Payoff diagrams, breakeven and maximum loss
Compute breakeven, maximum gain and maximum loss for each basic position before you ever trade one.
Options risk. Long options can lose 100% of the premium; short options can lose far more and may be assigned early. Examples use synthetic prices and the common 100-share multiplier — check actual contract terms.
The formulas (at expiration, per share)
Long call: breakeven = strike + premium; max loss = premium; max gain unlimited.
Long put: breakeven = strike − premium; max loss = premium; max gain = strike − premium (if the stock goes to zero).
Short call (uncovered): breakeven = strike + premium; max gain = premium; max loss unlimited. Short put: breakeven = strike − premium; max gain = premium; max loss = strike − premium.
Multiply per-share figures by 100 for a standard contract. Before expiration, values also depend on time and volatility, so real P/L differs from the expiry diagram.
Worked example
A long put (synthetic)
- Buy a 40-strike put for 1.50 ($150).
- Breakeven = 40 − 1.50 = 38.50.
- Stock at $35 at expiry: value (40 − 35) × 100 = $500; profit $350.
- Max loss $150 (stock ≥ $40). Max gain (40 − 1.50) × 100 = $3,850 if the stock goes to $0.
Write down breakeven and max loss first; they define the trade.
Common misconceptions
“If the stock moves my way, I profit.”
It must move beyond breakeven (and quickly enough) to profit on a long option.
“Short puts are low risk because they usually expire worthless.”
Most of the time a small gain; occasionally a loss many times the premium.
Checkpoint