Derivatives

How to calculate break-even price in options

Akhil Nallamuthu BL Research Bureau | Updated on May 23, 2021

Calculating break-even price in buying and selling a stock or futures contract can be straight forward. But calculating break-even price while trading options needs some calculation. It can be simple when you trade plain vanilla options but can get complicated when two or more legs of trades are executed as part of a strategy. Let us see how to arrive at break-even price for vanilla call and put options.

Say, you are bullish on the stock of ICICI Bank (₹642.4) and therefore you buy ₹700-strike June expiry call option for about ₹7. Here, the break-even price will be the strike-price plus the premium paid for buying the option. Hence, your trade will be break-even at ₹707.

So, if the position is held till expiry and if the stock does not reach ₹707, you will end up losing. The opposite is true for the option seller. Though the maximum profit is limited to the premium received, he/she will end up in profit if the stock closes below ₹707 on expiry. However, before expiry, the premium can go up or down from ₹7 depending upon the stock price movement.

Now, let us say that you are bearish on the same stock and so you buy ₹600-strike June expiry put option for about ₹8. The break-even price will be strike-price minus the premium paid i.e., ₹592. Hence, on expiry, you, i.e., put buyer, will profit if the stock price is below ₹592 whereas put seller will profit if the stock price is above ₹592.

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Published on May 23, 2021

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