Defining Profit Zones

To decide whether buying puts is a reasonable strategy for you, always be aware of potential profits and losses, rather than concentrating on profits alone. Make Money for Funds

Comparing limited losses to potential profits when using puts for downside protection is one type of analysis that helps you pick value when comparing puts, And when looking for a well-priced speculative move, time to expiration coupled with the gap between current market value and striking price--which dictates the amount of time value premium--will help you to find real bargains in puts.

Premium level is not a reasonable criterion for your selection.

The profit and loss zones for puts are the reverse of the zones for call buyers, because put owners anticipate a downward movement in the stock, whereas call buyers expect upward price movement. See Figure 4.5 for a summary of loss and profit zones and breakeven point using the following example.

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tag : Defining profit zones P.105 by Michale C. Thomsett