Common use of SELLING Clause in Contracts

SELLING. CALLS An investor who sells a call believes that the underlying stock price will fall and that they will be able to profit from a decline in the stock price by sell- ing calls. An investor who sells a call is obligated to deliver the underlying stock if the buyer decides to exercise the option. When looking to establish a position, the seller must determine their: • Maximum gain. • Maximum loss • Breakeven MAXIMUM GAIN SHORT CALLS For an investor who has sold uncovered or naked calls, maximum gain is always limited to the amount of the premium they received when they sold the calls MAXIMUM LOSS SHORT CALLS An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited loss. The seller of the calls is subject to a loss if the stock price increases. Since there is no limit to how high a stock price may rise, there is no limit to the mount of the loss DETERMINING THE BREAKEVEN FOR SHORT CALLS An investor who has sold calls must determine where the stock price must be at expiration in order for the investor to break even on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate by the amount of the option premium received and the investor still will break even at expi- ration. To determine an investor’s breakeven point on a short call, use the following formula: EXAMPLE Breakeven Strike price premium An investor has established the following option position: Short 1 XYZ May 30 call at 3 The investor’s maximum gain, maximum loss, and breakeven will be: Maximum gain: $300 (The amount of the premium received) Maximum loss: Unlimited Breakeven: $33 3 (Strike price premium) If, at expiration, XYZ is at exactly $33 per share and the investor closes out the transaction with a closing purchase or has the option exercised against them, they will break even excluding transaction costs. Notice the relationship between the buyer and the seller: Call Buyer Call Seller Maximum Gain Unlimited Premium received Maximum Loss Premium paid Unlimited Breakeven Strike price premium Strike price premium Wants Option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss and the buyer’s maximum loss is the seller’s maximum gain. Both the buyer and the seller will break even at the same point.

SELLING. CALLS PUTS An investor who sells a call put believes that the underlying stock price will fall rise and that they will be able to profit from a decline rise in the stock price by sell- ing callsselling puts. An investor who sells a call put is obligated to deliver purchase the underlying stock if the buyer decides to exercise the option. An investor who sells a put also may be selling the put as a way to acquire the underlying security at a cheaper price. If the stock is put to the investor, the investor’s purchase price is reduced by the amount of the premium received. When looking to establish a position, the seller must determine their: • Maximum gain. • Maximum loss • Breakeven MAXIMUM GAIN SHORT CALLS PUTS For an investor who has sold uncovered or naked callsputs, maximum gain is always limited to the amount of the premium they received when they sold the calls puts MAXIMUM LOSS SHORT CALLS PUTS An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited loss. The seller of the calls is subject to a loss if put believes that the stock price increaseswill rise. Since there is no There is, however, a limit to how high far a stock price may risedecline. A stock price may never fall below zero. As a result, there the investor who believes that the stock price will rise has a limited maximum loss. The worst thing that can happen for an investor who is no limit short a put is that the stock goes to zero and they are forced to purchase it at the mount strike price from the owner of the put. To determine the maximum loss for the seller of a put, use the following formula: Maximum loss = Strike price – premium DETERMINING THE BREAKEVEN FOR SHORT CALLS An PUTS Whenever an investor who has sold calls must determine where a put, they believe that the stock price must be at expiration in will rise. If the stock price begins to fall, the investor becomes subject to loss. In order for the investor to break even on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that , the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate fall by the amount of the option premium received and for the option. At expiration, the investor still will break even at expi- ration. To determine an investor’s breakeven point on a short call, use the following formulapoint: EXAMPLE Breakeven = Strike price – premium EXAMPLE An investor has established the following option position: Short 1 XYZ May 30 call put at 3 4 The investor’s maximum gain, maximum loss, and breakeven will be: Maximum gain: $300 400 (The amount of the premium received) Maximum loss: Unlimited Breakeven: loss $33 3 26 or $2,600 for the whole position (Strike price premium) Breakeven $26 30 4 (Strike price premium) If, at expiration, XYZ is at exactly $33 26 per share and the investor closes out the transaction position with a closing purchase or has the option exercised against them, they will break even even, excluding transaction costs. Notice the relationship between the buyer and the seller: Call Put Buyer Call Put Seller Maximum Gain Unlimited Strike price premium Premium received Maximum Loss Premium paid Unlimited Strike price premium Breakeven Strike price premium Strike price premium Wants Option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss and the buyer’s maximum loss is the seller’s maximum maxi- mum gain. Both the buyer and the seller will break even at the same point. OPTION PREMIUMS The price of an option is known as its premium. Factors that determine the value of an option and, as a result, its premium, are: The relationship of the underlying stock price to the option’s strike price The amount of time to expiration • The volatility of the underlying stock • Supply and demand In r r An option can be: • In the money. At the money. Out of the money.

