Calculating break-even price in buying and selling a stock or futures contract can be straight forward. But doing the same for options needs some calculation. It can be simple when you trade plain vanilla options, but it can get complicated when two or more legs of trade are executed as a part of a strategy.
Let us see how to arrive at a breakeven price for vanilla call and put options. Say, you are bullish on the stock of Tata Motors (₹790.40) and therefore you buy an 800-strike January expiry call option for ₹20. Here, the breakeven price will be the strike-price (800) plus the premium paid (₹20) for buying the option. Hence, the breakeven price is ₹820.
So, if the position is held till expiry and if the stock does not reach ₹820, you will end up in a loss. The opposite is true for the option writer (seller). Though the maximum profit is limited to the premium received, the seller will end up in profit if the stock closes below ₹820 on expiry. However, before expiry, the premium can go up or down from ₹20 depending upon the stock price movement.
Now, let us say that you are bearish on the same stock and so, you buy a 780-strike January expiry put option for ₹15. The breakeven price will be strike-price (780) minus the premium paid (₹15) which is ₹765. Hence, on expiry, you, the put buyer, will profit if the stock price is below ₹765 whereas put seller will profit if the stock price is above 765
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