I just now learned about options. and concluded the following things. please correct me if conclusion is wrong.
Let
strike price - P_strike
premium - Prem
SPOT price @ expiry - P_exp.
then
1) Buy call option liquidated in two ways
A) square off by selling call option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_exp-P_strike-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when rise expected
2) Sell call option
A) square off by buying call option ?? (is it possible to sell call option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_exp-P_strike-prem_buy
so
loss can be unlimited
profit limited to prem
used when fall expected
3) buy put option
A) square off by selling put option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_strike-P_exp-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when fall expected
4) sell put option
A) square off by buying put option ?? (is it possible to sell put option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_strike-P_exp-prem_buy
so
loss can be unlimited
profit limited to prem
used when rise expected
Let
strike price - P_strike
premium - Prem
SPOT price @ expiry - P_exp.
then
1) Buy call option liquidated in two ways
A) square off by selling call option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_exp-P_strike-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when rise expected
2) Sell call option
A) square off by buying call option ?? (is it possible to sell call option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_exp-P_strike-prem_buy
so
loss can be unlimited
profit limited to prem
used when fall expected
3) buy put option
A) square off by selling put option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_strike-P_exp-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when fall expected
4) sell put option
A) square off by buying put option ?? (is it possible to sell put option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_strike-P_exp-prem_buy
so
loss can be unlimited
profit limited to prem
used when rise expected