Profit and Loss Calculations for Single Options

Every options calculation starts here. Before you can tackle spreads, straddles, or tax treatment, you need to know the max gain, max loss, and breakeven for the four basic positions: long call, short call, long put, and short put.

Long Call

• Outlook: Bullish; you profit when the stock rises above the breakeven
• Maximum gain: Unlimited (stock can rise without limit)
• Maximum loss: Premium paid (the most you can lose is what you spent)
• Breakeven = Strike price + premium paid

Example: Buy 1 ABC Jan 50 call at $3

• Breakeven = $50 + $3 = $53
• Max loss = $3 x 100 shares = $300
• Max gain = unlimited

Short Call (Naked)

• Outlook: Bearish or neutral; you profit when the stock stays at or below the breakeven
• Maximum gain: Premium received
• Maximum loss: Unlimited (stock can rise without limit, and you must deliver shares at the strike)
• Breakeven = Strike price + premium received

Example: Write 1 ABC Jan 50 call at $3

• Breakeven = $50 + $3 = $53
• Max gain = $3 x 100 shares = $300
• Max loss = unlimited

Long Put

• Outlook: Bearish; you profit when the stock falls below the breakeven
• Maximum gain = Strike price - premium paid (stock can only fall to zero)
• Maximum loss: Premium paid
• Breakeven = Strike price - premium paid

Example: Buy 1 ABC Jan 50 put at $2

• Breakeven = $50 - $2 = $48
• Max loss = $2 x 100 shares = $200
• Max gain = ($50 - $2) x 100 = $4,800

Short Put (Naked)

• Outlook: Bullish or neutral; you profit when the stock stays at or above the breakeven
• Maximum gain: Premium received
• Maximum loss = Strike price - premium received (stock can fall to zero, and you must buy at the strike)
• Breakeven = Strike price - premium received

Example: Write 1 ABC Jan 50 put at $2

• Breakeven = $50 - $2 = $48
• Max gain = $2 x 100 shares = $200
• Max loss = ($50 - $2) x 100 = $4,800

Exam Tip: Gotchas

• A short put's max loss is NOT unlimited. The stock can only fall to zero, so the worst case is buying worthless stock at the strike price. Compare this to a short call, where max loss truly is unlimited because the stock can rise without limit.
• Buyer and writer are mirror images. The long put's max gain ($4,800) equals the short put's max loss ($4,800). One side's gain is always the other side's loss.

Quick Reference Table

The Key Pattern

• Calls: Breakeven = Strike + Premium (always add for calls)
• Puts: Breakeven = Strike - Premium (always subtract for puts)
• The buyer's breakeven equals the writer's breakeven on the same contract
• Buyers risk the premium; writers earn the premium but take on the opposite risk

Exam Tip: Gotchas

• For calls, breakeven is always strike + premium, both long and short. For puts, breakeven is always strike - premium, both long and short.
• The buyer's breakeven equals the writer's breakeven on the same contract.
• If you remember "Calls Add, Puts Subtract," you can derive any single-option breakeven instantly.