Pay-Off Diagrams: Strategies for Option Trading
Options combine into almost any payoff shape. The useful way to organise them is by the view each expresses, since every strategy is a statement about direction, volatility, or both.
The four single-option positions
Long call: . Bullish, limited loss, unlimited upside.
Short call: bearish or neutral, capped gain at the premium, unbounded loss.
Long put: bearish, limited loss, large gain if the underlying collapses.
Short put: bullish or neutral, capped gain, large loss on a fall.
Note the pattern: buyers have limited loss and unlimited (or large) gain; sellers have the reverse. Sellers are compensated for that asymmetry by receiving the premium, and they win more often while losing more when they lose.
Directional with capped risk: spreads
Bull call spread: buy a call at , sell one at . Bullish, cheaper than the outright call because the sold call funds part of it, with the upside capped above .
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