Break-Even Price in Options

The break-even price gains most of its recognition as a business and accounting term to describe the price at which a company experiences equilibrium between revenue and expenses. At this price, the company is neither making a net profit nor a net loss. In some other accounting circles, the break-even price (also referred to as BEP throughout the article) refers to the income or revenue that must be attained to cover the expenses for that period.

Source: bbtimes

This term not only applies to accounting. It is one major term to understand for crypto option buyers. What is it, and how does it play out with both major crypto option types?

What Is the Break-Even Price in Options?

The Break-even price in options is defined as the price an asset must reach for the options contract position to be considered neither profitable nor in a loss. Knowledge of the break-even price will help traders understand the state of their contracts and adjust their strategies (if need be).

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For the options buyer, the BEP is the price at which the options contract has enough intrinsic value to cover the money the investor paid for it, and profit is zero. The seller has a different perspective to it. Even if the option is in the money, he can still make a profit if it has not gone above the strike price plus the premium he received for the contract.  

The BEP in both buying and writing options factors two key information; the strike price and the premium paid to acquire the contract.

The calculation for the BEP in the call and put options slightly differs. Let’s see how.

Call Options Break-Even Price

Call Options buyers

The BEP here is the price of cost neutrality of the option. It can be calculated by adding the cost of the contract to the call strike price. Anything above the BEP is profit, and anything below it is loss. At this price, the profit from the contract will match the cost of the option premiums paid for the contract.

Source: Investing Answers

Break-even = Strike Price + Cost of contract

For example, Joan buys an Ethereum $2,000 call for $70. How much will Ethereum need to be at the expiration date for Joan’s options to break even?

BEP= 2000 + 70 = $2070

For Joan’s option to break even, Ethereum has to hit $2070. Anything above $2070 is her profit.

Options Writer

For every buyer, there must be a seller. The BEP for the Call Options seller is also calculated by adding the cost of the contract to the strike price. On the seller’s part, the loss is infinite, but anything below the BEP is profit.

For Joan’s contract (the example given above), if the contract were written by Nate, he would begin to lose money once Ethereum goes above $2070; anything between the strike price and $2070 would be offset by the premium gotten.

While option sellers’ losses are technically unlimited, the maximum profit is capped at the premium received when selling the contract.

Put Options Break-Even Price

Put Options buyer

The BEP in put options refers to the put strike price minus the cost of the contract. For the buyer, anything below the BEP is profit, and anything above it is loss.

Source: Analyst Prep

Breakeven = Strike Price – Cost of Premium

For example, Anjo buys an Ethereum $1,700 put for $50. How much will Ethereum need to trade for at the expiration date for Joan’s bet to break even?

BEP= $1,700 - $50 = $1,650

For Anjo’s option to break even, Ethereum has to drop to $1650. Anything below 1650 is his profit zone.

Put Options writer

If Kevin wrote the contract Anjo bought, his breakeven price would be the same as for Anjo. However, if the put option goes below $1650, Kevin starts incurring a loss. Anything above $1650 would mean Kevin makes money, with the maximum profit of $50 (same as for selling call options) recorded at $1700 and above. The maximum loss for put option sellers happens when the price of the underlying asset goes to 0, hence capping the loss at $1650 in Kevin’s case.

Conclusion

Calculating the break-even option price has meaning when trading cryptocurrency options. Without a proper understanding of where the market should go in order for you to break even, it’s like shooting in the dark, without an ability to build up more advanced positions with a reasonable risk profile and risk/reward ratio.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

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