This tool helps students understand how different options strategies work through step-by-step breakdowns and realistic scenarios. Click each example to reveal the solution.
1️⃣ Basic Option Payoff & Profit
Long Call: Buy a call with strike $45, premium $3. Stock ends at $55.
Protective Put: Buy stock at $50, buy a put at $45 for $3. Stock ends at $40.
💡 Strategy Breakdown:
- This strategy protects you against a large downside move.
- You are bullish, but want insurance.
- Buying a put gives you the right to sell the stock at $45 no matter what.
🧠 Step-by-step:
1. Buy stock at $50.
2. Buy a put with a $45 strike price for $3.
3. Stock drops to $40.
4. Stock loss = $50 - $40 = −$10.
5. Put payoff = $45 - $40 = $5.
6. Total = −$10 + $5 (put gain) − $3 (premium) = −$8.
✅ This strategy reduces your downside exposure significantly.
Protective Put (Example 2): Buy stock at $50, put at $45 for $3. Stock ends at $55.
💡 Strategy Breakdown:
- If the stock goes up, you still benefit — but a little less.
- The put expires worthless, so it’s just like buying the stock but with extra cost.
🧠 Step-by-step:
1. Buy stock at $50.
2. Buy a put at $45 for $3.
3. Stock rises to $55.
4. Gain from stock = $55 - $50 = $5.
5. Put expires worthless.
6. Total Profit = $5 − $3 (cost of put) = $2.
✅ The put served as insurance and wasn’t needed, but you still made money.
Straddle: Buy call and put at strike $50. Call = $4, Put = $3. Stock ends at $60.
💡 Strategy Breakdown:
- A straddle is a market-neutral strategy.
- You buy a call and a put at the same strike price and expiration.
- You use this when you expect a BIG price movement, but don’t know which direction.
🧠 Step-by-step:
1. Buy a call at strike $50, cost = $4.
2. Buy a put at strike $50, cost = $3.
3. Total cost = $7.
4. If stock ends at $60:
➤ Call is in the money = $60 - $50 = $10.
➤ Put expires worthless.
➤ Net payoff = $10 (call) - $7 (costs) = $3.
✅ Profit occurs because of a large move UP.
⚠️ Loss occurs if stock doesn't move much — you lose both premiums.
Straddle (Example 2): Buy call and put at strike $50. Call = $4, Put = $3. Stock ends at $40.
💡 Strategy Breakdown:
- This is the other case: big move DOWN helps the put side.
- The call expires worthless.
🧠 Step-by-step:
1. Buy a call at strike $50 for $4.
2. Buy a put at strike $50 for $3.
3. Stock drops to $40.
4. Put payoff = $50 - $40 = $10.
5. Call expires worthless.
6. Total cost = $4 + $3 = $7.
7. Total profit = $10 − $7 = $3.
✅ Profit comes from large downward movement.
⚠️ Again, if stock doesn’t move much, the strategy loses money.
Covered Call: You buy stock at $50 and sell a call at $55 for $2. Stock ends at $60.
💡 Strategy Breakdown:
- This is a moderately bullish strategy.
- You buy stock and sell a call to generate income.
- You expect the stock to go up moderately, but not too high.
🧠 Step-by-step:
1. Buy the stock at $50.
2. Sell a call option with a strike price of $55 for a $2 premium.
3. If the stock ends at $60, the option will be exercised, and you will sell the stock at $55.
4. Stock gain = $55 - $50 = $5.
5. Premium received = $2.
6. Total Profit = $5 (stock gain) + $2 (premium) = $7.
⚠️ You do not benefit from any stock price above $55 because you must sell at $55.
Covered Call (Example 2): Buy stock at $50, sell call at $55 for $2. Stock ends at $40.
💡 Strategy Breakdown:
- You are still bullish but want protection in case the stock doesn’t rise.
- Selling the call brings in income to cushion downside risk.
🧠 Step-by-step:
1. Buy the stock at $50.
2. Sell a call with a strike of $55 and collect $2 premium.
3. If the stock falls to $40, your stock loses $10.
4. The call expires worthless, so you keep the $2 premium.
5. Total Net = −$10 + $2 = −$8.
⚠️ The premium helps, but you still take a net loss because the stock fell.