top of page

What is the Break Even Point in Options: Break Even Point Formula

Updated: Mar 24

This basic concept can improve your knowledge as an options trader.

What is the break even point of an option?

When you buy an options contract, you are purchasing the right to buy or sell 100 shares of stock at a specific strike price. As an options trader, you have the benefit of leverage.

When you purchase 100 shares of stock without an option, you know exactly what price you paid per share.

However, when you buy a call option to purchase 100 shares, you must account for the premium you paid when calculating your cost basis.

When you buy a call option and exercise it, the breakeven point will be your cost basis of the shares.

Risk diagram of a SPY options strategy on Thinkorswim.
Image from Thinkorswim Trading Platform

Break even point formula

Call option break even formula:

  • Strike price + premium paid

For example, if you buy a $100 strike call option for $1.00 per share in premium, your cost basis if you exercise the option would be $101.

Therefore, if you decide to exercise this option, you would own 100 shares of the stock at $101 per share, including the premium for the option of $100.

Put option break even formula:

  • Strike price - premium paid

For example, if you buy a $100 strike put for $1.00 per share in premium, your cost basis would be $99.

When you buy a put option, you are betting on the stock moving down or hedging your portfolio.

Therefore, if you exercise a put option, you will be short 100 shares at your break even point of $99 per share in this example.

What if you don’t plan to exercise?

You are not obligated to exercise and take the shares when buying options. Instead of exercising, you can simply sell the contract to close it.

Options have the potential to make you a lot of money but buying them is a low-probability game. You will likely lose more than you win, but this is fine if you have a positive EV trading system.

How to Learn More About the Stock Market

If you want to learn more about the stock market and becoming a profitable trader, you can join the Haikhuu Trading community for free!

Haikhuu Trading offers daily live calls, morning reports, access to a team of professional traders, and an AI trading bot that provides stock trading alerts. Don’t miss the opportunity to elevate your trading skills — join Haikhuu Trading today!

Before you go

You can download my FREE eBook by clicking here!

If you want to keep educating yourself about personal finance and discover other deals on Amazon, you must check out these posts as well: This article contains affiliate links I may be compensated for if you click them.

What is the Most Successful Options Strategy

Options Trading for Income: The Complete Guide

Mark Minervini's Trading Strategy: 8 Key Takeaways

The Best Options Trading Books

The Best Trading Books

bottom of page