Add training workflow, datasets, and runbook
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Option Fundamentals • 15
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In this sold call example, we again see the shaded area representing
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the exposure range. We also see that the exposure is limited to 500 days
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and that it starts at the $60 strike price. The big difference we see between
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this diagram and the one before it is that when we gained upside exposure
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by buying a call, we had potentially profitable exposure infinitely upward;
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in the case of a short call, we are accepting the possibility of an infinite
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loss. Needless to say, the decision to accept such risk should not be taken
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lightly. We will discuss in what circumstances an investor might want to
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accept this type of risk and what techniques might be used to manage that
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risk later in this book. For right now, think of this diagram as part of an
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explanation of how options work, not why someone might want to use this
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particular strategy.
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Let’s go back to the example of a long call because it’s easier for
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most people to think of call options this way. Recall that you must pay a
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premium if you want to gain exposure to a stock’s directional potential. In
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the diagrams, you will mark the amount of premium you have to pay as a
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straight line, as can be seen here:
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5/18/2012
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-
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20
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40
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60
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80
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100
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120
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140
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160
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180
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200
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5/20/2013 249
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Breakeven Line: $62.50
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499
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Date/Day Count
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Stock Price
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749 999
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GREEN
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I have labeled the straight line the “Breakeven line” for now and have as-
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sumed that the option’s premium totals $2.50.
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Y ou can think of the breakeven line as a hurdle the stock must cross
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by expiration time. If, at expiration, the stock is trading for $61, you have
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the right to purchase the shares for $60. Y ou make a $1 profit on this trans-
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action, which partially offsets the original $2.50 cost of the option.
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