Chapter 06 · Section 6.1
Breakeven Point
Market Outlook : STABLE
Profit Potential : limited to
high ex.
low ex. -
net premium
Loss Potential : limited if
market falls
: unlimited if
market rises
Breakeven Points :
The breakeven points occur when market price at expiration equals...
a) ...the high exercise price minus the maximum profit.
b) ...the high exercise price plus the maximum profit.
c) ...the low exercise price minus the maximum profit.
d) ...the low exercise price plus the maximum profit.
e) a and b
f) c and d
Looking at the graph, you can see that the maximum profit occurs when the $ underlying price is equal to the high exercise price.
The breakeven points are symmetrical. The point at which you begin to lose $ is equally distant above and below one of the exercise prices.
Therefore, only use one of the exercise prices in order to respect this equal-distance relationship.