Hi Guys, Can anyone explain in plain english how to find what is the maximum loss/gain on put and call options. Too difficult for me to understand. Thanks in advance.
Look at the payoffs graph for each option, that should help you a lot. Long call option has unlimited gain, maximum loss is premium paid. __/ Short Call option has unlimited loss, maximum gain is premium received __ …\ (ignore the dots) Long Put has maximum gain is equal to strike price, maximum loss is premium paid __ Short Put has maximum loss equal to strike price, maximum gain is premium received __ /
learn/memorise the diagrams… its the only way to do it im afraid… unless you trade options yourself, i find it too difficult to do it any other way… once you know how to draw the diagrams, its very very easy… theres only 4 diagrams… basically, to ‘write’ or ‘sell’ an option, you are going to RECIEVE the premium, therefore the diagrams are ‘upside down’… to ‘buy’ an option, you must PAY the premium, so the diagrams are the right way up… a ‘call’ is the right to buy, so its like a ‘long stock’… starts flat, then goes outward… a ‘put’ is the right to sell, so its like a ‘short stock’… starts outward, then goes flat…
the decision tree is on the last page of the schweser quicksheet…