What Is Profit Range?

Profit range refers to the range of prices within which an investment position returns a profit. Certain strategies will determine the downside breakeven point and an upside breakeven point for a given investment position. The range between the two points is known as the profit range.

Understanding Profit Range

Profit range can be described as the range of potential profitable outcomes from a given investment position. Profit range is a helpful tool for investors, enabling them 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 paired 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 security with high volatility 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, on the other hand, generally prefer to play it safe with steady performing, lower volatility securities.

Profit range is commonly used by options investors because the gains or losses of these financial derivatives, which give buyers the right, but not the obligation, to buy or sell an underlying asset, are capped at a certain level.

Key Takeaways

  • Profit range refers to the range of prices within which an investment position returns a profit.
  • Certain strategies will determine the downside breakeven point and an upside breakeven point for a given investment position; the range between the two points is known as the profit range.
  • Profit range is commonly used by options investors because the gains or losses of these financial derivatives, which give buyers the right, but not the obligation, to buy or sell an underlying asset, are capped at a certain level.

Profit Range Method

Break-Even Analysis

A profit range hinges on a break-even point (BEP). For stock or futures investors, a breakeven point is determined by comparing the market price of an asset to the original cost, with the breakeven point being reached when the two prices are equal.

Companies also use breakeven points to gauge their return on investment (ROI). In this case, the breakeven point is the point at which total revenue and total cost of doing business are equal, resulting in neither gain nor loss. Monitoring the breakeven 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.

Break-even analysis relies on scrutiny of the contribution margin, the excess between the selling price of the product and total variable costs. 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. Breakeven analysis examines demand and price levels to determine the most desirable outcomes for production and sales.

A downside breakeven point is determined by the least desirable circumstances in regards to variable costs, while still remaining viable in the marketplace. In contrast, an upside breakeven point will be identified by the most desirable variable costs in relation to overall sales income. Profit range is established once the upside and downside breakeven points are defined, suggesting that in many cases the profit range is closely associated with the associated variable costs.