8.2 The 4 Basic Option Positions
The four basic single-leg positions are the building blocks of all option strategies. You must know their breakevens, max gains, and max losses effortlessly.
Key FINRA Exam Takeaways
- Long Call (Bullish): Max Gain = Unlimited; Max Loss = Premium paid; Breakeven = Strike + Premium.
- Short Call (Bearish): Max Gain = Premium received; Max Loss = Unlimited; Breakeven = Strike + Premium.
- Long Put (Bearish): Max Gain = Strike - Premium; Max Loss = Premium paid; Breakeven = Strike - Premium.
- Short Put (Bullish): Max Gain = Premium received; Max Loss = Strike - Premium; Breakeven = Strike - Premium.
- Selling uncovered (naked) calls has UNLIMITED potential loss.
| Position | Market Outlook | Max Profit | Max Loss | Breakeven Formula |
|---|---|---|---|---|
| Long Call | Bullish | Unlimited | Premium Paid | Strike + Premium |
| Short Call (Naked) | Bearish | Premium Received | Unlimited | Strike + Premium |
| Long Put | Bearish | Strike - Premium | Premium Paid | Strike - Premium |
| Short Put (Naked) | Bullish | Premium Received | Strike - Premium | Strike - Premium |
Knowledge Checkpoint • Section 8.2
An investor writes 1 ABC Jan 60 Call at a premium of 4 when ABC is trading at 58. If ABC subsequently rallies to $75 and the option is exercised against the investor, what is the net gain or loss?