Traditional investing in the stock market involves buying shares when the price is low and selling them when the price is high.
Option Education Episode 2 - Calculating Profits and Break-even
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 breakeven option strategies 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 current market price.
However, to figure your 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.
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 breakeven option strategies 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.