Buying a Put Option – Part 2/2
In ”Buying a Put Option – Part 1/2” we looked at an AAPL option chain and bought a Jan 185 put option for $4.65 and defined the positions potential reward, maximum risk and breakeven point.
With this information we can now draw a risk profile, a graph that shows the value of the put option (at expiration) with respect to the underlying, which in this case is the price of AAPL stock. Don’t worry!! – You won’t have to draw this by hand as many trading platforms do this for you automatically.
Generally, the risk profile shows you more than one line, meaning it will show you the value of the put option today as well as at expiration. I have only shown the value at expiration for simplicity.
Here is a summary of the Long Put Option:
- Unlimited Reward
- Limited Risk (Debit Paid)
- Breakeven = Strike Price – Option Premium
It is important that you take the time to understand this trade as it forms the underlying foundation for the advanced strategies I will cover in the future.
