Break even
The break-even point on an option is the price that the underlying asset has to hit in order to enable the option buyer (holder) to recover their premium.
The break-even point on an option is the price that the underlying asset has to hit in order to enable the option buyer (holder) to recover their premium.
So if a call option has a strike price of £2.50 and the up-front premium paid is 50p, the underlying share needs to rise to £3 (ignoring dealing costs and spreads) to hit breakeven. That's because the holder could then buy the share from the option writer for £2.50 and sell it on in the stockmarket for £3.
However, the 50p profit simply recovers the premium paid. Note that the option is 'in the money' as long as the underlying share is priced anywhere above £2.50. If it is, say, £2.70 on expiry, the option should be exercised to reduce the holder's 50p initial loss.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
See Tim Bennett's video tutorial: What are options and covered warrants?
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Christmas at Chatsworth: review of The Cavendish Hotel at Baslow
MoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
By Dr Matthew Partridge Published
-
Tycoon Truong My Lan on death row over world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published