Option Fundamentals   • 25
In fact, many of the option strategies I will introduce in this book 
simply represent a carving up of the risk-reward profile of a long or short 
stock position and isolating one piece of it. To make it more clear and easy 
to remember the rules for breaking even on different strategies, I will actu-
ally use a different nomenclature from breakeven.
If a diagram has one or both of the elements of the risk-return profile 
of buying a stock, I will call the breakeven line the effective buy price  and 
abbreviate it EBP. For example, if we sell a put option, we accept downside 
risk in the same way that we do when we buy 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
EBP = $45
RED
Basically, what we are saying when we accept downside risk is that 
we are willing to buy the stock if it goes below the strike price. In return 
for accepting this risk, we are paid $5 in premium, and this cash inflow 
effectively lowers the buying price at which we own the stock. If, when the 
option expires, the stock is trading at $47, we can think of the situation 
not as “being $3 less than the strike price” but rather as “being $2 over the 
b u y  p r i c e .”
Conversely, if a diagram has one or both of the elements of the risk-
return profile of short selling a stock, I will call the breakeven line the 
effective sell price and abbreviate it ESP. For example, if we buy a put option 
anticipating a fall in the stock, we would represent it graphically like this: