What is the break-even for an option?
Break-even is the stock price at which your option trade starts being profitable, not just less of a loss. It is the point where the option's value equals what you paid for it.
- Long call break-even = strike + premium paid.
- Long put break-even = strike - premium paid.
Example
You buy a $50 call for $1.20. Break-even is $50 + $1.20 = $51.20. If the stock closes above $51.20 at expiration, you make money. If it closes between $50 and $51.20, the call is ITM but you still lose part of the premium.
You buy a $50 put for $1.50. Break-even is $50 - $1.50 = $48.50. The stock has to close below $48.50 for you to come out ahead.
Why beginners misread this
It is easy to see the strike get hit and assume the trade worked. It did not. The stock has to move past the strike by at least the premium you paid, or you lose money overall. Before you buy any option, do the break-even math and ask whether the stock is likely to move that far before expiration.