WHAT IS 'Profit Range'

Profit Range refers to the range of prices which return a profit for a business or on a security. People typically use this term to describe businesses or securities with two break-even points, a downside break-even point as well as an upside break-even point, and Profit Range describes the range between the two.

BREAKING DOWN 'Profit Range'

A Profit Range can be a useful metric for investors to compare against the volatility of an underlying asset when designing an investment strategy. In most circumstances, solid investment strategies will match profit ranges with appropriate volatilities. Large profit ranges should usually be matched with high volatility assets, while smaller profit ranges should be matched with lower volatilities. Mismatches between volatility and profit range tend to lead to losses on a position.

The volatility of a security is associated with the amount of uncertainty or risk associated with the value of that security. A high volatility security can change drastically over a short period of time, which can be attractive to investors looking for a fast, high return on an investment. Risk-averse investors would tend to be more attracted to lower volatility securities with steady performance.

Break-Even Analysis and Profit Range

A break-even point is the point at which total revenue and total cost of doing business are equal, resulting in neither gain nor loss. Monitoring the break-even point for a business has a number of useful strategic applications, including assessing capacity and maximum profits after expenses are covered, as well as determining the amount of loss a company can sustain in the event of a downturn.

A break-even point is calculated by dividing total fixed expenses by the contribution margin, which is the margin between sales and total variable costs.

Break-even analysis relies on scrutiny of the contribution margin. Since fixed costs do not fluctuate the way that sales or variable costs do, they represent a constant foundation within the operating costs for a business. Break-even analysis examines demand and price levels to determine the most desirable outcomes for production and sales.

A downside break-even point will be determined by the least desirable circumstances in controlling variable costs while remaining viable in the marketplace, while an upside break-even point will be determined by the most desirable variable costs in relationship to overall sales income.

Profit Range is determined once the upside and downside break-even points are defined, suggesting that in many cases the Profit Range is closely associated with the associated variable costs.

RELATED TERMS
  1. Wide-Ranging Days

    Wide-ranging days describe the price range of a stock on a particularly ...
  2. Volatility Arbitrage

    Volatility arbitrage is a trading strategy that attempts to profit ...
  3. Break-Even Analysis

    An analysis to determine the point at which revenue received ...
  4. Profit Target

    A profit target is a predetermined point at which an investor ...
  5. Range Accrual

    A range accrual is a financial derivative in which the coupon ...
  6. Trading Strategy

    A set of objective rules designating the conditions that must ...
Related Articles
  1. Trading

    Measure Volatility With Average True Range

    Find more profitable entry and exit locations with this standard indicator.
  2. Trading

    Adjusting Day Trading Strategies For Different Market Conditions

    Being a successful trader means knowing when to play the market and how. Find out what strategies will have you on top.
  3. Investing

    How To Profit From Oil Volatility With The Following Strategies

    The recent volatility in oil prices presents an excellent opportunity for traders to make a profit if they are able to predict the right direction.
  4. Trading

    Range Trade Forex With Non-U.S. Dollar Pairs

    If you are following a range-trading strategy, you're better off with pairs that do not include the U.S. dollar. Find out why.
  5. Trading

    How To Profit From Volatility

    We explain four key strategies to profit fom volatility in markets.
  6. Trading

    When Not To Trade

    When conditions arise where systems are likely to perform poorly, traders must exercise discipline and cease trading.
  7. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  8. Trading

    Ratio Writing: A High-Volatility Options Strategy

    Selling a greater number of options than you buy profits from a decline back to average levels of implied volatility.
  9. Investing

    Interpreting a Strategy Performance Report

    A strategy performance report can provide key metrics to decide if your strategy is a winner.
  10. Trading

    Strategies for Trading Volatility With Options (NFLX)

    These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.
RELATED FAQS
  1. What is the Volatility Ratio formula and how is it calculated?

    Understand what the volatility ratio indicator is, how it is calculated and the way this technical indicator is used by traders ... Read Answer >>
  2. Which market indicators reflect volatility in the stock market?

    Learn the most commonly used technical indicators of stock market volatility that are watched by stock market traders and ... Read Answer >>
  3. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
  4. What is the average range of profit margin for a company in the financial services ...

    Learn why a company's profit margin is important in analyzing its worth and how companies within the financial services sector ... Read Answer >>
  5. How can I calculate break-even analysis in Excel?

    Learn what break-even analysis is and how to find the break-even point using the Goal Seek tool in Microsoft Excel using ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center