OPT ION S STR ATEGY QUICK GUIDE

OPTIONS STRATEGY
QUICK GUIDE

Trading options is a way for investors to take advantage of nearly

any market condition. The strategies in this guide will let you trade,
generate income, and limit risk whether you have a bullish or bearish

outlook. There are strategies for beginning and experienced traders,

with clear explanations, charts, minimum and maximum profit
potentials, and guides to the market outlook each strategy might

be most appropriate for. [Link]/options

 Trading options is one way to help you reach a variety of investing goals. You could be seeking income, targeting
a specific buy or sell price, or hedging (protecting) positions you already own.
A QUICK GUIDE TO
It’s important to view options trading in perspective. Most options strategies are not get-rich-quick strategies.
TRADING OPTIONS They are better viewed as flexible investments that can enhance or protect your portfolio in rising, falling, and
neutral markets.

This guide introduces some of the most popular options strategies for every level of options trading experience,
and for every market outlook. Note: You must complete an Options Agreement before you can trade options
at Fidelity.

ANATOMY OF AN OPTIONS TRADE

BUY to Open 1 XYZ DEC 50 CALL @ 2.30

Order type OPEN Number Ticker Expiration Strike price Type of Price per
(Create a of contracts symbol month (third contract share of
new) or being of the Friday is contract
CLOSE purchased underlying the typical
(Remove an stock expiration
existing) day)
position

Important note: Trading options can involve significant risk and may not be suitable for all investors. It’s
important to understand risks associated with trading options before you include them in your investment
portfolio. Also, you do not have to hold your positions to expiration. You can exit a position for a profit or a
loss before expiration.

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 GLOSSARY

Put: An option contract that gives the buyer the right currently exists or you are adding to an existing
HOW TO SPEAK to sell the underlying security at a specified price position. A buy or sell to “Close” implies that you are
for a certain, fixed period of time. The seller has an removing or closing out an existing position.
OPTIONS obligation to buy the underlying security at a specified
price for a certain, fixed period of time. Ratio spread: A multi-leg option trade of either all
calls or all puts whereby the number of long options
Call: An option contract that gives the buyer the right to short options is something other than 1:1. Typically,
to buy the underlying security at a specified price to manage risk, the number of short options is lower
for a certain, fixed period of time. The seller has an than the number of long options (i.e., 1 short call:
obligation to sell the underlying security at a specified 2 long calls).
price for a certain, fixed period of time.
Long position: A position wherein an investor is a net
In the money: A call option is “in the money” if holder in a particular options series.
the strike price is less than the market price of the
underlying security. A put option is in the money if Short position: A position wherein the investor is a
the strike price is greater than the market price of net seller (writer) of a particular options series.
the underlying security.
Strike price or exercise price: The stated price per
Out of the money: A call option is “out of the money” share for which the underlying security may be
if the strike price is greater than the market price of purchased (in the case of a call) or sold (in the case
the underlying security. A put option is out of the of a put) by the option holder upon exercise of the
money if the strike price is less than the market price option contract.
of the underlying security.
Synthetic position: A strategy involving two or more
Premium: The price a put or call buyer must pay to a instruments that has the same risk/reward profile as
put or call seller (writer) for an option contract. Market a strategy involving only one instrument.
supply and demand forces determine the premium.
Time decay or erosion: A term used to describe how
Break-even point (BEP): The stock price(s) at which the time value of an option can “decay” or reduce
an option strategy results in neither a profit nor loss. with the passage of time.

Open/Close: A buy or sell to “Open” an option trade Volatility: A measure of the fluctuation in the market
represents the creation of a new position in your price of the underlying security. Mathematically, volatility
account. It implies that no position in this option is the annualized standard deviation of returns.

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 MARKET STRATEGIES IN THIS GUIDE

►
NEUTRAL BEAR BULL
S TR ATEGIES S TR ATEGIES S TR ATEGIES

• Beginner: Covered Call • Intermediate: Bear Call Spread • Beginner: Long Call

• Intermediate: Short Put—Cash Secured • Intermediate: Bear Put Spread • Beginner: Collar

• Advanced: Long Diagonal Spread • Intermediate: Bull Call Spread

Click for more
with Calls
• Intermediate: Bull Put Spread
• Advanced: Long Diagonal Spread
with Puts Click for more

• Advanced: Short Iron Condor Spread

Click for more

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 $1,000

$800
Example of COVERED CALL
COVERED CALL (long stock + short call)
$600
Covered Call
$400
(long stock + short call) Buy 100 shares XYZ stock at 98.00 $200
Long Stocks

Sell to Open 1 XYZ 100 call at 3.50 $0

($200)

($400)
Market outlook

►
($600)
Neutral to Slightly Bullish ($800)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50

Explanation
A covered call produces a slight hedge on the A covered call position is created by buying (or owning) stock and selling to open call options on a share-for-
stock and allows the investor to earn premium share basis. In the example, 100 shares are purchased (or owned) and one call is sold to open. In return for the
income in return for temporarily forfeiting call premium received, which provides income in sideways markets and limited protection in declining markets,
upside potential in the stock’s price. That the investor is giving up profit potential above the strike price of the call. The call premium increases income in
being said, this strategy is for those who are neutral markets, but the seller of a call assumes the obligation of selling the stock at the strike price at any time
neutral to slightly bullish. It is not a strategy until the expiration date. In a covered call position, the risk of loss is on the downside. The stock position has
for those who are bearish or very bullish. substantial risk, because its price can decline sharply.

