So far we have learned about the six different basic positions of the stock market and options.  We have a basic three instruments, they are stock, calls and puts, and we can be either long or short.  So we have six basic positions, and these are the risk/reward graphs:

     1) Long stock

long-stock

     2) Short stock

short-stock

     3) Long Call

long-call

     4) Short Call (Write a Call)

short-call

     5) Long Put

long-put

     6) Short Put (Write a Put)

short-put

If you are Long or Short Stock, or Short a Call or Short a Put you have an unlimited loss potential (or down to $0 on the price of the stock).  If you are Long a Call or Long a Put you have a limited loss.  If you are Long or Short Stock or Long a Call or Long a Put you have an unlimited gain potential. 

Next we will start to combine these positions, to see the true power of options and ways to use them effectively.

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