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
| Position | Max Gain | Max Loss | Breakeven |
|---|---|---|---|
| Long call | Unlimited | Premium paid | Strike + premium |
| Short call | Premium received | Unlimited | Strike + premium |
| Long put | Strike - premium | Premium paid | Strike - premium |
| Short put | Premium received | Strike - premium | Strike - premium |
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.