Long Put Option Breakeven and Maximum Potential Profit
An investor buys 1 QRS 40 Put at 3.50. What is the investor's breakeven stock price and maximum potential profit?
Long put breakeven = Strike minus Premium ($40 - $3.50 = $36.50). Maximum profit occurs if the stock drops to $0 ($36.50 × 100 = $3,650).
Complete Analysis & Legal Rationale
Breakeven = Strike ($40) - Premium ($3.50) = $36.50. Since a stock price cannot fall below $0, the maximum gain is from $36.50 down to $0, which equals $36.50 per share ($3,650 per contract).
Mathematical Step-by-Step Derivation
- Step 1: Breakeven = Strike ($40.00) - Premium ($3.50) = $36.50.
- Step 2: Stock price floor = $0.00.
- Step 3: Max Profit = (Breakeven $36.50 - $0.00) × 100 = $3,650.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately calculates $36.50 breakeven and $3,650 maximum gain at stock price zero.
Treats the position as a long call (adding premium and assuming unlimited gain).
Assumes max profit is full strike price without subtracting premium paid.
Confuses option premium with maximum profit.
Official Standard: Standard breakeven and maximum gain disclosures for long put options.