Glossary

Break-Even Point (BEP): The stock price(s) at which an option
strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy
the underlying security at a specified price for a certain, fixed
period of time.
In-the-money: A call option is in-the-money if the strike price is
less than the market price of the underlying security. A put option
is in-the-money if the strike price is greater than the market
price of the underlying security.
Long position: A position wherein an investor is a net holder in a
particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike
price is greater than the market price of the underlying security.
A put option is out-of-the-money if the strike price is less than
the market price of the underlying security.
Premium: The price a put or call buyer must pay to a put or call
seller (writer) for an option contract. Market supply and demand
forces determine the premium.
Put: An option contract that gives the holder the right to sell
the underlying security at a specified price for a certain, fixed
period of time.
Short position: A position wherein the investor is a net writer
(seller) of a particular options series.
Strike price or exercise price: The stated price per share for which
the underlying security may be purchased (in the case of a call)
or sold (in the case of a put) by the option holder upon exercise of
the option contract.
Synthetic position: A strategy involving two or more instruments
that has the same risk/reward profile as a strategy involving only
one instrument.
Time decay or erosion: A term used to describe how the time value
of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the
underlying security. Mathematically, volatility is the annualized
standard deviation of returns.

neutral strategy LONG CALL BUTTERFLY

Example: Sell 2 calls;
buy 1 call at next lower strike;
buy 1 call at next higher strike
(the strikes are equidistant)
Market Outlook: Neutral around
strike
Risk: Limited
Reward: Limited
Increase in Volatility:
Typically hurts position
Time Erosion: Typically helps position
BEP: Two BEPs
1. Lower long call strike plus
net premium paid
2. Higher long call strike minus
net premium paid

neutral strategy RATIO SPREAD WITH CALLS

Example: Buy 1 call;
sell 2 calls at higher strike
Market Outlook: Neutral to slightly
bullish
Risk: Unlimited
Reward: Limited
Increase in Volatility: Typically hurts
position
Time Erosion: Typically helps position
BEP: Two BEPs
1. Long call strike plus premium paid
2. Short call strike plus
[(the difference between the long
call strike and short call strike)
minus premium paid]

neutral strategy SHORT STRANGLE

Example: Sell 1 call;
sell 1 put at lower strike
Market Outlook: Neutral
Risk: Unlimited
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received
2. Put strike minus premium
received

neutral strategy LONG STRANGLE

Example: Buy 1 call;
buy 1 put at lower strike
Market Outlook: Large move
in either direction
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Two BEPs
1. Call strike plus premium paid
2. Put strike minus premium paid

neutral strategy LONG STRADDLE

Example: Buy 1 call;
buy 1 put at same strike
Market Outlook: Large move
in either direction
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Two BEPs
1. Call strike plus premium paid
2. Put strike minus premium paid

neutral strategy SHORT STRADDLE

Example: Sell 1 call;
sell 1 put at same strike
Market Outlook: Neutral
Risk: Unlimited
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received
2. Put strike minus premium
received

neutral strategy COLLAR

Example: Own stock, protect
by purchasing 1 put and selling
1 call with a higher strike
Market Outlook: Neutral
Risk: Limited
Reward: Limited
Increase in Volatility: Effect
varies, none in most cases
Time Erosion: Effect varies
BEP: In principle, breaks even
if, at expiration, the stock is
above/(below) its initial level by
the amount of the debit/(credit)

bear strategy BEAR SPLIT-STRIKE COMBO

Example: Buy 1 put;
sell 1 call at higher strike
Market Outlook: Bearish
Risk: Unlimited
Reward: Limited, but substantial
Increase in Volatility: Neutral
Time Erosion: Neutral
BEP: Two BEPs
1. Short call strike plus
premium received
2. If established at a debit, long
put strike minus premium paid

bear strategy PUT BACKSPREAD

Example: Sell 1 put;
buy 2 puts at lower strike
Market Outlook: Bearish
Risk: Limited
Reward: Limited, but substantial
Increase in Volatility: Typically
helps position
Time Erosion: Typically
hurts position
BEP: Two BEPs
1. Short put strike minus
premium received
2. Long put strike minus
[(difference between long put
strike and short put strike) minus
credit received]

bear strategy BEAR PUT SPREAD

Example: Sell 1 put;
buy 1 put at higher strike
Market Outlook: Bearish
Risk: Limited
Reward: Limited
Increase in Volatility:
Helps or hurts depending on
strikes chosen
Time Erosion: Helps or hurts
depending on strikes chosen
BEP: Long put strike minus
net premium paid

bear strategy LONG PUT

Example: Buy put
Market Outlook: Bearish
Risk: Limited
Reward: Limited, but substantial
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Strike price minus
premium paid

bull strategy BULL SPLIT-STRIKE COMBO

Example: Buy 1 call;
sell 1 put at lower strike
Market Outlook: Bullish
Risk: Limited, but substantial
Reward: Unlimited
Increase in Volatility: Typically
helps position
Time Erosion: Typically
hurts position
BEP: Two BEPs
1. Long call strike plus premium
paid
2. If established at a credit, short
put strike minus premium
received

bull strategy BULL SPLIT-STRIKE COMBO

bull strategy CASH-SECURED SHORT PUT

Example: Sell 1 put; hold cash
equal to strike price x 100
Market Outlook: Neutral to
slightly bullish
Risk: Limited, but substantial
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Strike price minus
premium received

bull strategy PROTECTIVE/MARRIED PUT

Example: Own 100 shares of
stock; buy 1 put
Market Outlook: Cautiously
bullish
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Starting stock price
plus premium paid

bull strategy COVERED CALL/BUY WRITE

Example: Buy stock; sell calls
on a share-for-share basis
Market Outlook: Neutral to
slightly bullish
Risk: Limited, but substantial
(risk is from a fall in stock price)
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Starting stock price minus
premium received

bull strategy CALL BACKSPREAD

Example: Sell 1 call;
buy 2 calls at higher strike
Market Outlook: Very bullish
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Typically helps position
Time Erosion:
Typically hurts position
BEP: Two BEPs
1. Short call strike plus premium
received
2. Long call strike plus [(the
difference between the long call
strike and short call strike) minus
credit received]

bull strategy BULL CALL SPREAD

Example: Buy 1 call;                           
sell 1 call at higher strike
Market Outlook: Bullish
Risk: Limited
Reward: Limited
Increase in Volatility:
Helps or hurts depending
on strikes chosen
Time Erosion: Helps or hurts
depending on strikes chosen
BEP: Long call strike plus
net premium paid

bull strategy LONG CALL

Example: Buy call
Market Outlook: Bullish
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Strike price plus
premium paid
bull strategy LONG CALL

QUICKGUIDE

Each strategy has an
accompanying graph showing
profit and loss at expiration.
• The vertical axis shows the
profit/loss scale.
• When the strategy line is below
the horizontal axis, it assumes
you paid for the position or
had a loss. When it is above
the horizontal axis, it assumes
you received a credit for the
position or had a profit.
• The dotted line indicates the
strike price.
• The intersection of the strategy
line and the horizontal axis
is the break-even point (BEP)
not including transaction
costs, commissions, or margin
(borrowing) costs.
• These graphs are not drawn
to any specific scale and are
meant only for illustrative
and educational purposes.
• The risks/rewards described are
generalizations and may be
lesser or greater than indicated.