When a trader buys a call option, they are hoping that the underlying price rises, and specifically that it rises above their strike price. The strike price though, is not the price at which the trader will breakeven at expiration. This is because the option was not free, a premium was paid. This premium must be taken into account to calculate where the option will break even if held to expiry.

In example 3 in the previous lecture, you may remember we bought an SLV call option with a strike price of \$30, and then it expired with the price of SLV at \$31, which is above our strike price. This means the option had an intrinsic value of \$1 when it expired. However, because we paid a \$1.26 premium for the option, we lost \$0.26 per share on the trade overall.

It is useful when buying call options, particularly if you’re planning to hold them to expiry, to know what price the underlying needs to reach for your trade to break even. Thankfully this is a simple calculation.

In that example where the strike price of the call option was \$30, and the premium paid was \$1.26, the breakeven point is simply:

\$30 + \$1.26 = \$31.26

This means that if the price of SLV is exactly \$31.26 when the call option expires, the trade will have made precisely \$0. No profit, but no loss either.

At this price point of \$31.26, the call will expire with a value of \$1.26, which is equal to the premium that was paid for the option. As the value at expiry is the income from the trade, and the premium paid is the expense, when these two things are equal this means the trade will make \$0.

## General formula

More generally the breakeven point of a call option can be calculated as:

Breakeven Point = Strike Price + Premium Paid

It’s important to remember that it’s the premium paid per share that you need to use when making this calculation. You’ll remember that the contract multiplier for SLV was 100, so when we purchased the call option, the total premium paid was actually \$126. It is the per share price of \$1.26 though, that we use when making the breakeven calculations.

## More examples

As the calculation is simple when only considering one call option at a time, it’s possible to do this calculation on the fly while looking over the option chain.

For example, for a \$28 call option with a current ask price of \$1.62. If we were to purchase this call for \$1.62 and hold it until expiration, our breakeven point would be the strike price of \$28 plus the premium paid of \$1.62, which equals \$29.62.

For a \$23 call option with a current ask price of \$3.10. If we were to purchase this call for \$3.10 now and hold it until expiration, our breakeven point would be \$23 plus \$3.10, which equals \$26.10.

We will be moving on to the differences between buying and selling a call option later in the section. It’s worth mentioning briefly now though, that the breakeven point for the seller of the call option is exactly the same as the breakeven point for the buyer of the call option.

## In summary

The breakeven point of a call option can be calculated as the strike price plus the premium paid for the option.
Remember to use the per share value for the premium paid, not the total premium.