the loss has been offset. Break Even: The strategy breaks even if at expiration the underlying stock is above the lower strike or below the upper strike by the amount of breakeven option strategy received to initiate the position.

breakeven option strategy

Payoff: As with a short stock position, the potential profit is substantial, and the potential losses are unlimited. Break Even: At expiration, the strategy breakeven option strategy even if the stock price has declined by an amount equal to the premium paid for the option.

breakeven option strategy

Payoff: The maximum potential profit is unlimited on the upside and very substantial on the downside. If the stock makes a sufficiently large move, regardless of direction, gains on one of the two options can generate a substantial profit.

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Break Even: This strategy breaks even if, at expiration, the stock price is either above or below the strike price by the amount of premium paid. Typically both options are out-of-the-money.

breakeven option strategy

Payoff: The potential profit is unlimited on the upside and very substantial on the downside. The loss is limited to the premium paid for the options.

Straddles are often purchased before earnings reports, before new product introductions and before FDA announcements. The risk is that the announcement does not cause a significant change in stock price and, as a result, both the call price and put price decrease as traders sell both options. It is important to remember that the prices of calls and puts — and therefore the prices of straddles — contain the consensus opinion of options market participants as to how much the stock price will move prior to expiration. The same logic applies to options breakeven option strategy before earnings reports and other such announcements. Dates of announcements of important information are generally publicized in advanced and well-known in the marketplace.

Break Even: This strategy breaks even if, at expiration, the stock price is either above the Call strike price or below the Put strike price by the amount of premium paid.