How to Calculate Your True Break-Even on Any Trade
Suppose you come across what appears to be a good call option—the stock is at $100, the strike price is $105, and the option costs $3. You could then reason to yourself, "As long as the stock price rises above $105, I'll make a profit." But that would be incorrect. The strike price of $105 indicates when the call option becomes in the money; it doesn't show you when your whole trade has made back the premium you paid, for that you have to know the options break-even price. Here, the stock would have to reach $108 at expiry in order for the long call to break even, taking into account commissions and other trading costs. The extra $3 is the premium you paid for the option. Although this difference may appear minor, it can make a significant impact when assessing the profit and loss on options. The good news is that the basic calculation is simple. In the case of a long call you usually add the premium to the strike price, while for a long put you subtract the premium...