Breakeven Price for Options

The breakeven price is the point at which the cost of an option contract is fully offset by its profit or loss, effectively hedging the position. For both put and call options, the breakeven price determines the underlying asset value at which the option holder neither gains nor loses money.

Puts Breakeven

$$\text{Puts Breakeven Price}=\text{Striking Price}-\frac{\text{Contract Cost}}{\text{Number of Shares Under Control}}$$

Calls Breakeven

$$\text{Calls Breakeven Price}=\text{Striking Price}+\frac{\text{Contract Cost}}{\text{Number of Shares Under Control}}$$

Example calculations:

Put Option

 

• Striking Price: $52
• Contract Cost: $2000
• Number of Shares: 1000

$$\text{Breakeven Price}=52-\frac{2000}{1000}=52-2=50$$

So, the breakeven price per share is $50.

Call Option

 

• Striking Price: $60
• Contract Cost: $200
• Number of Shares: 100

$$\text{Breakeven Price}=60+\frac{200}{100}=60+2=62$$

Thus, the breakeven price per share is $62.

When calculating breakeven prices, always include all transaction costs in the contract cost. These costs encompass the option premium and potentially significant broker commissions. Commissions are paid on the option contract itself and may also be incurred during the execution or sale of the option contract.

For instance, in the put option example, if the stock price drops below $50, selling 1000 shares will incur additional commission costs. This underscores the importance of considering all associated costs when planning your strategy.