Options — Quick Reference

Core Concepts at a Glance

• Buyers pay premiums and have RIGHTS; writers receive premiums and have OBLIGATIONS

• Call = right to BUY; Put = right to SELL

• In the money = has intrinsic value; Out of the money = zero intrinsic value

• Premium = Intrinsic Value + Time Value

• Time value always decays to zero at expiration

• Selling the option is usually better than early exercise when time value remains

• Index options (SPX, NDX, RUT) are cash-settled and European-style; OEX is the exception (American-style)

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Four Basic Positions — Complete Reference

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> Memory trick: Buyers always pay premium = their max loss. Sellers always collect premium = their max gain. Long calls/short puts are bullish. Short calls/long puts are bearish.

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Spread and Combination Strategies

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In/Out/At the Money — Quick Rules

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Intrinsic Value Formulas

`` Call intrinsic = Max(Stock Price − Strike Price, 0) Put intrinsic = Max(Strike Price − Stock Price, 0) Time Value = Premium − Intrinsic Value ``

Quick examples:

• $50 call, stock at $54 → Intrinsic = $4

• $50 put, stock at $44 → Intrinsic = $6

• $50 call, stock at $47 → Intrinsic = $0 (OTM)

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Covered Call — Income Strategy Summary

Structure: Own 100 shares of stock + sell 1 call option

Goal: Generate premium income from shares you already own

Trade-off: Upside is capped at the strike price; in exchange, you receive the premium which reduces your cost basis

Best used when: You're neutral to slightly bullish on the stock; willing to sell at the strike price; want to reduce cost basis

> Example: Own stock at $48, sell $50 call for $3. > New effective cost basis = $48 − $3 = $45 > If stock called away at $50: Total profit = ($50 − $48) + $3 = $5/share

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Protective Put — Portfolio Insurance Summary

Structure: Own 100 shares of stock + buy 1 put option

Goal: Insure against a decline in the stock you own

Trade-off: Pay premium (cost of insurance); upside is unlimited; downside is floored at the put strike

Best used when: You own a stock long-term but fear near-term volatility (before earnings, Fed meetings, etc.)

> Example: Own stock at $72, buy $70 put for $4. > Max loss = ($72 − $70) + $4 = $6/share — no matter how far stock falls > Breakeven = $72 + $4 = $76 (premium cost must be recovered)

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Index Options — Key Facts

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Position	Max Gain	Max Loss	Breakeven	Outlook
Long Call (buy call)	Unlimited	Premium paid	Strike + Premium	Bullish
Short Call (sell call)	Premium received	Unlimited	Strike + Premium	Neutral/Bearish
Long Put (buy put)	Strike − Premium	Premium paid	Strike − Premium	Bearish
Short Put (sell put)	Premium received	Strike − Premium	Strike − Premium	Neutral/Bullish
Strategy	Construction	Outlook	Max Gain	Max Loss	Breakeven
Covered Call	Long stock + short call	Neutral/Income	(Strike − Cost) + Premium	Cost − Premium	Cost − Premium
Protective Put	Long stock + long put	Insurance	Unlimited	(Cost − Strike) + Premium	Cost + Premium
Bull Call Spread	Buy low call + sell high call	Mod. Bullish	Strike diff − Net debit	Net debit	Low strike + Net debit
Bear Put Spread	Buy high put + sell low put	Mod. Bearish	Strike diff − Net debit	Net debit	High strike − Net debit
Long Straddle	Buy call + buy put (same strike)	Big move	Unlimited / Strike − Total premium	Total premium	Strike ± Total premium
Short Straddle	Sell call + sell put (same strike)	No move	Total premium	Unlimited	Strike ± Total premium
Status	Call Condition	Put Condition	Intrinsic Value
In the money	Stock > Strike	Stock < Strike	Positive
At the money	Stock = Strike	Stock = Strike	Zero
Out of the money	Stock < Strike	Stock > Strike	Zero
Feature	Equity Options	Index Options (SPX, NDX)	OEX
Settlement	Physical stock delivery	Cash only	Cash only
Exercise style	American	European	American
Underlying	Single stock (100 shares)	Index value × $100	S&P 100 × $100
Tax treatment	Regular short/long-term	60/40 rule (Sec. 1256)	60/40 rule

Cash settlement example: SPX call struck at 4,700; settles at 4,760 → 60 points × $100 = $6,000 cash per contract.

Section 1256 (60/40 rule): 60% of gain/loss = long-term capital gain rate; 40% = short-term. Applies regardless of actual holding period.

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Common Exam Traps

• Breakeven is the same for buyer and writer: The long call's breakeven = the short call's breakeven = Strike + Premium. They just lose/profit on opposite sides.

• "Maximum gain for a long put": It is Strike − Premium (not unlimited), because a stock cannot fall below zero.

• Short call max loss is unlimited: The stock can theoretically rise to infinity, so the short call writer's loss has no ceiling. Never state "limited" for a naked short call.

• Covered call does NOT fully protect downside: The premium reduces cost basis but the investor still loses if the stock falls sharply below (cost − premium). A protective put provides true downside protection.

• Selling vs. exercising early: When time value remains, sell the option — don't exercise. Exercising throws away time value.

• OEX is American-style: All other major index options (SPX, NDX, RUT) are European-style. OEX is the exception tested on the Series 7.

• Index options cannot be physically settled: Cash settlement is mandatory for all index options — there is no underlying stock to deliver.

• Long straddle max loss = total premium: The worst case is the stock sits exactly at the strike at expiration and both options expire worthless.

• Straddle breakevens use TOTAL premium: Add both call and put premiums together, then add and subtract from the strike.