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.

See Tim Bennett's video tutorial: What are options and covered warrants?

Recommended

Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020
Intangible assets
Glossary

Intangible assets

An intangible asset is anything that a company owns that isn’t physical.
25 Sep 2020

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021