Explanation of the Strategy Descriptions
Each of the 17 strategy descriptions is explained using the following template:- Strategy View - when to use the strategy
- Strategy Implementation - how to effect the strategy
- Upside Potential - limited/unlimited
- Downside Risk - limited/unlimited
- Margin - whether required or not
- Comment - usually a comment on the effect of the passage of time on position value .
Strategy Profit/Loss Chart
The profitability of each stategy is represented by a chart.(The chart here represents the profit/loss profile for a buy call strategy).
Whenever the red line is above the horizontal line, the strategy is in profit, and when below in loss. We can see from this particular chart, that profit increases as the share price increases, but that as the share price falls the loss is limited at a certain level.
The point 'a' usually represents the value of the strike price (additional points are marked in the case of multiple option strategies). This point can be used as a reference point when judging the profitability for any particular strategy. The point 'b' here represents the breakeven point for the strategy - which in this case is the level of the share price equal to the strike price plus the premium paid for the call option.
It must be noted that these charts represent the profit/loss profile only at expiry of the options.
Further Notes
- These option strategies are largely independent of the underlying asset, hence in this area we have used the following terms loosely and interchangeably: asset, share price, index, commodity.
- In a similar fashion the terms strike and exercise price are used here interchangeably.
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Strategies can be seen together on one page, totally in text format.
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