Potential goals $1,000

$800
The covered call strategy is versatile. There
$600
are typically three different reasons why an
investor might choose this strategy. $400

$200
Income-oriented investors use covered $0
calls with the goal of enhancing cash
($200)
returns. In return for the call premium
($400)
received, which increases income in
($600)
neutral markets, the investor accepts a Limit on Upside Potential
limit on upside profit potential. Whether ($800)

the shares are purchased at the same

time a covered call is sold or purchased
previously, the investor should believe that the stock price will trade in a neutral-to-bullish range during the life of
the call. If the call expires worthless, then a decision has to be made whether (a) to sell another call, (b) to continue
holding the stock without selling another call, or (c) to sell the stock and invest the funds elsewhere. If the stock
price rises above the strike price of the call, then a decision has to be made whether (a) to let the stock be called
away, or (b) to buy the call and close out the obligation. Note that the call price may increase when the stock
price rises, and buying back the call can result in a loss. If the stock price declines, then a decision has to be made
whether (a) to hold the stock and risk further declines or (b) to close the covered call position, possibly at a loss.

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 COVERED CALL (Continued)

$1,000

$800 Investors who have a target selling price for a stock can sell a covered call hoping that the stock
$600
will be called away, thus achieving the target selling price. The “effective selling price” of a
covered call equals the strike price of the call plus the premium received. (See graph at top left.)
$400
In the example at left in which a 100-strike call is sold for 3.50 per share, the effective selling
$200
price is $103.50 (100.00 + 3.50) if the call is assigned. If the stock price rises above the strike
$0
price and the call is assigned, then the target selling price is achieved. If the stock price trades
($200)
Effective Selling Price sideways or down, then the call expires and the call premium is kept as income. In this outcome,
($400) while the investor did not sell the stock as hoped, the investor benefited from the call premium
($600) received. (See graph on middle left.)
($800)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50 Some investors sell covered calls to get a limited amount of downside protection when they expect
a stock to decline in price. A covered call provides only limited downside protection, because the
stock price can decline much more than the call premium. (See graph on bottom left.)
$1,400
$1,200 Original Long Stock Purchase P&L
New P&L If Call Expires
$1,000 Maximum profit
If the sell/strike price is not reached, the investor
$800 still benefits from the premium received. A covered call writer forgoes participation in any increase in the stock price above the call
$600
exercise price. Potential profit is limited to the call premium received plus strike price minus
$400
stock price less commissions. In the example above, the call premium is 3.50 per share, and
$200
$0
strike price minus stock price equals 100.00 – 98.00 = 2.00 per share. The maximum profit,
($200) Original Break-even Point
therefore, is 5.50 per share less commissions. This maximum profit is realized if the call is
($400) assigned and the stock is sold. Calls are generally assigned at expiration when the stock price is
Newer Break-even Point
($600) above the strike price. However, there is a possibility of early assignment.
($800)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50
Maximum risk
Risk is substantial if the stock price declines. The writer of a covered call has the full risk of stock
$1,000
ownership if the stock price declines below the break-even point.
$800

$600
Covered Call
Break-even stock price at expiration
$400
Long Stocks Stock price minus call premium received
$200
In this example: 98.00 − 3.50 = 94.50
$0

($200)
Appropriate market forecast
($400)
Limited Downside Protection The covered call strategy requires a neutral-to-bullish forecast. Writers of covered calls typically
($600)
Due to Lower Break-even Point forecast that the stock price will not fall below the break-even point before expiration.
($800)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50

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 $400

$300
Example of SHORT PUT —
SHORT PUT — CASH SECURED
$200

$100
CASH SECURED Sell to Open 1 XYZ 100 Put at 3.00 $0
per share ($300 less commissions) ($100)

Hold cash of $97.00 per share ($200)

($9,700 for 100 shares) ($300)

Market outlook

►
($400)
Neutral to bullish ($500)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50

Goal
To buy stock below the current price, or to If the stock price is below the strike price at expiration, then the put will be assigned. As a result, the
earn a reasonable return on the cash deposit investor will buy the shares and pay for them with the cash held in the money market account, plus the
without taking risk greater than owning stock. option premium. If the investor still wants to own the stock, then the investor need do nothing. However,
if the investor no longer wants to own the shares, then the stock must be sold. Alternatively, the investor
Explanation could close the obligation to buy shares by buying the put to close in the market place prior to expiration
and before an assignment notice is received.
Investors who sell cash-secured puts generally
are willing to buy the underlying shares of If the stock price is above the strike price of the put at expiration, then the put expires worthless and the
stock. Rather than buy the shares at the premium is kept as income. The investor must then decide whether to buy the stock at the current price, sell
current price, however, they hope the put will another put, or invest the cash elsewhere.
be assigned and the shares will be purchased
at a lower price.

In return for receiving a premium, the seller

of a put assumes the obligation to buy the
underlying stock at the strike price at any time
until the expiration date. Stock options in the
U.S. typically represent 100 shares. Therefore,
in the example above, the investor receives
$3.00 per share ($300 less commissions) and
assumes the obligation to buy 100 shares
of XYZ stock at $100 per share until the
expiration date (usually the third Friday of the
month). The net premium received can be
used to purchase the shares, so the investor
also deposits $97 per share ($9,700) cash in a
money market account, along with the $300
option premium, to pay for the 100 shares of
stock if the put is assigned.

