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.