Section 5.3 โ€” Breakeven, Max Gain, & Max Loss

  • โš™๏ธ How Option Value Moves

    • Call Options increase in value as the underlying security price rises.

    • Put Options increase in value as the underlying security price falls.

1. ๐Ÿ“ˆ Call Options (XP + Pr = BE):

  • ๐Ÿ’ก Breakeven (BE) Formula for Call

    • Strike Price (XP) + Premium (Pr) = Breakeven

      • Long (Buyer) Call: Profits when stock rises above BE

      • Short (Seller) Call: Profits when stock stays below BE

      Example:

      • Long 1 ABC Jan 50 Call @ 3
        โ†’ BE = 50 + 3 = $53
        โ†’ Profit if stock rises above $53

      ๐Ÿงฎ On a per-share basis:
      Each contract = 100 shares.
      So if the premium = $3 โ†’ $300 total.

๐Ÿ’ฐ Maximum Gain and Loss for Calls

Position / Max Gain / Max Loss / Profit when..

  • Long Call (Buyer) / Unlimited / Premium Paid / Stock price โ†‘ above BE

  • Short Call (Seller) / Premium Received / Unlimited / Stock price โ†“ below BE

  • Examples:

    • Long 1 ABC Jan 50 Call @ 3
      โ†’ Max Gain = Unlimited
      โ†’ Max Loss = $300

    • Short 1 ABC Jan 50 Call @ 3
      โ†’ Max Gain = $300
      โ†’ Max Loss = Unlimited

    Reason:

    • Stock price can rise infinitely (unlimited upside for long call, unlimited risk for short call).

2. ๐Ÿ“‰ Put Options (XP โ€“ Pr = BE):

  • ๐Ÿ’ก Breakeven (BE) Formula for Puts

    • Strike Price (XP) โ€“ Premium (Pr) = Breakeven

      • Long (Buyer) Put: Profits when stock falls below BE

      • Short (Seller) Put: Profits when stock stays above BE

      Example:

      • Long 1 ABC Jan 50 Put @ 3
        โ†’ BE = 50 โ€“ 3 = $47
        โ†’ Profit if stock drops below $47

๐Ÿ’ฐ Maximum Gain and Loss for Puts

Position / Max Gain / Max Loss / Profit when..

  • Long Put (Buyer) / From BE to $0 (max $47) / Premium Paid / Stock price โ†“ below BE

  • Short Put (Seller) / Premium Received / Strike Price โ€“ Premium / Stock price โ†‘ above BE

  • Examples:

    • Long 1 ABC Jan 50 Put @ 3
      โ†’ Max Gain = $47 ร— 100 = $4,700 (if stock drops to $0)
      โ†’ Max Loss = $300

    • Short 1 ABC Jan 50 Put @ 3
      โ†’ Max Gain = $300
      โ†’ Max Loss = $47 ร— 100 = $4,700 (if stock drops to $0)

Options

ใ€ฐ๏ธ

Options ใ€ฐ๏ธ

๐Ÿ“Š Summary Chart: Calls vs. Puts

Position / Formula for BE / Max Gain / Max Loss / Want Stocks to..

  • Long Call / XP + Pr / Unlimited / Premium Paid / Rise

  • Short Call / XP + Pr / Premium Received / Unlimited / Stay the same or fall

  • Long Put / XP โ€“ Pr / BE to $0 / Premium Paid / Fall

  • Short Put / XP โ€“ Pr / Premium Received / BE to 0 (if exercised) / Stay the same or rise

๐Ÿงฉ Key Takeaways

  • Call = Right to Buy โ†’ Bullish

  • Put = Right to Sell โ†’ Bearish

  • Breakeven always expressed per share

  • Max Gain/Loss depend on direction of price movement

  • Call buyers & put buyers risk only the premium

  • Call writers & put writers risk much more

Next Section

โœบ Review questions โœบ

  • Strike Price + Premium = BE

  • Strike Price โ€“ Premium = BE

  • 60 + 4 = $64

  • 40 โ€“ 3 = $37

  • Unlimited

  • Unlimited

  • Breakeven to $0 (if stock drops to zero)

  • Strike Price โ€“ Premium, or BE ร— 100 shares

  • Neither.

    • Long put = bearish

    • Short call = bearish
      (Bullish: Long call, short put)