## 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.

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## 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.

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