In the options basics and definitions video, we discussed call and put option prices in the context of intrinsic value and time value.

In this video, I want to discuss options trading math for calls and puts and the different trades that can be done – specifically, buying calls and puts or selling calls and puts.

### Options Math To Expiration

Math to expiration refers to the intrinsic value of an option at the time of expiration, based on the difference between the strike price and the underlying price. This difference will determine the profitability of your option trade.

There are 4 basic option trades. We are going to go over the math to expiration for each of these 4 option trades, and determine their breakeven price, along with their profit and loss.

Additionally, we will look at an options profit graph that will show the inherent risk-reward for each of the 4 trade types:

#### Options Trades Risk-Reward

Risk-reward is dependent upon whether the trade is an option buy or an option sell. Always remember that if you sell an option only, meaning that it is uncovered – you have done a trade that has a maximum gain and an unknown risk.

Here is the basic risk-reward for the 4 option trades:** **

- Buying a call
- The maximum risk is known – it is the cost of the option
- Breakeven occurs when the expiration underlying price – the strike price = option cost
- The profit after breakeven is on a 1:1 basis with the underlying price and is theoretically unlimited

- Selling a call
- The maximum profit is the price the option was sold for
- Breakeven occurs at the strike price + the option credit
- The loss after breakeven is on a 1:1 basis with the underlying and is theoretically unlimited

- Buying a put
- The maximum risk is known – it is the cost of the option
- Breakeven occurs when the strike price – the underlying price = option cost
- The profit after breakeven is on a 1:1 basis with the underlying price and is theoretically unlimited

- Selling a put
- The maximum profit is the price the option was sold for
- Breakeven occurs at the strike price – the option credit
- The loss after breakeven is on a 1:1 basis with the underlying and is theoretically unlimited

#### Options Trading Spreadsheet

You can use the options trading spreadsheet for easy calculation and seeing the profit graph for the underlying price at expiration. But even though you have this tool, it is important to understand the math and be able to do the calculation and draw the graph on paper.

Consider that the options traded are the following:

- FB Oct 50 call 2.00
- FB Oct 50 put 2.00

I am going to plot those on the stock option worksheet, where we can also compare the option math and profit to a stock only trade.

Graph1: Compare +1 50 call 2.00 to 100 shares bought at $50

Graph2: Compare -1 50 call 2.00 to 100 shares sold at $50

Graph3: Compare +1 50 put 2.00 to 100 shares sold at $50

Graph4: Compare +1 50 put 2.00 to 100 shares bought at $50

In our next options trading basics video, we will continue to discuss trading math by looking at call and put option spreads.