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.