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.