To calculate the payoff on long position put and call options at different stock prices, use these formulas: We also learned that the MAX function means that if the stock price - strike price is negative, just use zero. The break-even point in a profit and loss diagram is the point where an options strategy would neither make any profits nor incur any losses. At a stock price of $94, (MAX ($100 - $94, 0) - $3 = $6 - $3 = $3 per share profit. Let's review what we've learned. With our above argument, we can view this strategy as a limited profit with no downside risk but unlimited upside risk. In this case its $100 + $3 = $103. Therefore, there is no downside risk, and the maximum profit than an investor earns through this strategy is the premium received. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. In other words, it is the price at which the sellers and buyers value an asset right now., whereas the y-axis represents the profit/loss that one reaps from the stock options. courses that prepare you to earn In the first scenario, the share prices fall below to $0/- at expiration giving the holder the opportunity to exercise the option, whereas, in another scenario, the share prices rally to $85/- at expiration. Hence, whenever a put option is written by the seller or writer, it gives a payoff of zero (since the put is not exercised by the holder) or the difference between stock price and the strike price, whichever is minimum. Profits are limited to the premium he collects when the strike price exceeds the stock price and the calls are allowed to lapse. In our last scenario, the stock price soars above instead of falling ($75/-) strike price and hence, the buyer would rather not choose to exercise the put option as exercising put option here does not make sense or we can say that no one would sell the share at $70/- if it can be sold in the spot market at $75/-.
The other three situations are: The four situations are the basic forms of a profit and loss diagram associated with options trading. A short put refers to when a trader opens an options trade by selling or writing a put option. Copyright © 2020. Let’s calculate the Payoff for both the scenarios. BEP may also refer to the revenues that are needed to be reached in order to compensate for the expenses incurred.”. Here, the strike price is $70/- and one lot of put contract is of 100 shares. The strike price is $40, and the premium is $2.50.
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