Stock Payoff Graph Script
Slide 1
Payoff graphs are a common way to explain how options strategies behave in different scenarios. Today, we’ll help you understand these graphs.
Slide 2
We’ll start with the payoff graph of a stock, then go into two common options strategies. A covered call and a collar.
Slide 3
To better understand these graphs, let’s start with just owning a stock with no options strategy. As the price of the stock increases, so does its value. (Increasing price:increases value).
Slide 4
As the price of the stock decreases, so does its value. (Decreasing price: decreases value).
Slide 5
Now let’s look at a covered call payoff graph. Covered calls are used to generate income and modestly reduce risk on an underlying investment owned by an investor (covered calls: income + risk reduction). Options always have tradeoffs. A covered call trades growth for income (Tradeoff: Growth for income).
Slide 6
Now let’s see how a covered call compares to just owning a stock. Since a covered call generates income, losses may be reduced by the income received (income may reduce losses).
Slide 7
Remember, the tradeoff with a covered call is that growth is limited (growth is limited). Our payoff graph is flat once the stock price reaches the option’s strike price.
Slide 8
Now let’s look at a collar payoff graph. Collars are typically used to help protect against significant losses on an underlying investment held by an investor with minimal or zero cost. (Collars: protection+minimal cost). The trade off is that growth is limited, similar to a covered call (tradeoff: growth is limited).
Slide 9
Collars are typically done at zero-cost by selling a call option to offset the purchase of a put option. The collar strategy will behave similar to just owning the stock within a certain range.
Slide 10
A collar involves buying a put option, which protects the underlying asset by creating a floor starting at the option’s strike price. (Put: creates a floor)
Slide 11
A collar also involves selling a call, which helps offset the cost of buying the put. The tradeoff is this stock now has a ceiling starting at the option’s strike price. (Call: creates a ceiling)
Slide 12
Although we have discussed just a couple strategies today, there are numerous options strategies each with their own unique characteristics, risks and tradeoffs. (Each option strategy has its own unique characteristics, risks and tradeoffs)
Slide 13
Regardless of the strategy, it is important to understand your investment objectives, tolerance for risk, and the tradeoffs of the options strategy. (understand objectives, risk tolerance, and options tradeoffs)
Slide 14
(Risks)
Slide 15
(Glossary)
Slide 16
(Disclosures)
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of 'Characteristics and Risks of Standardized Options.' Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-888-678-4667). The document contains information on options issued by The Options Clearing Corporation. The document discusses exchange traded options issued by The Options Clearing Corporation and is intended for educational purposes. No statement in the document should be construed as a recommendation to buy or sell a security or to provide investment advice. If you need further information, please feel free to call the Options Industry Council Helpline. They will be able to provide you with balanced options education and tools to assist you with your iShares options questions and trading. The Options Industry Council Helpline phone number is 1-888-Options (1-888-678-4667) and its website is www.888options.com.
Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns. Actual investment outcomes may vary. There is no guarantee that these investments strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product or strategy will or is likely to achieve profits.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This material is provided for educational purposes only and is not intended to constitute investment advice or an investment recommendation within the meaning of federal, state or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.
Strategies involving short calls on equities are subject to early assignment risk. Investors may not participate in the growth of the underlying asset and may have their shares sold if assigned. Collars are not guaranteed to be cost neutral and pricing is contingent on strike selection, expiration, liquidity, and commissions.
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