# Put Options Profit, Loss, Breakeven

Put Options

2. Put Option Profit, Loss, Breakeven
3. Downside of Buying Put Options

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.

Next Page - Downside of Buying Put Options