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 SHORT PUT — CASH SECURED (Continued)

$400
Maximum potential profit if unassigned
$300
Maximum potential profit
$200 if unassigned limited to Limited to the net premium received.
net premium received
$100

$0
Maximum potential profit if assigned
($100) The potential profit is unlimited, because the price of the underlying stock can rise infinitely.
($200)
Break-even at expiration Maximum potential risk
($300)

($400) Risk is substantial, because the stock price can fall to zero.
($500)
92.50 93.50 94.50 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50
Assignment
Obligation to purchase shares at strike price.
$10,000
$8,000
Maximum potential profit if assigned is unlimited Break-even stock price at expiration
$6,000
Strike price minus premium received
$4,000
In this example: 100.00 – 3.00 = 97.00
$2,000
$0
($2,000)
($4,000)
Break-even point
($6,000)
($8,000) Maximum potential loss
if assigned is substantial
($10,000)
7.00 19.00 31.00 43.00 55.00 67.00 79.00 91.00 103.00 115.00 127.00 139.00 151.00 163.00 175.00 187.00

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 $250
$200
Example of LONG DIAGONAL $150
LONG DIAGONAL SPREAD WITH CALLS $100
$50
Short Call Strike
SPREAD WITH CALLS Sell to Open 1 28-day XYZ 100 Call $0
($50)
at 3.35 ($100)
Buy to Open 1 56-day XYZ 95 Call ($150)
($200)
at (7.60)
Market outlook ($250)
Long Call Strike

►
($300)
Net Debit = (4.25)
Neutral or modestly bullish ($350)
($400)
($450)
Goal 85 90 95 100 105 110 115

To profit from neutral stock price action near

the strike price of the short call with limited A long diagonal spread with calls realizes its maximum profit if the stock price equals the strike price of the
risk on the downside and limited profit short call on the expiration date of the short call. The forecast, therefore, can either be “neutral” or “modestly
potential on the upside. bullish,” depending on the relationship of the stock price to the strike price of the short call when the position
is established.
To profit from a bullish stock price move to
the strike price of the short call with lower risk If the stock price is at or near the strike price of the short call when the position is established, then the forecast
than a simple long call, but also with limited must be for unchanged, or neutral, price action.
profit potential if the stock price rises beyond
the strike price of the short call. If the stock price is below the strike price of the short call when the position is established, then the forecast
must be for the stock price to rise to the strike price at expiration (modestly bullish).
Explanation
While one can imagine a scenario in which the stock price is above the strike price of the short call and a
A long diagonal spread with calls is created diagonal spread with calls would profit from bearish stock price action, it is most likely that another strategy
by buying one “longer-term” call with a lower would be a more profitable choice for a bearish forecast.
strike price and selling one “shorter-term”
call with a higher strike price. In the example Maximum potential profit
a two-month (56 days to expiration) 95 Call
The maximum profit is realized if the stock price is equal to the strike price of the short call on the expiration
is purchased and a one-month (28 days to
date of the short call. With the stock price at the strike price of the short call at expiration of the short call, the
expiration) 100 Call is sold. This strategy is
profit equals the price of the long call minus the net cost of the spread including commissions. This is the point
established for a net debit, and both the
of maximum profit because the long call has its maximum difference in price with the expiring short call. It is
profit potential and risk are limited. The
impossible to know for sure what the maximum profit potential is, because it depends of the price of long call,
maximum profit is realized if the stock price
and that price is subject to the level of volatility, which can change.
is equal to the strike price of the short call on
the expiration date of the short call, and the At expiration of the shorter-term call the position can be closed by selling to close the longer-term call.
maximum risk is realized if the stock price falls If the outlook is now bullish for the underlying at this time the longer-term call can remain open and
below the strike price of the long call. handled as a Long Call strategy. If the outlook is still neutral to modestly bullish another call can be sold
creating a Long Diagonal Spread, Vertical Spread, or Calendar Spread depending on the chosen strike
price and expiration.

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 LONG DIAGONAL SPREAD WITH CALLS (Continued)

Maximum potential risk

The maximum risk of a long diagonal spread with calls is equal to the net cost of the spread including
commissions. If the stock price falls sharply below the strike price of the long call, then the value of the
spread approaches zero; and the full amount paid for the spread is lost.

Assignment

While the long call in a long diagonal spread with calls has no risk of early assignment, the short call does
have such risk. Early assignment of stock options is generally related to dividends, and short calls that are
assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose
time value is less than the dividend have a high likelihood of being assigned.

If the short call is assigned, then 100 shares of stock are sold short and the long call remains open. If a short
stock position is not wanted, it can be closed in one of two ways. First, 100 shares can be purchased in the
market place. Second, the short 100-share position can be closed by exercising the long call. Remember,
however, that exercising a long call will forfeit the time value of that call. Therefore, it is generally preferable to
buy shares to close the short stock position and then sell to close the long call. This two-part action recovers
the time value of the long call. One caveat is commissions. Buying shares to cover the short stock position and
then selling the long call is only advantageous if the commissions are less than the time value of the long call.

Note, however, that whichever method is used (buying stock or exercising the long call), the date of the stock
purchase will be one day later than the date of the short sale. This difference will result in additional fees,
including interest charges and commissions. Assignment of a short call might also trigger a margin call if
there is not sufficient account equity to support the short stock position.

Break-even stock price at expiration

There is one break-even point, which is below the strike price of the short call. Conceptually, the break-even
point at expiration of the short call is the stock price at which the price of the long call equals the net cost
of the spread. It is impossible to know for sure what the break-even stock price will be, however, because it
depends of the price of the long call, which depends on the level of volatility.

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 $400

$300
Example of LONG DIAGONAL
LONG DIAGONAL SPREAD WITH PUTS $200
Short Put Strike

SPREAD WITH PUTS Sell to Open 1 28-day XYZ 100 Put

$100

$0
at 3.25
($100)
Buy to Open 1 56-day XYZ 105 Put
($200)
at (7.60) Long Put Strike
Market outlook

►
($300)
Net Cost = (4.35)
Neutral or modestly bearish
($400)

