Profit and Loss Calculations for Single Options
Chapters in this video
What this video covers
- Why a long call has unlimited maximum gain while the buyer's maximum loss is capped at the premium paid
- Why a naked short call carries truly unlimited risk, since the underlying stock has no ceiling
- How a long put's maximum gain is capped at strike minus premium, because a stock price can only fall to zero
- Why a short put's maximum loss is NOT unlimited, the classic exam trap that separates short calls from short puts
- The "Calls Add, Puts Subtract" rule for finding breakeven on any single-option contract
- The mirror image rule: the buyer's maximum gain equals the writer's maximum loss on the same contract, and their breakevens are identical
- How to read a profit and loss (P&L) question quickly by identifying position, strike, and premium before reaching for a formula
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