Loading the player...

What is the 'Breakeven Point (BEP)'

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 an underlying asset 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 the 'Breakeven Point (BEP)'

Breakeven point can applied to any trading position, including stocks, options, and futures. The terms is also used in other fields. Accounting and economics use the term to describe when sales match costs, or profits match losses, for example.

Stock Market Breakeven 

Assume an investor buys XYZ stock at $50. That is now their breakeven point on the trade. If the price moves above $50, the investor is making money. If stock drops below $50, they are losing money. If the price stays right at $50, they are breakeven, because they are not making or losing anything. 

Commissions are not typically included in the breakeven, but traders can include them if they wish. 

Call Option Breakeven

Assume that an investor pays a $5 premium for a XYZ stock option with a $50 strike price. That means 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 the stock is trading below this, the benefit of the option has not exceeded its cost. 

If 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 the $55 breakeven price, or $5 per share.

Put Option Breakeven

Assume an investor pays a $2 premium for a ABC put option with a $30 strike price. That 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 $2 premium, or $28. If the stock is trading above that price, the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $22, for example, the trader has a profit of $6 (breakeven of $28 minus the current market price). 

Accounting or Economic 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. Break-Even Analysis

    An analysis to determine the point at which revenue received ...
  2. Covered Combination

    A covered combination is an options strategy that involves the ...
  3. Long Put

    A long put is buying a put option, which profits if the underlying ...
  4. Strike Price

    Strike price is the price at which the underlying asset of a ...
  5. Vanilla Option

    A vanilla option gives the holder the right to buy or sell an ...
  6. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
Related Articles
  1. Personal Finance

    Tips for Answering Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of the Series 7.
  2. 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.
  3. Managing Wealth

    Are Hybrid Cars Really More Economical?

    Find out if buying a hybrid vehicle is more economical than a fuel-based vehicle. Fewer trips to the gas station sounds nice, but you need to do the math.
  4. 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.
  5. Trading

    Strip Options: A Market Neutral Bearish Strategy

    Strip Options are market neutral trading strategies with profit potential on either side price movement, with a "bearish" skew.
  6. Trading

    The Basics Of Option Price

    Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.
  7. Trading

    More Tips For Series 7 Options Questions

    Here are more tips to ace the Series 7 questions on options contracts and stock positions.
  1. 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 >>
  2. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  3. 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 >>
Trading Center