Goal
85 90 95 100 105 110 115

To profit from neutral stock price action near

the strike price of the short put with limited A long diagonal spread with puts realizes its maximum profit if the stock price equals the strike price of the
risk on the upside and limited profit potential short put on the expiration date of the short put. The forecast, therefore, can either be “neutral” or “modestly
on the downside. bearish,” depending on the relationship of the stock price to the strike price of the short put when the
position is established.
To profit from a bearish stock price move to
the strike price of the short put with lower risk If the stock price is at or near the strike price of the short put when the position is established, then the
than a simple long put, but also with limited forecast must be for unchanged, or neutral, price action.
profit potential if the stock price falls beyond
the strike price of the short put. If the stock price is above the strike price of the short put when the position is established, then the forecast
must be for the stock price to fall to the strike price at expiration (modestly bearish).
Explanation
While one can imagine a scenario in which the stock price is below the strike price of the short put and a
A long diagonal spread with puts is created diagonal spread with puts would profit from bullish stock price action, it is most likely that another strategy
by buying one “longer-term” put with a higher would be a more profitable choice for a bullish forecast.
strike price and selling one “shorter-term”
put with a lower strike price. In the example, Maximum potential profit
a two-month (56 days to expiration) 105 Put The maximum profit is realized if the stock price is equal to the strike price of the short put on the expiration
is purchased and a one-month (28 days to date of the short put. With the stock price at the strike price of the short put at expiration of the short put,
expiration) 100 Put is sold. This strategy is the profit equals the price of the long put minus the net cost of the spread including commissions. This is the
established for a net debit, and both the profit point of maximum profit because the long put has its maximum difference in price with the expiring short
potential and risk are limited. The maximum put. It is impossible to know for sure what the maximum profit potential is, because it depends of the price of
long put, and that price is subject to the level of volatility, which can change.
profit is realized if the stock price is equal to the
strike price of the short put on the expiration At expiration of the shorter-term put the position can be closed by selling to close the longer-term put.
date of the short put, and the maximum risk is If the outlook is now bearish for the underlying at this time the longer-term put can remain open and
realized if the stock price rises above the strike handled as a Long Put strategy. If the outlook is still neutral to modestly bearish another put can be
price of the long put. sold creating a Long Diagonal Spread, Vertical Spread, or Calendar Spread depending on the chosen
strike price and expiration.

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 LONG DIAGONAL SPREAD WITH PUTS (Continued)

Maximum potential risk

The maximum risk of a long diagonal spread with puts is equal to the net cost of the spread including
commissions. If the stock price rises sharply above the strike price of the long put, then the value of the
spread approaches zero; and the full amount paid for the spread is lost.

Assignment
While the long put in a long diagonal spread with puts has no risk of early assignment, the short put
does have such risk. Early assignment of stock options is generally related to dividends, and short
puts that are assigned early are generally assigned on the ex-dividend date. In-the-money puts with
little or no time value remaining in the options’ premium have a higher likelihood of being assigned.

If the short put is assigned, then 100 shares of stock are purchased and the long put remains open.
If a long stock position is not wanted, it can be closed in one of two ways. First, 100 shares can be
sold in the marketplace. Second, the long 100-share position can be closed by exercising the long
put. Remember, however, that exercising a long put will forfeit the time value of that put. Therefore,
it is generally preferable to sell shares to close the long stock position and then sell to close the long
put. This two-part action recovers the time value of the long put. One caveat is commissions. Selling
shares to close the long stock position and then selling the long put is only advantageous if the
commissions are less than the time value of the long put.
Note, however, that whichever method is used, selling stock or exercising the long put, the date
of the stock sale will be one day later than the date of the purchase. This difference will result in
additional fees, including interest charges and commissions. Assignment of a short put might also
trigger a margin call if there is not sufficient account equity to support the long stock position.

Break-even stock price at expiration

There is one break-even point, which is above the strike price of the short put. Conceptually, the
break-even point at expiration of the short put is the stock price at which the price of the long put
equals the net cost of the spread. It is impossible to know for sure what the break-even stock price will
be, however, because it depends of the price of the long put which depends on the level of volatility.

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 $400
Short Put Strike Short Call Strike
SHORT IRON CONDOR Example of SHORT IRON $300

CONDOR SPREAD (long put +

SPREAD
$200
short put + short call + long call)
$100
(long put + short put + short call + long call) Buy to Open 1 XYZ 95 Put at (0.70)
$0
Sell to Open 1 XYZ 100 Put at 2.10
($100)
Sell to Open 1 XYZ 105 Call at 2.35 Long Put Strike Long Call Strike
Market outlook ($200)

►
Buy to Open 1 XYZ 110 Call at (0.95)
Neutral, modestly bullish, ($300)
or modestly bearish Net Credit = 2.80 90.00 92.00 94.00 96.00 98.00 100.00 102.00 104.00 106.00 108.00 110.00 112.00 114.00 116.00 118.00 120.00

Goal
To profit from neutral stock price action
A short iron condor spread realizes its maximum profit if the stock price is equal to or between the strike
between the strike price of the short options
prices of the short options on the expiration date. The forecast, therefore, can either be “neutral,” “modestly
with limited risk.
bullish” or “modestly bearish,” depending on the relationship of the stock price to range of maximum profit
when the position is established.
Explanation

A short iron condor spread is a four-part strategy If the stock price is in the range of maximum profit when the position is established, then the forecast must be
for unchanged, or neutral, price action.
consisting of a bull put spread and a bear call
spread in which the strike price of the short put If the stock price is below the range of maximum profit when the position is established, then the forecast
is lower than the strike price of the short call. All must be for the stock price to rise into the range of maximum profit at expiration (modestly bullish).
options have the same expiration date.
If the stock price is above the range of maximum profit when the position is established, then the forecast
In the example, one 95 Put is purchased, one must be for the stock price to fall into the range of maximum profit at expiration (modestly bearish).
100 Put is sold, one 105 Call is sold and one
110 Call is purchased, so the four strike prices
are equidistant. However, it is normal for the
distance between the short call and short put
to be greater than the distance between the
long and short options of the same type. For
example, an 85–90 Bull Put Spread might be
combined with a 105–110 Bear Call Spread to
create a short iron condor in which the distance
between the strike prices of the short options is
15 points while the distance between the strike
prices of the bull and bear spreads are 5 points.
(continued on next page)

