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