Options Trading Playbook: The Most Powerful Strategies to Generate Passive Income from Financial Markets in any Situation by Michael J. Sullivan

Options Trading Playbook: The Most Powerful Strategies to Generate Passive Income from Financial Markets in any Situation by Michael J. Sullivan

CHAPTER 1 The four main types of
options
The first "strategies" I will explain are the simplest of all, namely the four basic
(or simple) options types. They are the building blocks with which it is possible
to build increasingly complex positions, so it is very important that you learn the
behaviour of each of them before moving on to the next chapter.
They can also be used alone to form real strategies, the fact that they are very
simple to use does not make them less profitable, the contrary is actually true.
Anyone who tells you otherwise has never traded in the financial markets; some
of the best traders I know use only one option over and over and over (waiting
for ideal market condition of course), generating huge gains.
1.1 Long Call

1.1.1 Description
The Long Call is by far the simplest type of option, it benefits from a bullish
market, and, in exchange for the payment of a premium, it gives the option
holder the right to buy the underlying at the strike price, whatever its current
market price might be.
To trade a Long Call you have to:
buy a call at a strike price of your choice.
The Long Call’s payoff can be seen in the following figure. This one in particular
was obtained on an imaginary underlying XYZ whose market price is $30,
through the purchase of the call with a strike price of $30 (paying it $1.05).

As you can see, whatever the price of the underlying is going to be at expiration,
the maximum loss is equal to the premium paid to open the position, while the
maximum gain is theoretically infinite.
1.1.2 The Greeks
Let us now take a quick look at the Greeks of this strategy to understand how it
behaves when market conditions change. To get the Greeks of a strategy it is
simply necessary to add the Greeks of the single options, something that any
broker does automatically. Look at the result in the next table.
In this instance there will be no sum to be made as only one leg is involved. The
diagrams further down show the Greeks as a function of the strike price and
time, where the solid line represents the value on the opening day, while the
dashed one refers to the expiration date.

Options Trading Playbook: The Most Powerful Strategies to Generate Passive Income from Financial Markets in any Situation by Michael J. Sullivan