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 SHORT IRON CONDOR SPREAD (Continued)

Maximum potential profit $400

Maximum
potential profit
(continued from previous page) The maximum profit potential is $300 Short Put Short Call
Strike Strike
equal to the net credit received $200
A short iron condor spread is established less commissions, and this profit is
for a net credit, and both the potential profit realized if the stock price is equal to $100

and maximum risk are limited. The maximum or between the strike prices of the $0
profit is realized if the stock price is equal to or short options at expiration. In this Break-even
($100) Maximum Maximum
outcome, all options expire worthless points
between the strike prices of the short options potential potential
risk risk
on the expiration date. The maximum risk is and the net credit is kept as income. ($200) Long Put Long Call
Strike Strike
the difference between the prices of the bull ($300)
put spread (or the bear call spread) less the net Maximum potential risk 90.00 92.00 94.00 96.00 98.00 100.00 102.00 104.00 106.00 108.00 110.00 112.00 114.00 116.00 118.00 120.00

credit received. The maximum risk is realized if The maximum risk is equal to the
the stock price is above the highest strike price difference between the strike prices of the bull put spread (or the bear call spread) less the net credit
or below the lowest strike price at expiration. received. In the example above, the difference between the strike prices of the bull put spread (and
also the bear call spread) is 5.00, and the net credit received is 2.80, not including commissions. The
This is an advanced strategy because the maximum risk, therefore, is 2.20 less commissions.
profit potential is small in dollar terms and
There are two possible outcomes in which the maximum loss is realized. If the stock price is below the
because “costs” are high. Given that there are
lowest strike price at expiration, then the calls expire worthless, but both puts are in the money. With
four options and four strike prices, there are
both puts in the money, the bull put spread reaches its maximum value and maximum loss. Also, if the
multiple commissions in addition to four bid-
stock price is above the highest strike price at expiration, then the puts expire worthless, but both calls
ask spreads when opening the position and are in the money. Consequently, the bear call spread reaches it maximum value and maximum loss.
again when closing it. As a result, it is essential
to open and close the position at “good prices.” Assignment
It is also important to consider the per-contract
Stock options in the United States can be exercised on any business day, and holders of short stock
commission rate since commissions will impact
option positions have no control over when they will be required to fulfill the obligation. Therefore, the
the return on investment. risk of early assignment is a real risk that must be considered when entering into positions involving short
options.

Break-even stock price at expiration

There are two break-even points. The lower break-even point is the stock price equal to the strike price
of the short put minus the net credit received. The upper break-even point is the stock price equal to the
strike price of the short call plus the net credit received.

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 $300
Lower Strike Price
$200
Example of BEAR CALL
BEAR CALL SPREAD SPREAD (short call + long call) $100

(short call + long call) Sell to Open 1 XYZ 100 Call at 3.30 $0

Buy to Open 1 XYZ 105 Call at (1.50) ($100)

Net Credit = 1.80 ($200)

Market outlook Higher Strike Price

($300)

Bearish (neutral if the lower ($400)

strike is out of the money) 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00 117.00

Goal The bear call spread is a strategy that collects option premium and limits risk at the same time. It profits from
both time decay and falling stock prices. A bear call spread is the strategy of choice when the forecast is for
To profit from neutral to bearish price action
neutral to falling prices and there is a desire to limit risk.
in the underlying stock.
Maximum potential profit $300
Explanation
Potential profit is limited to the net $200
A bear call spread consists of one short call premium received less commissions, Maximum potential profit
$100 is net premium received
with a lower strike price and one long call with and this profit is realized if the stock less commissions
a higher strike price. Both calls have the same price is at or below the strike price of the $0

underlying stock and the same expiration date. short call (lower strike) at expiration and ($100) Maximum potential risk is
difference between strikes
A bear call spread is established for a net credit both calls expire worthless. minus net credit received
($200)
(or net amount received) and profits from a Break-even point including commissions
declining stock price, time erosion, or both. Maximum potential risk ($300)

Potential profit is limited to the net premium The maximum risk is equal to the ($400)
87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00 117.00
received less commissions and potential difference between the strike prices
maximum loss is limited if the stock price rises minus the net credit received including
above the strike price of the long call. commissions. In the example above, the difference between the strike prices is 5.00 (105.00 – 100.00 = 5.00),
and the net credit is 1.80 (3.30 – 1.50 = 1.80). The maximum risk, therefore, is 3.20 (5.00 – 1.80 = 3.20) per share
less commissions. This maximum risk is realized if the stock price is at or above the strike price of the long call
(higher strike) at expiration.

Assignment
Short calls are generally assigned at expiration when the stock price is above the strike price. However, there
is a possibility of early assignment.

Break-even stock price at expiration

Strike price of short call (lower strike) plus net premium received. In this example: 100.00 + 1.80 = 101.80

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 $400
Lower Strike Price
$300
Example of BEAR PUT SPREAD
BEAR PUT SPREAD (long put + short put) $200

(long put + short put) Buy to Open 1 XYZ 100 Put at (3.20) $100

Sell to Open 1 XYZ 95 Put at 1.30 $0

Net Cost = (1.90) ($100)

Higher Strike Price
Market outlook ($200)

Bearish ($300)
82.00 84.00 86.00 88.00 90.00 92.00 94.00 96.00 98.00 100.00 102.00 104.00 106.00 108.00 110.00 112.00

Goal
Bear put spreads have limited profit potential, but they cost less than buying only the higher strike put. Since
To profit from a gradual price decline in the
most stock price changes are “small,” bear put spreads, in theory, have a greater chance of making a larger
underlying stock.
percentage profit than buying only the higher strike put. In practice, however, choosing a bear put spread
instead of buying only the higher strike put is a subjective decision. Bear put spreads benefit from two factors,
Explanation
a falling stock price and time decay of the short option. A bear put spread is the strategy of choice when the
A bear put spread consists of one long put forecast is for a gradual price decline to the strike price of the short put.
with a higher strike price and one short
Maximum potential profit $400
put with a lower strike price. Both puts
have the same underlying stock and the Potential profit is limited to the $300
Maximum potential profit
same expiration date. A bear put spread difference between the strike prices $200 is difference between
is established for a net debit (or net cost) minus the net cost of the spread strikes minus the net cost
$100 including commissions
and profits as the underlying stock declines including commissions. In the example
sufficiently in price. Profit is limited if the stock above, the difference between the strike $0
prices is 5.00 (100.00 – 95.00 = 5.00), Maximum potential
price falls below the strike price of the short ($100) risk is the net cost
put (lower strike), and potential loss is limited and the net cost of the spread is 1.90 including commissions
Break-even point
(3.20 – 1.30 = 1.90). The maximum profit, ($200)
if the stock price rises above the strike price of
therefore, is 3.10 (5.00 – 1.90 = 3.10) per
the long put (higher strike). ($300)
share less commissions. This maximum 82.00 84.00 86.00 88.00 90.00 92.00 94.00 96.00 98.00 100.00 102.00 104.00 106.00 108.00 110.00 112.00

profit is realized if the stock price is at or

below the strike price of the short put
(lower strike) at expiration.

Maximum potential risk

The maximum risk is equal to the cost of the spread including commissions. A loss of this amount is realized
if the position is held to expiration and both puts expire worthless because the stock price at expiration is
above the strike price of the long put (higher strike).

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 BEAR PUT SPREAD (Continued)

Assignment
Short puts are generally assigned at expiration when the stock price is below the strike price.
However, there is a possibility of early assignment.

Break-even stock price at expiration

Higher strike price less net debit.
In this example: 100 – 1.90 = 98.10

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 $1,200

$1,000
Example of LONG CALL
LONG CALL $800
Buy to Open 1 XYZ 100 Call at 4.00 $600

per share $400

($400 plus commissions) $2000

$0

($200)
Market outlook
($400)
Bullish ($600)
85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00

Goal
To buy stock on or before the expiration date Buying a call to limit the risk of buying stock requires a two-part forecast. First, the forecast must be bullish, which
with limited downside risk, or participate in an is the reason for wanting to buy the stock. Second, there must also be a reason for the desire to limit risk. Perhaps
upside market move. there is a pending earnings report that could send the stock price sharply in either direction. In this case, buying
a call gives the investor control over 100 shares at the current price if the report is positive, and it limits the risk
Explanation of a negative report. Alternatively, an investor could believe that a downward trending stock is about to reverse
upward. In this case, buying a call limits the risk of the judgment about the change in trend being wrong.
In return for paying a premium, the buyer
of a call gets the right (not the obligation) to
Potential Goals $6,000
buy the underlying stock at the strike price $4,000
at any time until the expiration date. Stock Buying a call allows the holder to limit Long Call has limited risk
$2,000
the short-term risk of buying stock during the life of the call
options in the U.S. typically represent 100
and has two advantages and one $0
shares. Therefore, in the example provided,
disadvantage. The first advantage is ($2,000)
the investor pays $4.00 per share ($400 plus
that risk is limited during the life of the ($4,000)
commissions) for the right to buy 100 shares call. Second, buying a call to limit risk ($6,000)
of XYZ stock at $100 per share until the is different than using a stop-loss order Stock has substantial risk
($8,000)
expiration date (usually the third Friday of the during the life of the call
on the stock. Whereas a stop-loss order ($10,000)
month). In the event that a long call ends up is price sensitive and can be triggered
($12,000)
expiring in the money, the holder will need to by a sharp fluctuation in the stock price, 0 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00

have cash in the account to cover the purchase a long call is limited by time, not stock
of 100 shares of XYZ at the strike price. price. The disadvantage of buying a call
is that the total cost of the stock is increased by the premium paid.

If the stock price is above the strike price of the call at expiration and if the investor still wants to buy the stock,
then the call is exercised and stock is purchased at the strike price and paid for with the cash held in the money
market account.

If the stock price is below the strike price at expiration, then the call expires and the premium paid plus
commissions are lost. The investor must then decide whether to buy the stock at the current price or to invest
the cash elsewhere.

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 LONG CALL (Continued)

$1,200
Maximum potential profit
$1,000
The potential profit is unlimited, because the price of the underlying stock can rise infinitely. If the
$800
Maximum potential profit is unlimited stock moves higher ahead of expiration, boosting the value of the long call, the call can be sold for
$600
a profit.
$400

$2000 Maximum potential risk

$0
Maximum potential risk is limited to Limited to the premium paid plus commissions, and a loss of this amount is realized if the call
($200)
premium paid plus commission is held until expiration and expires worthless.
Break-even point
($400)

($600) Break-even stock price at expiration

85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00

Strike price plus premium paid

In this example: 100.00 + 4.00 = 104.00

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 $2,000

$1,500
Example of COLLAR
COLLAR (long stock + long put +short call) $1,000 Call Strike Price
$500
(long stock + long put + short call) Buy 100 shares XYZ stock at ($100.00)
$0
Sell to Open 1 XYZ 105 Call at 1.80
($500)
Buy to Open 1 XYZ 95 Put at (1.60) Put Strike Price
($1,000)
Market outlook Net Debit = 99.80
($1,500)
Bullish, but concerned ($2,000)
85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00

