26  •   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
ESP = $45
GREEN
When a short seller sells a stock, he or she gets immediate profit exposure 
to the stock’s downside potential. The seller is selling at $50 and hopes to make 
a profit by buying the shares back later at a lower price—let’s say $35. When we 
get profit exposure to a stock’s downside potential using options, we are getting 
the same exposure as if we sold the stock at $50, except that we do not have to 
worry about losing our shirts if the stock moves up instead of down. In order to 
get this peace of mind, though, we must spend $5 in premium. This means that 
if we hold the position to expiration, we will only realize a net profit if the stock 
is trading at the $50 mark less the money we have already paid to buy that ex-
posure—$5 in this case. As such, we are effectively selling the stock short at $45.
There are some option strategies that end up not looking like one of 
the two stock positions—the flexibility of options allows an investor to do 
things a stock investor cannot. For example, here is the graphic representa-
tion of a strategy commonly called a long strangle:
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
BE 1 = $80.75
BE 2 = $19.25
GREEN
GREEN