Question:
What is the maximum loss for an option buyer?
What is the maximum loss for an option buyer?
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An option buyer has limited risk (capped at the premium paid) and unlimited profit potential, whereas an option seller has limited profit (the premium) and unlimited risk.
Updated On: Jun 22, 2026
- Unlimited
- Equal to the strike price
- The option premium paid
- Equal to the spot price of the underlying asset
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The Correct Option is C
Solution and Explanation
Step 1: Analyzing Option Payoff Profiles:
Let us examine the payoff of a long option position at expiration. For a call option, the payoff is $\max(0, S_T - K)$ minus the premium paid ($P$).
Step 2: Evaluating Downside Risk:
If the market moves unfavorably, the option buyer will simply let the option expire unexercised. The value of the option contract drops to zero.
Step 3: Quantifying the Absolute Downside:
Since the option buyer cannot lose more than the upfront cost of the contract, their maximum loss is strictly limited to the option premium paid (C).
Let us examine the payoff of a long option position at expiration. For a call option, the payoff is $\max(0, S_T - K)$ minus the premium paid ($P$).
Step 2: Evaluating Downside Risk:
If the market moves unfavorably, the option buyer will simply let the option expire unexercised. The value of the option contract drops to zero.
Step 3: Quantifying the Absolute Downside:
Since the option buyer cannot lose more than the upfront cost of the contract, their maximum loss is strictly limited to the option premium paid (C).
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