Financial Tutorial
 

Options: Basic Strategies - Limited Risk

LONG CALL

To be used when a sharp increase of the underlying security price is expected.
Maximum risk: limited to premium paid.
Maximum profit: unlimited.

SHORT CALL COVERED BY UNDERLYING

To be used when a stabilization of the underlying security price is expected.
Maximum risk: limited to loss of profit due to increase of the underlying security price. Even if the risk is covered because you don't need the repurchase the security if you are assigned, the potential loss if the security price increases is unlimited.
Maximum profit: limited to premium received.

LONG PUT

To be used when a sharp decrease of the underlying security price is expected. Long put can be used as a protection if you have the security in the portfolio or as a speculative position if not. Long put on index are often used to protect a well diversified portfolio.
Maximum risk: limited to premium paid.
Maximum profit: unlimited.

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