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.

  1. Breakeven Price

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

    An options strategy in which the investor holds a position in ...
  3. Naked Call

    A naked call is an options strategy in which the investor writes ...
  4. Index Option

    A financial derivative that gives the holder the right, but not ...
  5. Option

    A financial derivative that represents a contract sold by one ...
  6. Short Straddle

    A short-straddle is an options strategy comprised of selling ...
Related Articles
  1. Personal Finance

    Tips For Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of this exam.
  2. 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.
  3. 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.
  4. Trading

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  5. Trading

    Option Strategies For A Down Market

    All investors should be aware that the best time to buy stocks is when the market is tanking, according to history.
  6. Trading

    What To Do When Your Options Trade Goes Awry

    Check out some repair strategies to help boost the profit potential of a losing position.
  7. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  8. Trading

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  9. Trading

    How to Sell Put Options to Benefit in Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
  10. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  1. 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 >>
  2. How do you find the break-even point using a payback period?

    Understand what a company's breakeven point is and what its payback period is. Learn why a company would want to track both ... Read Answer >>
  3. How is break-even analysis affected by economies of scale?

    Learn what economies of scale are, how they affect total cost and how they affect the break-even point of a company. 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. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center