Goal
To limit risk at a “low cost” and to have some The appropriate forecast for a collar depends on the timing of the stock purchase relative to the opening of
upside profit potential at the same time when the options positions and on the investor’s willingness to sell the stock.
first acquiring shares of stock.
If a collar position is created when first acquiring shares, then a two-part forecast is required. First, the forecast
To protect a previously-purchased stock for must be neutral to bullish, which is the reason for buying the stock. Second, there must also be a reason for
a “low cost” and to leave some upside profit the desire to limit risk. Perhaps there is a concern that the overall market might begin a decline and cause
potential when the short-term forecast is this stock to fall in tandem. In this case,
bearish but the long-term forecast is bullish. the collar – for a “low” net cost – gives $2,000

the investor both limited risk and some $1,500

Explanation limited upside profit. $1,000
Maximum potential profit
if short call is assigned
A collar position is created by buying (or Alternatively, if a collar is created to $500
owning) stock and by simultaneously buying protect an existing stock holding, then $0
protective puts and selling covered calls on there are two potential scenarios. ($500)
a share-for-share basis. Usually, the call and First, the short-term forecast could be Maximum potential loss Break-even point
put are out of the money. In the example, bearish while the long-term forecast is
($1,000) if long put is exercised
100 shares are purchased (or owned), one bullish. In this case, for a “low” net cost, ($1,500)
out-of-the-money put is purchased and one the investor is limiting downside risk if ($2,000)
out-of-the-money call is sold. If the stock the anticipated price decline occurs.
85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00

price declines, the purchased put provides Second, the investor could be near the
protection below the strike price until the “target selling price” for the stock. In this case, the collar would leave intact the possibility of a price rise to the
expiration date. If the stock price rises, profit target selling price and, at the same time, limit downside risk if the market were to reverse unexpectedly.
potential is limited to the strike price of the
covered call less commissions.
Maximum potential profit
Potential profit is limited because of the covered call. In the example above, profit potential is limited to 5.20,
which is calculated as follows: the strike price of the call plus 20 cents minus the stock price and commissions.
20 cents is the net credit received for selling the call at 1.80 and buying the put at 1.60.

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 COLLAR (Continued)

If selling the call and buying the put were transacted for a net debit (or net cost), then the maximum
profit would be the strike price of the call minus the stock price and the net debit and commissions.

The maximum profit is achieved at expiration if the stock price is at or above the strike price of the
covered call. Short calls are generally assigned at expiration when the stock price is above the strike
price. However, there is a possibility of early assignment.

Maximum potential risk

Potential risk is limited because of the protective put. In the example above, risk is limited to 4.80,
which is calculated as follows: the stock price minus 20 cents minus the strike price of the put and
commissions. 20 cents is the net credit received for selling the call at 1.80 and buying the put at 1.60.

If selling the call and buying the put were transacted for a net debit (or net cost), then the maximum
loss would be the stock price minus the strike price of the put, plus the net debit and commissions.

The maximum risk is realized if the stock price is at or below the strike price of the put at expiration.
If such a stock price decline occurs, then the put can be exercised or sold.

Assignment
Possibility of early assignment.

Break-even stock price at expiration

Stock price plus put premium minus call premium.
In this example: 100.00 + 1.60 – 1.80 = 99.80

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 $400

Example of BULL CALL SPREAD $300

BULL CALL SPREAD (long call + short call) $200

Higher Strike Price

(long call + short call) Buy to Open 1 XYZ 100 Call at (3.30) $100

Sell to Open 1 XYZ 105 Call at 1.50 $0

Net Cost = (1.80) ( $100)

Market outlook ( $200)

Lower Strike Price
Bullish ($300)
95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50 108.50 109.50 110.50

Goal
To profit from a price rise in the Bull call spreads have limited profit potential, but they cost less than buying only the lower strike call. Since
underlying stock. most stock price changes are “small,” bull call spreads, in theory, have a greater chance of making a larger
percentage profit than buying only the lower strike call. In practice, however, choosing a bull call spread
Explanation instead of buying only the lower strike call is a subjective decision. Bull call spreads benefit from two factors,
a rising stock price and time decay of the short option. A bull call spread is the strategy of choice when the
A bull call spread consists of one long call with
forecast is for a gradual price rise to the strike price of the short call.
a lower strike price and one short call with a
higher strike price. Both calls have the same
Maximum potential profit $400
underlying stock and the same expiration date.
A bull call spread is established for a net debit Potential profit is limited to the $300
Maximum potential profit
(or net cost) and profits as the underlying stock difference between the strike prices $200
is difference between
minus the net cost of the spread strikes minus the net cost
rises sufficiently in price. Profit is limited if the
including commissions
$100
stock price rises above the strike price of the including commissions. In the example
short call, and potential loss is limited if the above, the difference between the strike $0
Maximum potential
stock price falls below the strike price of the prices is 5.00 (105.00 – 100.00 = 5.00),
($100) risk is the net cost
long call (lower strike). and the net cost of the spread is 1.80 including commissions
Break-even point
(3.30 – 1.50 = 1.80). The maximum profit, ($200)
therefore, is 3.20 (5.00 – 1.80 = 3.20) per
($300)
share less commissions. This maximum 95.50 96.50 97.50 98.50 99.50 100.50 101.50 102.50 103.50 104.50 105.50 106.50 107.50 108.50 109.50 110.50

profit is realized if the stock price is at

or above the strike price of the short call
at expiration.

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 BULL CALL SPREAD (Continued)

Maximum potential risk

The maximum risk is equal to the cost of the spread including commissions. A loss of this amount
is realized if the position is held to expiration and both calls expire worthless. Both calls will expire
worthless if the stock price at expiration is below the strike price of the long call (lower strike).

Assignment
Short calls are generally assigned at expiration when the stock price is above the strike price.
However, there is a possibility of early assignment.

