How to Determine the Break-Even Point of a Call Option

A call option helps you profit from an asset's rising price.

A call option helps you profit from an asset's rising price.

When you buy a call option, it’s important to know where your break-even point is so that you know when you can potentially ring the cash register, or profit from the trade. A call option is a financial instrument that gives you the right to buy a particular asset, such as a stock, at a predetermined price before the option expires. The break-even point is the price of the underlying asset at which you make zero dollars; you neither lose nor gain money. You start to profit from the trade when the underlying asset’s price exceeds the breakeven point.

Visit any financial website that provides option quotes. Type a stock’s ticker symbol into the option quote text box and click “Get Options” to view a table of information on the options available for that stock. Alternatively, pull up the information for options on stocks or other types of investments on your broker’s online trading platform.

Find the strike price of your desired call option. The strike price is the price for which the option gives you the right, but not the obligation, to buy the underlying asset. For example, if a call option on a stock has a strike price of $25, you have the right to buy the stock for $25 before the option expires.

Find the call option’s ask price, or premium, which is the amount required to buy the option. In this example, assume the option’s ask price is $3.

Add the strike price and the ask price to determine the call option’s break-even point. Concluding the example, add $25 and $3 to get a break-even point of $28. This means the option will turn profitable when the stock price exceeds $28.

Tip

  • Stock option contracts are quoted on a per-share basis. One contract gives you the right to buy 100 shares of stock. To figure one contract’s total cost, multiply the ask price by 100. In the previous example, one contract costs $300, or $3 times 100, and gives you the right to buy 100 shares for $2,500.
 

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