Breakeven points

A call breaks even at strike plus premium

You paid for a call. How high does the stock have to go before you stop losing money? That price is the breakeven. Breakeven is the stock price at expiration where the buyer gets the premium back, with no gain and no loss.

Say you buy a 50 call for a premium of 3. The premium is the price you paid for the option. If the stock closes at 50, the call is worth nothing. You're still down the 3 you paid.

At 53, the call is worth 3, because you can buy at 50 something worth 53. That pays back your 3, so you're even. A call needs the stock to rise, so you add. Call breakeven is the strike plus the premium.

The slip is calling the strike the breakeven. At the strike, the call is worth zero, and you're down the whole premium. Where the stock trades today doesn't matter either. Breakeven uses only the strike and the premium.

A call breaks even at the strike plus the premium. That's where the buyer gets the premium back.

A put breaks even at strike minus premium

A put makes money when the stock falls. How far does it have to fall to pay you back? Breakeven is the stock price at expiration where the buyer gets the premium back, with no gain and no loss.

Say you buy a 50 put for 3. A put is the right to sell at the strike price, here 50. At 47, the put is worth 3, because you can sell at 50 something worth 47. That pays back your 3, so you're even.

A put needs the stock to fall, so you subtract. Put breakeven is the strike minus the premium. Put the two side by side. A call goes up from the strike by the premium. A put goes down from the strike by the premium.

The writer breaks even at the same price as the buyer, because one side's gain is the other side's loss. The slip is adding the premium on a put. That's the call rule, and it gives 53 instead of 47.

A put breaks even at the strike minus the premium. That's where the buyer gets the premium back.

With stock, breakeven starts from what you paid

What if you own a stock and also buy an option on it? Where's the breakeven then? Say Lee buys 100 shares at $52. He's worried the price could drop.

So he buys a 50 put for a premium of 2. A put is the right to sell at the strike. Below 50, he can still sell at 50. Owning a stock and buying a put on it is called a protective put. It works like insurance on the shares.

Lee paid 52 for each share and 2 for the put. His total cost is 54 a share. To break even, the stock has to rise to his total cost. So his breakeven is 54.

The rule: when you own the stock and buy an option on it, breakeven is the stock cost plus the premium. The slip is using the put's own rule. 50 minus 2 is 48, but that rule is for a put held without the stock.

With the stock, start from what you paid for it. Breakeven is the stock cost plus the premium.

Worked example: Put breakeven, checked

1. You buy one October 35 put for 2.50. Where do you break even at expiration?
2. It's a put, so you subtract, because a put needs the stock to fall. 35 minus 2.50 is 32.50.
3. Now check it. At 32.50 you can sell at 35, so the put is worth 2.50. That's exactly what you paid, so you net zero.
4. If you got 37.50, you used the call rule. Puts go down from the strike.

Common mistakes

Which way from the strike?

Moved the wrong way from the strike? Ask what the option needs. A call needs the stock to rise, so add the premium to the strike. A put needs the stock to drop, so subtract the premium from the strike. Call up, put down.