Hedge Strategies and Income Strategies on options

1

I am having a difficult time putting the hedge and income strategies on options in a formula format. Does Achievable have a matrix like the long/short call/put options to show the formula for that?

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2

We’re always looking to improve our materials, and creating a matrix of formulas for these strategies is definitely something we’ll include in the future. For now, I’ll go ahead and provide them in basic text form here.

The formulas listed below all assume 100 shares of stock and 1 option contract. Some of these formulas will not work if approaching a unique version of these strategies (for example, going long 100 shares of stock and long 3 puts)

Hedging strategies

Long stock & long put

  • Sentiment: bullish, but downside risk for stock is covered by long put
  • Maximum gain = unlimited
  • Maximum loss = gain or loss on stock if sold at put exercise price + premium
  • Breakeven = stock purchase price + premium

For example:

Long 100 shares of ABC stock @ $42
Long 1 ABC Jan 40 put @ $3

  • Maximum gain = unlimited
  • Maximum loss = $200 stock loss (buy @ $42, sell @ $40) + $300 premium → $500
  • Breakeven = $42 + $3 → $45

Short stock & long call

  • Sentiment: bearish, but upside risk for stock is covered by long call
  • Maximum gain = gain on stock if market goes to zero - premium
  • Maximum loss = gain or loss on stock if repurchased at call exercise price + premium
  • Breakeven = stock sale price - premium

For example:

Short 100 shares of BCD stock @ $87
Long 1 BCD Apr 90 call @ $4

  • Maximum gain = $8,700 stock gain (short @ $87, buy back @ $0) - $400 premium → $8,300
  • Maximum loss = $300 stock loss (short @ $87, buy back @ $90) + $400 premium → $700
  • Breakeven = $87 - $4 → $83

Income strategies

Long stock & short call (covered call)

  • Sentiment: bullish/neutral (best in flat market, but profit still made if bullish)
  • Maximum gain = gain or loss on stock if sold at call exercise price + premium
  • Maximum loss = gain or loss on stock if sold at $0 - premium
  • Breakeven = stock purchase price - premium

For example:

Long 100 shares of XYZ stock @ $120
Short 1 XYZ Jul 125 call @ $6

  • Maximum gain = $500 stock gain (buy @ $120, sell @ $125) + $600 premium → $1,100
  • Maximum loss = $12,000 stock loss (buy @ $120, sell @ $0) - $600 premium → $11,400
  • Breakeven = $120 - $6 → $114

Short stock & short put (covered put)

  • Sentiment: bearish/neutral (best in flat market, but profit still made if bearish)
  • Maximum gain = gain or loss on stock if repurchased at put exercise price + premium
  • Maximum loss = unlimited
  • Breakeven = stock sale price + premium

For example:

Short 100 shares of MNO stock @ $23
Short 1 MNO Oct 20 put @ $5

  • Maximum gain = $300 stock gain (short @ $23, buy back @ $20) + $500 premium → $800
  • Maximum loss = unlimited
  • Breakeven = $23 + $5 → $28

I hope this helps! Please let me know if you have any questions.

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3

Thanks, that’s very helpful.

However, in the text, Ch 9.4.5 at the bottom on the summary, you listed
Long stock hedge

Long stock & **long call**
Market sentiment: bullish
Put shields long stock from risk

Is that supposed to be Long PUT?

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Yes - that was a typo in the chapter’s Key Points. Thanks for pointing that out! It’s now been updated.
Long puts hedge long stock position (not long calls).

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