Calculate potential profit and loss on call options, put options, and covered call strategies.
Options give you the right (but not the obligation) to buy or sell a stock at a specific price before a specific date. Understanding your profit and loss profile before entering a trade is essential risk management.
A long call gives you the right to buy 100 shares at the strike price. Your maximum loss is the premium paid. Your profit potential is theoretically unlimited as the stock rises above the break-even price.
A long put gives you the right to sell 100 shares at the strike price. Used as downside protection or to profit from a stock decline. Maximum loss is the premium paid.
A covered call involves owning 100 shares and selling a call option against them. This generates income (the premium) but caps your upside at the strike price. A popular income-generating strategy for long-term stock holders.