By Joe Duarte A call option provides you with profits similar to long stock, whereas a put option provides you with profits similar to short stock.
This makes sense given your rights as an option holder, which allow you to buy or sell stock at a set level. There is one slight difference between stock rewards and option rewards: Options require an initial premium payment that you must consider when identifying potential gains.
Fall below the breakeven for put option profits to kick in. In each case, this results in profits that are slightly less than your stock profits.
Depending on the position, this might mean the highest the underlying can be with short callsor the lowest the underlying can be with short putsor both with short strangles. Long Options For long options, the option breakeven point is the debit paid past the long option strike price. The easiest way to think about this is that when we buy something, we must sell it for the same amount we bought it for to break-even. The only way we can do that at expiration for long options is if the strike price is ITM by the same value that we bought the option for, since we only have intrinsic value at expiration.
As soon as the stock moves away from this price, you have gains or losses. Call option Purchasing a call option gives you rights to buy stock at a certain level.
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- Breakeven Point (BEP) Definition
As a result, the option increases in value when the stock moves upward. Calls with strike prices below the price of the stock are referred to as ITM.
For a call position you own to be profitable at expiration, it must remain above the strike price plus your initial investment. At this level, option premiums will minimally equal your cost when you bought the call.
A break-even price is the amount of money, or change in value, for which an asset must be sold to cover the costs of acquiring and owning it. It can also refer to the amount of money for which a product or service must be sold to cover the costs of manufacturing or providing it.
Your call option can similarly rise indefinitely until expiration. As a result, call option profits are considered to be unlimited, just like stock.
Call options with a strike price that is below the stock price are OTM, and their premium is all time value. After the stock moves above the strike price, it is referred to as ITM and has intrinsic option breakeven along with the option breakeven value.
Put option Purchasing a put option gives you rights to sell stock at a certain level. Puts with strike prices above the price of the stock are referred to as ITM.
- Put options give you the right to sell an asset.
- Break-Even Price Definition
For a put position you own to be profitable at expiration, it must remain below the strike price minus option breakeven initial investment. At this level, option premiums will minimally equal your cost when you bought the put. Your put option can continue to increase in value until this level is reached, all the way to its expiration.
As a result, put option profits are considered to be high, but limited, just like a short stock. Call options have risks and rewards similar to long stock, whereas put options have rewards that are similar to short stock.
Put option risk is limited to the initial investment. The reason your rewards are similar rather than the same is because you need to account for the premium amount when you purchased the option.
Traditional investing in the stock market involves buying shares when the price is low and selling them when the price is high. However, there's an alternative way to make money: using stock options. Depending on the option you buy, you could make money when the price goes down or make money when the price goes up. Before you venture into option trading, you need to know how to figure your breakeven point.
His work has been quoted in Barron's, Marketwatch.