SELLING. CALLS An investor who sells a call believes that the underlying stock price will fall and that they he or she will be able to profit from a decline in the stock price by sell- ing selling calls. An investor who sells a call is obligated to deliver the underlying stock if the buyer decides to exercise the option. When looking to establish a position, the seller sellers must determine theirdetermine: • Maximum Their maximum gain. • Maximum loss Their maximum loss. • Breakeven Their breakeven. MAXIMUM GAIN FOR A SHORT CALLS CALL For an investor who has sold uncovered or naked calls, the maximum gain is always limited to the amount of the premium they received when they sold the calls were sold. MAXIMUM LOSS FOR A SHORT CALLS CALL An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited unlim- ited loss. The seller of the calls is subject to a loss if the stock price increases. Since Because there is no limit to how high a stock price may rise, there is no limit to the mount amount of the loss DETERMINING THE investor’s loss. BREAKEVEN POINT FOR A SHORT CALLS CALL xxxx://xxx.xxxxxxxxx.xxx An investor who has sold calls must determine where the stock price must be at expiration in order for the investor to break even on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate by the amount of the option premium received received, and the investor will still will break even at expi- rationexpiration. To determine an investor’s breakeven point on a short call, use the following formula: breakeven = strike price + premium EXAMPLE Breakeven Strike price premium An investor has established the following option position: Short 1 XYZ May 30 call at 3 3. The investor’s maximum gain, maximum loss, and breakeven will be: • Maximum gain: $300 (The amount of the premium received) • Maximum loss: Unlimited • Breakeven: $33 = 30 + 3 (Strike strike price + premium) If, If at expiration, expiration XYZ is at exactly $33 per share and the investor closes out the transaction with a closing purchase or has the option exercised against themhim or her, they the investor will break even even, excluding transaction transactions costs. Notice the relationship between the buyer and the seller: Call Buyer Call Seller Maximum Gain gain Unlimited Premium received Maximum Loss loss Premium paid Unlimited Breakeven Strike price + premium Strike price + premium Wants Option option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss loss, and the buyer’s maximum loss is the seller’s maximum gain. Both the buyer and the seller will break even at the same point. BUYING PUTS xxxx://xxx.xxxxxxxxx.xxx An investor who purchases a put believes that the underlying stock price will fall and that he or she will be able to profit from a decline in the stock price by purchasing puts. An investor who purchases a put can control the underlying stock and profit from its price decline while limiting his or her loss to the amount of the premium paid for the puts. Buying puts allows investors to maximize their leverage while limiting their losses. It may also allow investors to realize a more significant percentage return based on their investment compared to the return that could be realized from shorting stock. When looking to establish a position, buyers must determine: • Their maximum gain. • Their maximum loss. • Their breakeven.

SELLING. CALLS An investor who sells a call believes that the underlying stock price will fall and that they will be able to profit from a decline in the stock price by sell- ing calls. An investor who sells a call is obligated to deliver the underlying stock if the buyer decides to exercise the option. When looking to establish a position, the seller must determine their: • Maximum gain. gain • Maximum loss • Breakeven MAXIMUM GAIN SHORT CALLS For an investor who has sold uncovered or naked calls, maximum gain is always limited to the amount of the premium they received when they sold the calls calls. MAXIMUM LOSS SHORT CALLS An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited loss. The seller of the calls is subject to a loss if the stock price increases. Since there is no limit to how high a stock price may rise, there is no limit to the mount amount of the loss their loss. DETERMINING THE BREAKEVEN FOR SHORT CALLS An investor who has sold calls must determine where the stock price must be at expiration in order for the investor to break even on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate by the amount of the option premium received and the investor still will break even at expi- ration. To determine an investor’s breakeven break-even point on a short call, use the following formula: EXAMPLE Breakeven = Strike price + premium An investor has established the following option position: Short 1 XYZ May 30 call at 3 The investor’s maximum gain, maximum loss, and breakeven will be: Maximum gain: $300 (The amount of the premium received) Maximum loss: Unlimited Breakeven: $33 = 30 + 3 (Strike price + premium) If, If at expiration, expiration XYZ is at exactly $33 per share and the investor closes out the transaction with a closing purchase or has the option exercised against them, they will break even excluding transaction transactions costs. Notice the relationship between the buyer and the seller: Call Buyer Call Seller Maximum Gain Unlimited Premium received Maximum Loss Premium paid Unlimited Breakeven Strike price + premium Strike price + premium Wants Option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss and the buyer’s maximum loss is the seller’s maximum gain. Both the buyer and the seller will break even at the same point.

