Options Pricing
Options Break-Even
The stock price at expiration where an option trade neither makes nor loses money (accounting for premium paid/received).
Formula
Call BE = Strike + Premium Paid | Put BE = Strike − Premium Paid
Variables
Strike- Option strike price
Premium Paid- Total premium paid or received
Worked Example
Scenario: Buy $100 call for $2: break-even = $100 + $2 = $102. At expiration, stock must be above $102 to profit.
Steps:
- For calls bought: add premium to strike
- For calls sold: subtract premium from strike
- For puts bought: subtract premium from strike
- For puts sold: add premium to strike
When to Use This Formula
- Determine profit/loss threshold for options
- Plan exit prices
- Evaluate risk/reward of strategies
Limitations & Assumptions
- Ignores commissions and slippage
- Ignores early exit or assignment before expiration
- Assumes no other positions (spreads have multiple break-evens)
Common Questions
Why do options have multiple break-evens?
Spreads (multiple legs) each have their own strike and premium, creating a range of possible expiration outcomes.
Option pricing, payoff and the Greeks
- Intrinsic valueDefinition
- Time valueDefinition
- RhoDefinition
- Early assignment riskDefinition
- American vs European optionsDefinition
Reference note: This is an educational mathematical reference. The formula's applicability depends on assumptions, market conditions, and use case. Always verify results independently and consult domain experts for decisions.