Fortunately, when you’re calculating the buying or selling of put options for the Series 7(which give the holder the right to sell), you use the options chart in the same way but with a slight change. Instead of using calls same as you do with call options, you use puts switch — in other words, you place the premium and the strike price on opposite sides of the options chart.
| Buying or Selling | Maximum Loss | Maximum Gain |
|---|---|---|
| Buying a put | Premium | (strike – premium) × 100 shares |
| Selling a put | (strike – premium) × 100 shares | Premium |
How to buy put options
This will explain how to find the maximum loss, maximum gain, and the break-even point for buyers (holders) of put options. Here’s the ticket order for the calculations:
Buy 1 TUV Oct 55 put at 6
Find the maximum loss.
Exercising an option is, well, optional for the holder, so buyers of put options can’t lose more than the premium. Because this investor purchased the option for $600 (6 × 100 shares per option), you enter that value in the Money Out side of the options chart. The maximum loss (the most that this investor can lose) is the $600 premium paid.
Determine the maximum gain.
To find the maximum gain, you have to exercise the option at the strike price. The strike price is 55, so you enter $5,500 (55 strike price × 100 shares per option) on the opposite side of the options chart. (Puts switch: The premium and the strike price go on opposite sides of the options chart.) Exercising the option means selling the underlying stock, so that $5,500 is Money In.
You’ve already determined the maximum loss; now look at the Money In portion of the options chart. Because you find $4,900 more Money In than Money Out ($5,500 – $600), the maximum gain is $4,900.
The break-even point is the security price where the investor doesn’t have a gain or loss. The simplest way to figure this point out for a put option is to use put down (put options go in-the-money when the price of the stock goes below the strike price). When using put down, you subtract the premium from the strike price:
Strike price – premium = 55-6 = 49
For this investor, the break-even point is 49. The investor paid $6 for the option, so the option has to go $6 in-the-money in order for this investor to recoup the amount that she paid. As with call options, the break-even point is always the same for the buyer and the seller.
How to Sell put options
The following steps show you how to calculate the maximum gain and loss for the seller of a put option. You will find out how to demonstrate calculations for the break-even point. Here’s the ticket order for the example:
Sell 1 TUV Sep 30 put at 8
Determine the maximum gain.
The seller makes money only if the holder of the option fails to exercise it. This investor sold the option for $800 (8 × 100 shares per option); you put that number in the Money In side of the options chart. The maximum gain (the most this investor can make) is $800.
Find the maximum loss.
To calculate the maximum loss, you have to exercise the option at the strike price. The strike price is 30, so you place $3,000 (30 strike price × 100 shares per option) on the opposite side of the options chart. (Remember puts switch: The premium and strike price go on opposite sides of the options chart.)
You’ve already determined the maximum gain; now look at the Money Out portion of the options chart and compare it to the Money In. The maximum potential loss for this investor is the $2,200 difference between the Money Out and the Money In.
You calculate the break-even point for buying or selling puts the same way: You use put down (the strike price minus the premium) to figure out the break-even point:
Strike price – premium = 30 – 8 = 22
For this investor, the break-even point is 22. Because this investor received $8 for the option, the option has to go $8 in-the-money for this investor to lose the amount she received for selling the option. Put options go in-the-money when the price of the stock goes below the strike price (put down).