Options Trading Tutorial

How is maximum profit that can be earned on an option contract calculated if strike price & buy price is known

For instance, if one put option was purchased for $300 and its strike price is 30, how can I calculate the maximum profit that can be earned on this option contract? Is there a formula to this?

Public Comments

1. On a put, the best outcome is if the share price goes to $0.00. In which case the profit equals the strike price less the cost of the put.
2. For a put opiton the formula is (strike price x multiplier) - premium paid. The multiplier is usually 100 if the underlying is a stock or stock index. In your example that makes the maximum profit possible ($30.00 x 100) - $300 = $2,700 For a call option the maximum profit possible is infinite, just as it is for a long stock position.