Option Fundamentals   • 27
Here we have a stock trading at $50 per share, and we have bought 
one put option and one call option. The put option is struck at $20 and 
is trading for $0.35. The call option is struck at $80 and is trading for 
$0.40. Note that the top part of the diagram looks like the top part of the 
long-stock diagram and that the bottom part looks like the bottom part 
of the short-stock diagram. Because a stock investor cannot be simulta-
neously long and short the same stock, we cannot use such terminology 
as effective buy  or effective sell  price. In this case, we use breakeven  and 
abbreviate it BE.
This option strategy illustrates one way in which options are much 
more flexible than stocks because it allows us to profit if the stock moves 
up (into the call’s range of exposure) or down (into the put’s range of 
exposure). If the stock moves up quickly, the call option will be in the 
money, but the put option will be far, far, far out of the money . Thus, if 
we are ITM on the call, the premium paid on the puts probably will end 
up a total loss, and vice versa. For this reason, we calculate both break-
even prices as the sum of both legs  of our option structure (where a leg 
is defined as a single option in a multioption strategy). As long as the leg 
that winds up ITM is ITM enough to cover the cost of the other leg, we 
will make a profit on this investment. The only way we can fail to make a 
profit is if the stock does not move one way or another enough before the 
options expire.
Flexibility without Directionality Is a Sucker’s Game
Despite this great flexibility in determining what directional invest-
ments one wishes to make, as I mentioned earlier, option market mak-
ers and floor traders generally attempt to mostly (in the case of floor 
traders) or wholly (in the case of market makers) insulate themselves 
against large moves in the underlying stock or figure out how to lim-
it the cost of the exposure they are gaining and do so to such an ex-
tent that they severely curtail their ability to profit from large moves. 
I do not want to belabor the point, but I do want to leave you with one 
graphic illustration of a “typical” complex option strategy sometimes 
called a condor :