Option breakeven point
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 option breakeven point 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.
Option Basics Options represent the right to buy or sell stock at a certain price, known as the strike price. Call options give you the right to buy a stock while put options give you the right to sell.
So, call options are known as "in the money" when the stock's market price exceeds the value of the option while put options are in the money when the option's price is lower than the option breakeven point market price.
However, to figure who trades options breakeven point, you have to include the cost of commission.
Option Cost Before you can start figuring the breakeven point, you must calculate how much the option cost to purchase.
Then, figure the per-share cost by dividing the total cost by the number of shares you have the option to buy or sell. Call Option Breakeven If you have a call option, which allows you to purchase stock at a certain price, you calculate your breakeven point by adding your cost per share to the strike price of the option.
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- The advantage of using options is that a trader commits a much smaller amount of money to take a position in a certain stock.
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- 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.
- 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.
The strike price on a call option represents the price at which you can buy the stock. Put Option Breakeven If you have a put option, which allows you to sell your stock at a certain price, you calculate your breakeven point by subtracting your cost per share to the strike price of the option.
The strike price on a put option represents the price at which you can sell the stock.