Invest in Commodities Companies
Value versus Growth Stocks in an Uncertain Economy
ETFs: How to Combine Style and Sector Strategies

How to Calculate the Break-Even Price for Calls and Puts

Before you buy any call or put option in your stock trading adventures, you must calculate the break-even price. Here's the formula to figure out if your trade has potential for a profit:

Strike price + Option premium cost + Commission and transaction costs = Break-even price

So if you’re buying a December 50 call on ABC stock that sells for a $2.50 premium and the commission is $25, your break-even price would be

$50 + $2.50 + 0.25 = $52.75 per share

That means that to make a profit on this call option, the price per share of ABC has to rise above $52.75.

To calculate the break-even price for a put option, you subtract the premium and the commission costs. For a December 50 put on ABC stock that sells at a premium of $2.50, with a commission of $25, your break-even point would be

$50 – $2.50 – 0.25 = $47.25 per share

That means the price per share of ABC stock must fall below $47.25 for you to make a profit.

Make sure that you understand the fee structure used by your broker before making any option trades. Fees differ significantly from one broker to the next. Brokers frequently charge round-trip fees, which refer to the fees that you’re charged on the way in and on the way out of an options trading position. To figure out round-trip commission fees in the break-even formula, simply double the commission cost.

blog comments powered by Disqus
ETF Investment Strategy: Active Trading Can Lead to Losses
Six Things in an Annual Report Necessary for Fundamental Analysis
Using "the Greeks" to Measure Risks with Options
High-End Investments: Foreign Currency Trading and Hedge Funds
Watching Volatility When You Trade Options
Advertisement

Inside Dummies.com