Been looking at put option graphs but they’re confusing. The lines and curves don’t make much sense yet.
I understand the basic idea of puts, but the profit/loss charts are hard to read. Breakeven points and max profit areas are tricky.
Did anyone else find these tough at the beginning?
X-axis shows asset price at expiration. Y-axis shows profit/loss.
• Strike price = $50, premium = $3
• Breakeven = $47 ($50 - $3)
• Max loss = $3 (premium paid)
• Profit increases as price drops below $47
Downward sloping line after breakeven point.
That green line indicates profit when the price is under the strike price minus your premium.
Those graphs can be quite challenging at first. Remember that put options are profitable when the price is below your strike price.
The breakeven point usually combines your strike price with the premium you spent. Anything lower is where you start to see profit.
While it seems max profit happens if the asset drops to zero, just concentrate on where you begin to earn and where you can face losses.
My first put option trade was a disaster because I didn’t understand the graph showing time decay.
Focus on that hockey stick shape. When price drops below your breakeven, profits accelerate fast.
I lost $200 on Apple puts because I thought being right about direction was enough. The graph would have shown me I needed a bigger move.