Put Option Profit/Loss, Breakeven

The following is the profit/loss graph at expiration for the put option in the example given on the previous page.

Break-even

The breakeven point is quite easy to calculate for a put option:

Breakeven Stock Price = Put Option Strike Price - Premium Paid

To illustrate, the trader purchased the $47.50 strike price put option for $0.44. Therefore, $47.50 - $0.44 = $47.06. The trader will breakeven, excluding commissions/slippage, if the stock falls to $47.06 by expiration.

Profit

To calculate profits or losses on a put option use the following simple formula:

Put Option Profit/Loss = Breakeven Point - Stock Price at Expiration

For every dollar the stock price falls once the $47.06 breakeven barrier has been surpassed, there is a dollar for dollar profit for the options contract. So if the stock falls $5.00 to $45.00 by expiration, the owner of the the put option would make $2.06 per share ($47.06 breakeven stock price - $45.00 stock price at expiration). So total, the trader would have made $206 ($2.06 x 100 shares/contract).

Partial Loss

If the stock price decreased by $2.75 to close at $47.25 by expiration, the option trader would lose money. For this example, the trader would have lost $0.19 per contract ($47.06 breakeven stock price - $47.25 stock price). Therefore, the hypothetical trader would have lost $19 (-$0.19 x 100 shares/contract).

To summarize, in this partial loss example, the option trader bought a put option because they thought that the stock was going to fall. By all accounts, the trader was right, the stock did fall by $2.75, however, the trader was not right enough. The stock needed to move lower by at least $2.94 to $47.06 to breakeven.

Complete Loss

If the stock did not move lower than the strike price of the put option contract by expiration, the option trader would lose their entire premium paid $0.44. Likewise, if the stock moved up, irrelavent by how much it moved upward, then the option trader would still lose the $0.44 paid for the option. In either of those two circumstances, the trader would have lost $44 (-$0.44 x 100 shares/contract).

Again, this is where the limited risk part of option buying comes in: the stock could have risen 20 points, potentially blowing out a trader shorting the stock, but the option contract owner would still only lose their premium paid, in this case $0.44.

Buying put options has many positive benefits like defined-risk and leverage, but like everything else, it has its downside, which is explored on the next page.

1. Buying Put Options	3. Downside of Buying Put Options
2. Put Option Profit/Loss; Breakeven

Next Page - Downside of Buying Put Options