Calculating Break Even Prices for Options Strategies

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Calculating the break even price for options strategies isn't as complicated and overwhelming as it may seem. It’s actually quite simple and an invaluable concept to master because it's critical to risk management.

In this episode, we’ll explain how you can use basic math to calculate the break even price for ten popular options strategies. We’ll walk through the calculations step-by-step, so you can master the process.

PS - The autotrading platform automatically factors in the break even price when calculating the probability of profit, so you don't have to!

What is a break even price (and why is it important)?

The break even price is when a position begins to make or lose money. It essentially comes down to adding premiums to call options and subtracting premiums from put options.

The break even price is above or below the long or short strike, depending on the position type. Long options and debit spreads add cost to your position. Short options and credit spreads give the position a little extra room before losing money.

Let’s dive into some examples.

Strategies

Calculating break even prices is slightly different based on each strategy.

Long single-leg options and debit spreads cost money to enter the position. Therefore, the break even price is the difference between the long option’s strike price and the contract’s premium.

Conversely, you receive a credit when opening short single-leg options and credit spreads. You can think of the credit received as a ‘cushion.’ Add or subtract the credit received to the short option’s strike price to calculate the break even price.

Here are some detailed examples to help you calculate the break even price for ten popular options strategies.

Long call

Long single-leg options are popular for beginning options traders. However, because they cost money to enter the trade, it is important to understand how the debit you pay impacts the position’s profit potential. The underlying price must exceed the strike price by at least the premium amount to make money.

To calculate a long call option's break even price, add the contract’s premium to the strike price.

For example, if you buy a call option with a $100 strike price for $5.00, the break even point is $105. The underlying security must be above $105 at expiration for the position to make money.

Short call

Short options use the same concept in reverse. When you sell an option (or a credit spread), you receive the premium as a credit. Add the short call option’s credit to the contract’s strike price to calculate the break even price.

For example, if you receive $5.00 for selling a call option with a $100 strike price, the break even point is $105. The underlying security must be below $105 at expiration for the position to make money.

So, even though you sold the $100 call option, you don’t lose money unless the stock is above $105 at expiration.

Long put

To calculate a long put’s break even price, you use the same process as the long call. However, since it is a put option (and you want the stock price to go down), simply subtract the contract’s premium from the strike price.

For example, if you buy a put option with a $100 strike price for $5.00, the break even price is $95. The underlying security must be below $95 at expiration for the position to make money.

In other words, the stock must decline by more than the cost of buying the put option contract to make a profit.

Short put

Calculating the break even price for a short put is the opposite of a short call: subtract the contract’s premium from the strike price.

For example, if you collect $5.00 when selling a put option with a $100 strike price, the break even point is $95. The underlying security must be above $95 at expiration for the position to make money.

Short put spread

Short put spreads, also known as bull put spreads or credit put spreads, are a bullish to neutral options strategy where you sell a put option and buy a put option with the same expiration date at a lower price. Buying the additional put option reduces the premium collected but defines the position’s risk.

Calculating the break even price of a short put spread is the same as a single-leg short put option: the put spread’s break even point is simply the short strike minus the net credit received.

For example, if you sell a put spread with a $50 short put strike price and receive $1.00, the break even point is $49. The underlying security must be above $49 at expiration for the position to profit.

This short video explains how to calculate a bull put spread’s break even price in more detail.

Long put spread

Long put spreads, also known as bear put spreads or debit put spreads, are a multi-leg bearish debit strategy. Long put spreads are the opposite of a short put spread, as they profit if the stock price goes down.

Long put spreads consist of buying a put option and selling a put option with the same expiration date at a lower price. Selling the put option reduces the position’s cost while limiting the profit potential.

The break even calculation is the long strike less the net cost to enter the position.

For example, if you buy a put spread with a $50 long put strike price for $1.00, the break even point is $49. The underlying security must be below $49 at expiration for the position to profit.

Short call spread

Short call spreads, also known as bear call spreads or credit call spreads, are a bearish to neutral options strategy where you sell a call option and buy a call option at a higher price with the same expiration date. Buying the additional call option reduces the premium but defines the position’s risk.

Calculating the break even price of a short call spread is the same as a single-leg short call option: the call spread’s break even point is the short strike plus the net credit received.

For example, if you sell a call spread with a $50 short call strike price and collect $1.00, the break even point is $51. The underlying security must be below $51 at expiration for the position to profit.

Long call spread

Long call spreads, also known as bull call spreads or debit call spreads, are a multi-leg bullish debit strategy.

Long call spreads consist of buying a call option and selling a call option with the same expiration date at a higher price. Long call spreads are similar to long put spreads, but they are bullish.

Add the premium paid to the long call option to calculate the break even price for a call debit spread.

For example, if you buy a call spread with a $50 long call strike price for $1.00, the break even point is $51. The underlying security must be above $51 at expiration for the position to profit.

Iron Condor

Iron condors combine an out-of-the-money short call spread and an out-of-the-money short put spread; so, there are two break even prices. The multi-leg position receives a credit, so the break even points are above the short call strike and below the short put strike.

For example, if an iron condor is opened for a $2.00 credit, the break even price will be $2.00 above the short call strike and $2.00 below the short put strike.

In this example, the short call spread’s short strike is $105, so the upper break even price is $107. The short put spread’s short strike is $95, so the lower break even price is $93.

Learn how to calculate the break even prices for an iron condor here.

Iron butterfly

Like iron condors, an iron butterfly combines two credit spreads and has two break even points above and below the short option’s strike prices. However, iron butterflies are typically entered at-the-money. You can also think of an iron butterfly as a short straddle combined with a long strangle.

For example, if an iron butterfly is opened for a $5.00 credit, the break even price will be $5.00 above and below the short strikes. So, an iron butterfly centered at $100 will have a profitable range of $95-$105.