The purpose of this lesson is to understand each of the following positions by recreating them yourself in the form of an Option Profit Diagram.
The holding of an option only is called a naked position. That is, if you buy a call option and nothing else, you have a naked call.
There are four naked positions: buying a call, writing a call, buying a put, and writing a put.
The values from the four possible naked positions are shown in the following. In each graph, value is defined as the terminal payoff less the cost of the option.
Buy Naked Call Option
Buy Naked Put Option
Write Naked Call Option
Write Naked Put Option
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