
We continue from our previous article on Long Put Option: How to Trade Long Put? Payoff Charts Explained and discuss the limited profit limited loss potential for a Long Put Option Position.
What is the maximum profit possible in a Long Put Option Position
Long Put Option Position is said to be a Limited Profit, Limited Loss position.
The maximum profit possible in a Long Put Option Position is when the underlying stock price goes to Zero i.e. the company goes bankrupt. Then, you get the maximum difference upon exercising the Long Put Option Position.
Payoff from a Long Put Option Position = Strike Price  Underlying Price.
This value will be maximum when the Undelrying Price goes to zero, so you get to keep the entire Strike Price. However, you also need to consider the money you paid upfront to buy the Put Option.
SO in the example above, if the Microsoft company goes bankrupt (say for example), then the stock price of Microsoft will go to Zero, and the maximum profit you will get from this Long Put Option Position is:
Payoff from a Long Put Option Position = Strike Price  Underlying Price  Premium paid
= $30  $0  $5
= $25
This will be your maximum profit from a Long Put Option Position.
What is the maximum Loss possible in Long Put Option Position
The maximum loss possible in Long Put Option Position is complete loss of option premium or price you pay to buy the put option.
In the above example, if the price of underlyng micrsoft stays above $30, the Put option cannot be exercised. Hence, you will loose your $5 which you used to buy the Long Put Option. That is your maximum loss.
However, one more important thing that you need to consider is the brokerage you pay for trading options contracts. Irrespective of whenther you make profits or losses, you need to deduct the brokerage from your net profits or losses, as that is a cost.
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