OUTRIGHT OPTIONS OVERVIEW

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Outright options are trading strategies consisting of buying or selling option contracts that are not hedged – with no simultaneous placing of a related or offsetting position.

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Purchasing outright options puts at risk the full premium being paid, and long outright options can lose all the capital invested by the expiration of the contract.

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Adding outright options to a portfolio can be used to limit or reduce risk, to hedge from macroeconomic or overall market risks (interest rates, indexes).

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Selling naked options is highly levered, and not the best place to get started when trading options. Potential losses of naked short option positions can easily exceed the premium received by the seller.

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Shorting an asset via puts can be done without exposing a portfolio to margin calls and short squeezes.

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Some benefits of investing via outright long options include: Known capital and risk, leveraged exposure to the underlying, absence of margin calls, directional exposure (long from calls and short from puts), and eased risk management.

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Some draw backs of investing via outright long options include: Upfront premium costs, negative carry (time decay), higher need for active management, complexity derived from the non linear exposure to the underlying.

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AT THE MONEY OUTRIGHT OPTIONS PAYOUT EXAMPLE

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The example below compares the payout at expiration of a call, a put and the underlying stock – and calculates the percentage return over the amount invested. The strikes of the options are set at the stock price (at the money).

Using $6 for the premium of both a put and a call we calculate the net payout for each scenario. 

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