SELLING. CALLS An investor who sells a call believes that the underlying stock price will fall and that they he or she will be able to profit from a decline in the stock price by sell- ing selling calls. An investor who sells a call is obligated to deliver the underlying stock if the buyer decides to exercise the option. When looking to establish a position, the seller sellers must determine theirdetermine: • Maximum Their maximum gain. • Maximum loss Their maximum loss. • Breakeven Their breakeven. MAXIMUM GAIN FOR A SHORT CALLS CALL For an investor who has sold uncovered or naked calls, the maximum gain is always limited to the amount of the premium they received when they sold the calls were sold. MAXIMUM LOSS FOR A SHORT CALLS CALL An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited unlim- ited loss. The seller of the calls is subject to a loss if the stock price increases. Since Because there is no limit to how high a stock price may rise, there is no limit to the mount amount of the loss DETERMINING THE investor’s loss. BREAKEVEN POINT FOR A SHORT CALLS CALL An investor who has sold calls must determine where the stock price must be at expiration in order for the investor to break even on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate by the amount of the option premium received received, and the investor will still will break even at expi- rationexpiration. To determine an investor’s breakeven point on a short call, use the following formula: breakeven = strike price + premium EXAMPLE Breakeven Strike price premium An investor has established the following option position: Short 1 XYZ May 30 call at 3 3. The investor’s maximum gain, maximum loss, and breakeven will be: • Maximum gain: $300 (The amount of the premium received) • Maximum loss: Unlimited • Breakeven: $33 = 30 + 3 (Strike strike price + premium) If, If at expiration, expiration XYZ is at exactly $33 per share and the investor closes out the transaction with a closing purchase or has the option exercised against themhim or her, they the investor will break even even, excluding transaction costs. Notice the relationship between the buyer and the seller: Call Buyer Call Seller Maximum Gain gain Unlimited Premium received Maximum Loss loss Premium paid Unlimited Breakeven Strike price + premium Strike price + premium Wants Option option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss loss, and the buyer’s maximum loss is the seller’s maximum gain. Both the buyer and the seller will break even at the same point.

SELLING. CALLS An investor Investors who sells a call believes sell calls believe that the underlying stock price will fall and that they will be able to profit from a decline in the stock price by sell- ing callsprice. An investor who sells a call is obligated to deliver the underlying stock if the buyer decides to exercise exer- cise the option. When looking to establish a position, the seller sellers must determine theirdetermine: • Maximum gain. Their maximum gain • Maximum Their maximum loss • Breakeven Their breakeven MAXIMUM GAIN SHORT CALLS For an investor who has sold uncovered or naked calls, the maximum gain is always limited to the amount of the premium they the investor received when they sold the calls were sold. MAXIMUM LOSS SHORT CALLS An investor who has sold uncovered or naked calls does not own the underly- ing stock and, as a result, has unlimited risk and the potential for an unlimited unlim- ited loss. The seller of the calls is subject to a loss if the stock price increases. Since Because there is no limit to how high a stock price may rise, there is no limit to the mount amount of the loss investor’s loss. DETERMINING THE BREAKEVEN FOR SHORT CALLS An investor who has sold calls must determine where the stock price must be at expiration in order for the investor to break even breakeven on the transaction. An investor who has sold calls has received the premium from the buyer in the hopes that the stock price will fall. If the stock appreciates, the investor may begin to lose money. The stock price may appreciate by the amount of the option premium received received, and the investor will still will break even breakeven at expi- rationexpiration. To determine an investor’s breakeven point on a short call, call use the following formula: breakeven = strike price + premium EXAMPLE Breakeven Strike price premium An investor has established the following option position: Short 1 XYZ May 30 call at 3 The investor’s maximum gain, maximum loss, and breakeven will be: Maximum gain: $300 (The the amount of the premium received) Maximum loss: Unlimited Breakeven: $33 = 30 + 3 (Strike strike price + premium) If, If at expiration, expiration XYZ is at exactly $33 per share and the investor closes out the transaction with a closing purchase or has the option exercised against themhim or her, they the investor will break even breakeven, excluding transaction transactions costs. Notice the relationship between the buyer and the seller: Call Buyer Call Seller Maximum Gain gain Unlimited Premium received Maximum Loss loss Premium paid Unlimited Breakeven Strike price + premium Strike price + premium Wants Option option to Exercise Expire Because an option is a two-party contract, the buyer’s maximum gain is the seller’s maximum loss loss, and the buyer’s maximum loss is the seller’s maximum maxi- mum gain. Both the buyer and the seller will break even breakeven at the same point.