What it is
You sell a put below today's price and use its premium to buy a call above it. In this example the two nearly cancel, so the trade opens for close to nothing. What pays for the call is not cash but an obligation: if the stock falls below the put's strike, you will be buying 100 shares there.
Between the two strikes both options expire worthless and very little happens. Above the call it behaves like owning the stock; below the put it behaves like owning the stock too, at a loss. It is, in effect, a way to take on most of a stock's movement outside a band, for almost no money up front.
What has to happen for it to make money
The stock has to rise past the call's strike plus the small net cost. Above that, the gain grows without a ceiling. A stock that stays in the band leaves the result near zero. A fall below the put's strike loses a dollar a share for every dollar, down to a price of zero.
It is a bullish bet with a bearish consequence. Rising volatility helps it a little in this example, because the bought call gains slightly more than the sold put loses; on real quotes, where puts tend to carry richer premiums, that balance can tip the other way.
Once it is on
The put is the part that needs planning. Anyone who would not want to own the stock at the put's strike, or does not have the cash or margin to do so, is carrying a risk the near-zero cost hides. People who use it on a stock they are happy to buy lower see the put as a limit order they are paid to place.
What goes wrong
A fall. The cheap entry encourages size, and every contract is an obligation to buy 100 shares below the market. A drop well past the put's strike produces a loss as large as owning those shares outright.
Nothing at all. A stock that sits between the strikes until expiry returns roughly nothing, and the call's chance of paying off has been used up.
Pros and cons
- Pro: exposure to a rise for little or no money down.
- Pro: no ceiling on the gain above the call.
- Pro: little lost if the stock stays in the band.
- Con: the sold put carries nearly the full downside of the stock.
- Con: needs margin, or cash, for the put.
- Con: the low cost makes it easy to oversize.
In Restrike
A put and a call are different types, so the Log keeps them as two rows: a short put, scored as one, and a bought call, recorded in dollars. A shared strategy label scores the pair together. Import is read-only, and Restrike never places a trade.