1
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Two premiums arrive.

2
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Is Mira protected now?

3
00:00:04,450 --> 00:00:08,762
She moves both payments towards her savings box.

4
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Dev puts the two open contracts beside them.

5
00:00:12,625 --> 00:00:15,000
One is a sold call.

6
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A rise can make that call costly.

7
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The other is a sold put.

8
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A fall can make that put costly.

9
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Both payments come with responsibilities.

10
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Today, we compare two ways of selling this pair.

11
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These are made up index option examples.

12
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All results are before costs, unless stated otherwise.

13
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Mira is learning on paper, without placing real orders.

14
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First, Mira makes a short straddle.

15
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Both options use the same strike: twenty five thousand.

16
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Both belong to the same index.

17
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Their expiry date must match too.

18
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She uses equal quantities on both sides.

19
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The call brings one hundred fifty rupees per unit.

20
00:01:07,894 --> 00:01:11,293
The put brings another one hundred fifty.

21
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Together, that is three hundred rupees per unit.

22
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This example uses sixty five units of each option.

23
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The total received is nineteen thousand five hundred rupees.

24
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Sixty five is our example quantity, not a current rule.

25
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That money received is still not completed profit.

26
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Now move to expiry, the contract end date.

27
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Suppose the final settlement is exactly twenty five thousand.

28
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Neither option requires an expiry payment there.

29
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All three hundred rupees remain, before costs.

30
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That is the straddle’s highest expiry profit.

31
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Now move settlement to twenty five thousand two hundred.

32
00:01:58,844 --> 00:02:02,594
The call requires two hundred rupees per unit.

33
00:02:02,594 --> 00:02:06,444
The put requires nothing at this higher level.

34
00:02:06,444 --> 00:02:10,456
Three hundred minus two hundred leaves one hundred.

35
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Multiply that hundred by sixty five units.

36
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That is six thousand five hundred rupees before costs.

37
00:02:19,396 --> 00:02:23,984
At twenty five thousand three hundred, the credit runs out.

38
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This is the upper expiry breakeven, before costs.

39
00:02:28,321 --> 00:02:32,321
The lower one is twenty four thousand seven hundred.

40
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We subtract three hundred from the common strike.

41
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Now let settlement rise to twenty five thousand six hundred.

42
00:02:40,621 --> 00:02:44,433
The call needs six hundred rupees per unit.

43
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Our three hundred covers only half of that.

44
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The loss is three hundred rupees per unit.

45
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For sixty five units, that loses nineteen thousand five hundred.

46
00:02:57,283 --> 00:03:00,846
The falling line continues beyond the drawing.

47
00:03:00,846 --> 00:03:05,040
The uncovered call has no fixed upper loss limit.

48
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For a short strangle, Mira separates the strikes.

49
00:03:10,065 --> 00:03:13,952
She sells the twenty four thousand six hundred put.

50
00:03:13,952 --> 00:03:17,865
She sells the twenty five thousand four hundred call.

51
00:03:17,865 --> 00:03:21,740
Our index starts near twenty five thousand.

52
00:03:21,740 --> 00:03:27,527
Same index, same expiry, and equal quantities still matter.

53
00:03:27,527 --> 00:03:30,965
The put brings seventy rupees per unit.

54
00:03:30,965 --> 00:03:34,290
The call brings sixty rupees per unit.

55
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Together, they bring one hundred thirty rupees per unit.

56
00:03:38,690 --> 00:03:43,265
Again, we use sixty five units on each side.

57
00:03:43,265 --> 00:03:47,865
The total received is eight thousand four hundred fifty rupees.

58
00:03:47,865 --> 00:03:52,224
This example gives a wider gap, but less credit.

59
00:03:52,924 --> 00:03:58,787
At expiry, settlement between these strikes needs no option payment.

60
00:03:58,787 --> 00:04:02,086
The full credit remains, before costs.

61
00:04:02,086 --> 00:04:07,461
The lower expiry breakeven is twenty four thousand four hundred seventy.

62
00:04:07,461 --> 00:04:11,862
The upper one is twenty five thousand five hundred thirty.

63
00:04:11,862 --> 00:04:15,386
Now settlement jumps to twenty six thousand.

64
00:04:15,386 --> 00:04:19,199
The call needs six hundred rupees per unit.

65
00:04:19,199 --> 00:04:23,737
Subtract six hundred from the credit of one hundred thirty.

66
00:04:23,737 --> 00:04:27,512
We lose four hundred seventy rupees per unit.

67
00:04:27,512 --> 00:04:33,286
Across sixty five units, that loses thirty thousand five hundred fifty.

68
00:04:33,286 --> 00:04:37,499
A large fall can also produce a large put loss.

69
00:04:37,499 --> 00:04:40,724
An index cannot fall below zero.

70
00:04:40,724 --> 00:04:44,952
So that put loss is finite, but can be huge.

71
00:04:45,652 --> 00:04:50,977
Those breakevens describe expiry, not today’s closing price.

72
00:04:50,977 --> 00:04:55,752
Even inside them, closing both options can cost more.

73
00:04:55,752 --> 00:05:01,352
Time remaining and changing market expectations affect option prices.

74
00:05:01,352 --> 00:05:05,364
Use available trading quotes for the whole position.

75
00:05:05,364 --> 00:05:09,864
Buying back usually means paying the seller’s asking price.

76
00:05:09,864 --> 00:05:13,877
An old last price may not be available now.

77
00:05:13,877 --> 00:05:17,965
The other sold option is not a protective hedge.

78
00:05:17,965 --> 00:05:22,102
A pair that starts balanced can become unbalanced.

79
00:05:22,102 --> 00:05:25,202
News can move the index suddenly.

80
00:05:25,202 --> 00:05:28,952
A stop order can be skipped during that jump.

81
00:05:28,952 --> 00:05:33,456
An exit plan does not create a fixed loss limit.

82
00:05:34,156 --> 00:05:38,906
First, a straddle sells both options at one strike.

83
00:05:38,906 --> 00:05:42,818
A strangle uses a lower put and higher call.

84
00:05:42,818 --> 00:05:47,244
Second, premium received is not your final profit.

85
00:05:47,244 --> 00:05:51,943
Expiry breakevens do not promise profit before expiry.

86
00:05:51,943 --> 00:05:56,431
Third, two sold options do not cap each other’s risk.

87
00:05:56,431 --> 00:06:00,606
The uncovered call has no fixed upper loss limit.

88
00:06:00,606 --> 00:06:04,443
The put can also lose a very large amount.

89
00:06:04,443 --> 00:06:09,481
Mira records both sides, quantity, and costs together.

90
00:06:09,481 --> 00:06:12,994
Keep practising on paper while you learn.

91
00:06:12,994 --> 00:06:17,268
In chapter four, we add bought options for protection.

92
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How do those extra options change the loss shape?