Loading the player...

What is the 'Breakeven Point - BEP'

The breakeven point is the price level at which the market price of a security is equal to the original cost. For options trading, the breakeven point is the market price that a stock must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is the strike price plus the premium paid, while breakeven for a put position is the strike price minus the premium paid.

BREAKING DOWN 'Breakeven Point - BEP'

Investors use options to purchase the right to buy or sell a particular stock at a specific price. To make decisions about an option position, an investor needs to know if the market price of the stock generates a gain or loss, which is why the breakeven level is important.

How Breakeven Impacts a Call Position

Assume that an investor pays a $5 premium for one 50-call option on XYZ stock, which means that the investor has the right to buy 100 shares of XYZ stock at $50 per share at any time before the options expires. The breakeven point for the call option is the $50 strike price plus the $5 call premium, or $55. If, for example, the stock is trading at $60 per share, the call owner buys the stock at $50 and sells the securities at the $60 market price. The profit is $60 less $55, or $5 per share.

Factoring in a Put Option

The breakeven point is also used to determine when a put option trade is profitable. In this example, assume that an investor pays a $6 premium for one 30-put option on ABC stock, which allows the put buyer to sell 100 shares of ABC stock at $30 per share until the option's expiration date. The put position's breakeven price is $30 less the $6 premium, or $24. If the stock is trading at a market price of $22, for example, the put owner can buy the stock at $22 and sell the securities at $30 by exercising the put. The gain is $30 sale price less the $28 ($22 cost per share plus the $6 premium), or $2 per share.

Examples of Accounting Breakeven

Accountants define breakeven as the sales level that pays for all costs and that generates a profit of zero. Managers calculate the breakeven sales level to cover all of the company's cost and to forecast a desired level of profit. Breakeven can be calculated based on units sold or by using the total dollar amount of sales, and the breakeven formula can be adjusted to estimate a target level of profitability.

RELATED TERMS
  1. Breakeven Price

    1. The amount of money for which an asset must be sold to cover ...
  2. Breakeven Yield

    The yield required to cover the cost of marketing a banking product ...
  3. Straddle

    An options strategy in which the investor holds a position in ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Pegging

    1. A method of stabilizing a country's currency by fixing its ...
Related Articles
  1. Investing

    What is the Breakeven Point?

    In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point.
  2. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  3. Personal Finance

    Tips For Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of this exam.
  4. Trading

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  5. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  6. Trading

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  7. Trading

    How To Buy Options On the Dow Jones

    We show why buying options on the Dow Jones is a good alternative to trading the exchange-traded fund.
  8. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  9. Trading

    Fix Broken Trades With The Repair Strategy

    You can recover from your losses if you know how to use this handy trader's tool.
  10. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
RELATED FAQS
  1. What does break-even analysis tell a business about its shutdown point?

    Learn what a break-even analysis tells a company about its shutdown point, and understand why a company's break-even point ... Read Answer >>
  2. How do I determine the breakeven point for a short put?

    Learn how to determine the breakeven point for a short put. Shorting puts is appropriate for sophisticated traders who understand ... Read Answer >>
  3. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  4. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  5. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center