Learning stock options

I was having difficulty trying to learn the basics of stock options. The information was out there in the Internet but not in the format that was easy for me. So, here is one in a format that is easier for me to understand.


Legend

• SP: strike price
• OC: option cost or the premium. Paid by buyer , Received by seller.
• MP: market price of the underlying share
• CO: brokerage commission, paid by both buyer and seller

Option types

• Call: right to buy share
• Put: right to sell share

4 participants

• buyer of call
• seller of call
• buyer of put
• seller of put

Buyer of call (long bullis)

• expecting upward trend (bullish)
• profit = MP-SP-OC-CO, if SP+OC <>
• max profit is potentially unlimited
  
• max lost = OC+CO if SP+OC > MP during option validity

Seller of call (short bearish)

• expecting downward trend (bearish)
• max profit = OC-CO if SP+OC > MP throughout option validity
• max lost = MP-OC+CO if SP+OC <>
• if selling without backing share (naked call), then max lost is potentially unlimited
  
• if selling with backing share (covered call), then max lost is your backing share (value=MP)

Buyer of put (long bearish)

• expecting downward trend
• two ways to achieve profit
  
• profit way 1 = SP-MP-OC-CO if SP+OC > MP throughout option validity
• profit way 2 = OCresale-OCoriginal. Since the MP is going down, then the OC of selling the put option the buyer bought is increasing.
• max lost = OC+CO. lost if SP+OC <>

Seller of put (short bullish)

• expecting upward trend
• max profit = OC-CO if SP+OC <>
• max lost = MP-OC+CO if SP+OC > MP during option validity