In finance, the term breakeven point is used to indicate the line between profit and loss. For example, if you buy the stocks at € 5 with the aim of speculating on the price, € 5 for you is the breakeven point.
If the stock rises above € 5 made a profit, if it drops below go at a loss. The breakeven point for the options is not exactly the strike price, that is the price in the case of exercise of the right, the same must be add or subtract (depending on the option is call or put) the money paid (premium) for purchase option.
Of course we are assuming to be our buyers, in fact, for those who sell options the situation is completely different, in fact the only gain is given by the premium that the buyer pays to purchase the option.
Let’s buy a call option on 100 stocks FIAT bullish forecast. The option premium is 0.50 cents per stock, the current stock price is € 20, the strike price of € 22.
What is the breakeven point?
Let’s take a quick calculation.
If the stock is appreciated, for example, reaches € 26, we can realize a profit, because thanks to our option, we can buy the stock at 22 €. However, we would start earning only after € 22.5 due to the premium paid for the option. Our breakeven point is € 22.5 , above this threshold the option increases in value as a result of the appreciation of its underlying (stock).
Therefore to determine the breakeven point, we have to add the premium paid for the option at the strike price. In fact, as we have already explained, the option price is influenced by many variables (most important the time factor and volatility), so it’s very likely that the breakeven point option has already acquired higher value and therefore its sale will guarantee a profit.
The breakeven point calculated in this way can be used as a valid and simple system to locate the underlying minimum price so that our option starts producing profit. To calculate the breakeven point precisely would be necessary use a specific software.
If we buy a put option to earn we have to hope that the market is bearish, that’s why the breakeven point of a put option is the difference between the strike price and the premium.