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Risk Curves

A mathematical chart drawn to analyze an option’s risk, reward, and breakeven points. Risk Curve analysis assists a Trader with analyzing whether or not to enter a position, and assists in setting entry and exit strategies.

Bullish Strategies

long stock
The purchase price sets the cost basis, and the exit price establishes whether there is a net profit or loss on the asset.  No gain or loss is final until the stock is actually sold.  Though gains can be unlimited as a stock trades higher, there is extreme risk as all stocks can trade to zero.
long callA long call refers to buying a call option, and is a strategy to profit if the stock price moves higher.  It is a bullish position for investors who want to participate in an anticipated move higher for a specific period of time, but without the risk and capital outlay of a stock investor.  Profit potential is unlimited, and risk is limited to the premium paid for the call option.
covered call
Also refered to as a Naked Put, a short put involves selling (a.k.a. writing) a put option to collect premium when the seller does not actually own shares of the underlying securities or options.  This carries extreme risk and limited profit.  The goal is for the short options to expire worthless, thus keeping the full premium collected upon entry.
bull put spread A bull spread is a limited-risk/limited-reward strategy.  It can be executed with calls or puts.  Using calls, it is a a debit spread (bull call spread), consisting of a long call and a short call with a higher strike price.  Using puts, it is a credit spread (bull put spread), consisting of a long put and a short put with a higher strike price.  This is a neutral to bullish strategy.
married put
A protective option strategy whereby an investor, holding a long position in stock, purchases a put on the same stock to protect against a depreciation in the stock's price.  Also referred to as a “protective put” or “synthetic call”.  This strategy establishes a floor, allowing unlimited profits while limiting the potential loss.  This strategy can be considered similar to buying “insurance” against your stock.
short putA Bullish options strategy that involves selling short or "writing" a put option.  When the stock rises above the strike price of the short put by expiration, the put options expire worthless and the entire premium (credit) from its sale is retained as profit.  The seller of the short put is betting the stock price will be above the strike price on expiration so he can keep the premium.
covered call
Also refered to as a Naked Put, a short put involves selling (a.k.a. writing) a put option to collect premium when the seller does not actually own shares of the underlying securities or options.  This carries extreme risk and limited profit.  The goal is for the short options to expire worthless, thus keeping the full premium collected upon entry.
bull put spread A bull spread is a limited-risk/limited-reward strategy.  It can be executed with calls or puts.  Using calls, it is a a debit spread (bull call spread), consisting of a long call and a short call with a higher strike price.  Using puts, it is a credit spread (bull put spread), consisting of a long put and a short put with a higher strike price.  This is a neutral to bullish strategy.

Bearish Strategies

short stock
This strategy consists of an investor selling stock shares they do not own, anticipating the stock will decrease in value and the investor can buy them back at a cheaper price.   This is a bearish strategy that carries unlimited risk, because there is no ceiling as to how high a stock can trade.
long put Buying a put (a.k.a. long put) is a means to profit if the stock price moves lower.  It is a candidate for bearish investors who want to participate in an anticipated downturn, but without the unlimited risk of selling stock short.  Risk in a long put is limited to the premium paid.
short call Selling a call (a.k.a. writing an uncovered call) is a strategy that profits if the stock price holds neutral or declines.  Maximum profit in a short call is found with the stock trading at or below the short call strike price at expiration.  When this happens, the option expires worthless and the investor keeps the entire premium that was collected upon entry. bear call spread A bear spread is a limited-risk/limited-reward strategy.  It can be executed with calls or puts.  Using puts, it is a a debit spread (bear put spread), consisting of a long put and a short put with a lower strike price.  Using calls, it is a credit spread (bear call spread), consisting of a long call and a short call with a lower strike price.  This is a neutral to bearish strategy.

Non-Directional Strategies

straddle risk curve A straddle consists of buying a call option and a put option with the same strike price and expiration.  The combination generally profits if the stock price moves sharply in either direction during the life of the options. strangle risk curve A strangle consists of buying a call option with a strike price above the current stock price, and at the same time buying a put option with a strike price below the current stock price.  This strategy profits if the stock price moves sharply in either direction during the life of the option.
butterfly rc A butterfly involves four options (all calls or all puts) at three different strike prices. A long butterfly involves buying one call at a lower strike, selling two calls at the middle strike, and buying one call at a higher strike. The highest and lowest strikes are "wings" while the middle strike makes up the "body" of the butterfly.  This strategy profits if the underlying stock is inside the outer wings at expiration.  Maximum profit is at expiration, with the stock trading at the inner strike price. iron condor rc A condor carries profit/loss characteristics similar to a butterfly.  Four options at four strike prices are used.  Similar to the butterfly, the outer strike prices make the "wings".  Unlike the butterfly, the "body" of a condor consists of one option at each of the two middle strikes.  This strategy profits if the underlying stock is close to the inner wings as you approach expiration.  Maximum profit is at expiration, with the stock trading between the two inner strikes.
butterfly rc A butterfly involves four options (all calls or all puts) at three different strike prices. A long butterfly involves buying one call at a lower strike, selling two calls at the middle strike, and buying one call at a higher strike. The highest and lowest strikes are "wings" while the middle strike makes up the "body" of the butterfly.  This strategy profits if the underlying stock is inside the outer wings at expiration.  Maximum profit is at expiration, with the stock trading at the inner strike price. iron condor rc A condor carries profit/loss characteristics similar to a butterfly.  Four options at four strike prices are used.  Similar to the butterfly, the outer strike prices make the "wings".  Unlike the butterfly, the "body" of a condor consists of one option at each of the two middle strikes.  This strategy profits if the underlying stock is close to the inner wings as you approach expiration.  Maximum profit is at expiration, with the stock trading between the two inner strikes.
reverse butterfly rcSimilar to the reverse iron condor, a reverse butterfly is a hybrid strategy.  It’s structure and desired stock move is the exact opposite of a long butterfly.  It is entered as a credit spread, and is composed of four options (all calls or all puts) at three different strike prices.  The structure involves selling one call at a lower strike, buying two calls at the middle strike, and selling one call at a higher strike.  The highest and lowest strikes are "wings", while the middle strike makes up the "body" of the reverse butterfly.  This strategy profits when the underlying stock is outside the outer wings, and maximum profit is at expiration.  rev iron condor rcA reverse iron condor is a hedged strangle.  Similar to the strangle, a reverse iron condor consists of buying a call option with a strike price above the current stock price, and at the same time buying a put option with a strike price below the current stock price.  In addition, this strategy incorporates selling another call and put further out of the money.  This hedges down the entry debit significantly, allowing for a much higher probability for profit than a strangle.  In exchange for reducing the entry debit and raising probability for success, the profit potential in the trade is capped.  This strategy profits if the stock price moves sharply in either direction during the life of the option.  Maximum profit is at option expiration, with the stock trading below the short put or above the short call. 

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