Review of Some Option Concepts

Payoff to owner is max(C_T,0)

But profit is max(C_T,0)-Premium

S_T>X+premium, buyer profit>0>seller profit

S_T=X+premium, buyer profit=0=seller profit

S_T<X+premium, buyer profit<0<seller profit

Covered Call (see here for details of covered call)

Profit = C₀ + (S_T-S₀) – max(S_T-X,0)

So maximum profit: C₀ + X – S₀

(Think: Why max profit not C₀ + (S_T-S₀) by making max(S_T-X,0)=0?)

Maximum loss: C₀-S₀

Breakeven: S₀-C₀

For investors believe that the stock won’t move in short terms to generate extra income. (Shape is that of shorting a put)

Protective put (see here for details)

Limit downside risk at the cost of buy put (= portfolio insurance)

Profit = S_T-S₀ – P₀ + max(X-S_T,0)

Max Profit = S_T – S₀ – P₀

Max loss = X – S₀ – P₀

Breakeven = (only meaningful when X<S₀+P₀) = S₀+P₀

Lock gains like longing a call