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Suppose the stock is $41 at expiry. The graph says I will lose money. I think I paid $37.20 for (net debit) at this price. I would make money, not lose. What am I missing?

Thanks for all your input, please be gentle I am new to this.

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What I intended to buy was on original image, but edited out. Here it is again.. I did not mimic anyone, it was originally a simple covered call, I added a put to protect from stock going lower..

enter image description here

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    I edited the image to just show the graph. Please edit your question to tell us exactly what you bought or sold. An option P/L graph is typically a straight line at expiration. This looks strange to me. Jun 30 '15 at 16:52
  • That is very odd. It looks like a straddle maybe with fees that grow with how much money you make?
    – rhaskett
    Jun 30 '15 at 17:03
  • @rhaskett , looks like OP mimicked someone's spread trade on dough without knowing what it was. Looks to me like a double calendar spread, since that kind of spread has multiple expirations these charts aren't able to tell the whole picture
    – CQM
    Jul 1 '15 at 0:46
  • you sure it was a net debit and not a net credit?
    – CQM
    Jul 1 '15 at 0:48
  • it was a net debit, I just uploaded the details again..
    – userX
    Jul 1 '15 at 5:12
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Suppose the stock is $41 at expiry. The graph says I will lose money. I think I paid $37.20 for (net debit) at this price. I would make money, not lose. What am I missing?

The `net debit' doesn't have anything to do with your P/L graph. Your graph is also showing your profit and loss for NOW and only one expiration. Your trade has two expirations, and I don't know which one that graph is showing. That is the "mystery" behind that graph.

Regardless, your PUTs are mitigating your loss as you would expect, if you didn't have the put you would simply lose more money at that particular price range.

If you don't like that particular range then you will have to consider a different contract.

it was originally a simple covered call, I added a put to protect from stock going lower..

Your strike prices are all over the place and NBIX has a contract at every whole number.... there is nothing simple about this trade. You typically won't find an "always profitable" combination of options. Also, changes in volatility can distort your projects greatly.

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  • An option pricing graph of a diagonal position can only show the P&L of a near term expiration. Jun 26 '20 at 14:50
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You haven't said why you think you will gain at $41, but the graph never lies. Take it one piece at a time: At $41, your stock will lose a big chunk of value. Your short calls will expire. Your puts will gain a bit of value. The stock's loss outweighs the option gains.

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Buying a short term protective put converts a covered call position to another strategy. So while you'd like us to be gentle, that's impossible because because the short call that you sold is ITM and the long put that you bought expires sooner than the short call which expires in a year. The explanation of that position is complex so here's the short version.

When you add a protective put of the same expiration to a covered call, it becomes a long stock collar. That position is equivalent to a vertical spread. However, you bought a put that expires in less than a month and that converts the covered call to a diagonal spread. In order to understand why it's a diagonal spread, you need to understand synthetic positions which you read about here or here.

You asked:

Suppose the stock is $41 at expiry. The graph says I will lose money. I think I paid $37.20 for (net debit) at this price. I would make money, not lose. What am I missing?

The short answer is that when your stock drops from $47.50 to $41, it loses more than you gain from the short call dropping in value and the long put gaining in value.

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