Advertisement
Online Test Banks
Score higher
See Online Test Banks
eLearning
Learning anything is easy
Browse Online Courses
Mobile Apps
Learning on the go
Explore Mobile Apps
Dummies Store
Shop for books and more
Start Shopping

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
Advertisement
Advertisement

Inside Dummies.com

Dummies.com Sweepstakes

Win an iPad Mini. Enter to win now!