To get to a point where your loss is zero breakeven the price of the option should increase to cover the strike price in addition to premium already paid.
Stocks Introduction to profit-loss diagrams Diagrams aren't just horrible, boring torture devices drawn by old Econ teachers on screechy chalkboards. We've been there. For options, profit-loss diagrams are simple tools to help you understand and analyze option strategies before investing. When completed, a profit-loss diagram shows the profit potential, risk potential and breakeven point of a potential option play. They're drawn on grids, with the horizontal axis representing a range of stock prices that the underlying stock could go to and the vertical axis representing the corresponding profit or loss for the option investor on a per-share basis.
Your maximum gain is unlimited as a call buyer given the fact that there is no ceiling to price increase. What are your choices as a call buyer?
What are your two main objectives as a call buyer? As a call seller your maximum loss is unlimited. To reach breakeven point, the price of the option should increase to cover the strike price in addition to premium already paid.
Call options: Learn the basics of buying and selling
Your maximum gain as a call seller is the premium already received. What are your choices as a call seller?
What is your option buyer profit objective as a call seller? As a Put Buyer, your maximum loss is the premium already paid for buying the put option.
The price of the call contract must act as a proxy response for the valuation of 1 the estimated time value — thought of as the likelihood of the call finishing in-the-money and 2 the intrinsic value of the option, defined as the difference between the strike price and the market value multiplied by max[S-X, 0]. Determining this value is one of the central functions of financial mathematics.
To option buyer profit breakeven point, the price of the option should decrease to cover the strike price minus the premium already paid. Your maximum gain as a put buyer is the strike price minus the premium.
As a put seller your maximum loss is the strike price minus the premium.
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To get to a point where your loss is zero breakeven the price of the option should not be less than the premium already received. Your maximum gain as a put seller is the premium received. What are your choices as a put seller?
What is your main objective as a put seller? As a put seller, investors believe that the underlying stock price will rise and that they will be able to profit from a rise in the stock price by selling puts. Investors who sell a put are obligated to purchase the underlying stock if the buyer decides to exercise the option.
An investor who sells a put may also be selling the put as a way to obtain the underlying security at a cheaper price.