Break-even stock price at expiration

Strike price of long call (lower strike) plus net premium paid
In this example: 100.00 + 1.80 = 101.80

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 $300

Example of BULL PUT SPREAD $200

BULL PUT SPREAD (long put + short put) $100

Higher Strike Price

(long put + short put) Sell to Open 1 XYZ 100 Put at 3.20 $0

Buy to Open 1 XYZ 95 Put at (1.30) ($100)

Net Credit = 1.90 ($200)

Lower Strike Price
Market outlook ($300)

Bullish (neutral if the higher ($400)

strike is out of the money) 83.00 85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00

Goal The bull put spreads is a strategy that collects option premium and limits risk at the same time. They profit
To profit from neutral to bullish price action in from both time decay and rising stock prices. A bull put spread is the strategy of choice when the forecast is
for neutral to rising prices and there is a desire to limit risk.
the underlying stock.

Maximum potential profit $300

Explanation
Potential profit is limited to the net premium $200
A bull put spread consists of one short put Maximum potential profit
received less commissions, and this profit is
with a higher strike price, and one long $100 is net premium received
realized if the stock price is at or above the less commissions
put with a lower strike price on the same $0
strike price of the short put (higher strike) at
underlying stock and with the same expiration
expiration and both puts expire worthless. ($100) Maximum potential risk is
date. A bull put spread is established for a net difference between strikes
credit (or net amount received) and profits ($200) minus net credit received Break-even point
Maximum potential risk including commissions
from a rising stock price, time erosion, or both.
($300)
Potential profit is limited to the net premium The maximum risk is equal to the difference
received less commissions and potential loss between the strike prices minus the net ($400)
83.00 85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00
is limited if the stock price falls below the credit received including commissions. In
strike price of the long put. the example above, the difference between
the strike prices is 5.00 (100.00 – 95.00 = 5.00), and the net credit is 1.90 (3.20 – 1.30 = 1.90). The maximum risk,
therefore, is 3.10 (5.00 – 1.90 = 3.10) per share less commissions. This maximum risk is realized if the stock price
is at or below the strike price of the long put (lower strike) at expiration.

Assignment
Short puts are generally assigned at expiration when the stock price is below the strike price. However, there
is a possibility of early assignment.

Break-even stock price at expiration

Strike price of short put (higher strike) minus net premium received.
In this example: 100.00 – 1.90 = 98.10

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 $1,200

$1,000
Example of PROTECTIVE PUT
PROTECTIVE PUT (long put + long stock) $800

$600
(long put + long stock) Buy 100 shares XYZ stock at 100.00
$400
Buy to Open 1 XYZ 100 Put at 3.25
$200
Net Debit is 103.25
$0
Market outlook
($200)
Bullish but concerned ($400)
85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00

Explanation
A protective put position is created by buying The protective put strategy requires a two-part forecast. First, the forecast must be bullish, which is the reason
(or owning) stock and buying put options on for buying (or holding) the stock. Second, there must also be a reason for the desire to limit risk. Perhaps there
a share-for-share basis. In the example, 100 is a pending earnings report that could send the stock price sharply in either direction. In this case, buying a put
shares are purchased (or owned) and one put to protect a stock position allows the investor to benefit if the report is positive, and it limits the risk of a negative
is purchased. If the stock price declines, the report. Alternatively, an investor could believe that a downward trending stock is about to reverse upward. In this
purchased put provides protection below the case, buying a put when acquiring shares limits risk if the predicted change in trend does not occur.
strike price. The protection, however, lasts
only until the expiration date. If the stock Potential Goals
price rises, the investor participates fully, less
The protective put limits risk when first acquiring shares of stock. This is also known as a “married put.” It is
the cost of the put.
also used to protect a previously purchased stock when the short-term forecast is bearish but the long-term
forecast is bullish.

Buying a put to limit the risk of stock $6,000

ownership has two advantages and one $4,000

Protective Put has limited risk
disadvantage. The first advantage is $2,000
during the life of the put
that risk is limited during the life of the $0
put. Second, buying a put to limit risk ($2,000)
is different than using a stop-loss order
($4,000)
on the stock. Whereas a stop-loss order
($6,000)
is price sensitive and can be triggered Stock without protective put
($8.000)
by a sharp fluctuation in the stock price, has substantial risk
($10,000)
a long put is limited by time, not stock
price. The disadvantage of buying ($12,000)
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00
a put is that the total cost of the stock
is increased by the cost of the put.

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 PROTECTIVE PUT (Continued)

$2,000
If the stock price is below the strike price at expiration, then a decision has to be made whether
$1,500 to (a) sell the put to close and keep the stock position unprotected, (b) sell the put to close and
Maximum potential profit is unlimited
$1,000 buy another put to open, thus extending the protection, or (c) exercise the put and sell the stock
$500
and invest the funds elsewhere. There is no “right” or “wrong” choice; every investor must make a
personal decision based on the forecast and the desire to hold the stock.
$0

($500) Maximum potential profit

Maximum potential risk is limited Break-even point
($1,000)
Potential profit is unlimited, because the underlying stock price can rise indefinitely. However,
($1,500) the profit is reduced by the cost of the put plus commissions.
($2,000)
85.00 87.00 89.00 91.00 93.00 95.00 97.00 99.00 101.00 103.00 105.00 107.00 109.00 111.00 113.00 115.00
Maximum potential risk
Risk is limited to an amount equal to stock price minus strike price plus put price plus commissions.
In the example above, the put price is 3.25 per share, and stock price minus strike price equals
0.00 per share (100.00 – 100.00). The maximum risk, therefore, is 3.25 per share plus commissions.
This maximum risk is realized if the stock price is at or below the strike price of the put at expiration.
If such a stock price decline occurs, then the put can be exercised or sold.

Break-even stock price at expiration

Stock price plus put price
In this example: 100.00 + 3.25 = 103.25

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 This guide covers some of the many options strategies available to

you. Learn more about options trading and the tools, articles, courses,

videos, and webinars available to you at [Link]/options.

When you have questions, talk with experienced options trading

specialists at 800.353.4881.

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before
trading options, please read Characteristics and Risks of Standardized Options . Supporting documentation for any claims, if applicable, will
be furnished upon request.

There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles,
and collars, as compared with a single option trade.

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