18  •   The Intelligent Option Investor
5/18/2012
-
20
40
60
80
100
120
140
160
180
200
5/20/2013 249 499
Date/Day Count
Stock Price
749 999
Breakeven Line: $45.00
RED
In this diagram, we are receiving a $5 premium payment in return for 
accepting exposure to the stock’s downside. As such, as long as the stock 
expires above $45, we will realize a profit on this investment.
Visual Representation of Options Canceling Exposure
Let’s take a look again at our visual representation of the risk and reward 
of a stock:
5/18/2012
-
20
40
60
80
100
120
140
160
180
200
5/20/2013 249 499
Date/Day Count
Stock Price
749 999
GREEN
RED
We bought this stock at $50 per share and will experience an unreal-
ized gain if the stock goes up and an unrealized loss if it goes down. What 
might happen if we were to simultaneously buy a put, expiring in 365 days 
and struck at $50, on the same stock?
Because we are purchasing a put, we know that we are gaining expo-
sure to the downside. Any time we gain exposure, we shade the exposure