How it unfolds, step by step
The setup
Index X sits at 19,960. A call struck at 20,000 is bought for ₹85. The arithmetic breakeven is 20,085, which is the strike plus the premium. Charges on the round trip push the working line a few points higher again.
What happens next
Over the fortnight the index rises to 20,065. That is 105 points of upward movement, and the direction was right. The strike has been comfortably crossed, and the option finishes 65 points in the money.
What it means — and does not
It is still a loss. The 65 points of intrinsic value are less than the ₹85 that was paid for them, so the position returns about three-quarters of the premium. The strike is where the option starts to be worth something. The breakeven is where the position starts to be worth something. The distance between the two is exactly the premium. Confusing them is the most expensive small mistake in a beginner's options account.
- Index level
- Strike · 20,000
- Breakeven: strike + premium · 20,085
The index clears the strike and stops short of the breakeven line. A correct direction still returns less than the premium paid.
Show the underlying data
| Day | Index level |
|---|---|
| 1 | 19,960 |
| 2 | 19,975 |
| 3 | 19,995 |
| 4 | 20,010 |
| 5 | 20,005 |
| 6 | 20,020 |
| 7 | 20,035 |
| 8 | 20,030 |
| 9 | 20,045 |
| 10 | 20,055 |
| 11 | 20,050 |
| 12 | 20,060 |
| 13 | 20,058 |
| 14 | 20,062 |
| 15 | 20,065 |
What this does not establish
The line is fixed in points, but it is not today's sale-price . Before expiry, remaining is part of the premium a holder can sell, so it can reduce the underlying movement needed to recover the original premium. Time passing and implied-volatility changes can move that sale premium either way. The reading is refuted whenever the position is judged against the strike instead of against the stated accounting question. The honest test is to calculate today's sale premium from today's remaining time value and assumptions, rather than treating the expiry line as a pre-expiry result.
Things to check
4Strike plus premium paid: where does that put the line, in points?
Add the charges on both legs: what does the working line become?
Is the expected move larger than the distance from here to that line?
Include the premium and charges before comparing the breakeven with the underlying.
Common mistakes
2Treating the strike as the breakeven. The premium paid sits between the two, and it is usually the larger number.
Treating an expiry breakeven as the price needed for an earlier sale. Remaining time value is still part of that sale premium.
A 20,000 call is bought for 85 and the index finishes at 20,065. How did the position do?
- It made money, because the strike was crossed
- It broke about even
- It lost, because 65 points of value is less than the 85 paid for it
Show the answer
C. It lost, because 65 points of value is less than the 85 paid for it
The strike is where an option starts to be worth something. The position only returns its cost once that value equals the premium. The distance between the two is exactly the premium paid, and charges push the line a little further again.
Frequently asked
3How do I calculate the breakeven on a bought call?
For a bought call, add the premium and both legs' charges divided by quantity to the strike. For a bought put, subtract the premium and those charges from the strike.
Why is the breakeven not the strike?
Because the premium has already been paid. The strike is where the option begins to have intrinsic value. The position only returns what it cost once that intrinsic value equals the premium.
Do charges really change the answer?
They move the line, and by more than most people expect on a small premium. Several charges are levied on the premium rather than on the contract's notional value. The options breakeven calculator on this site works the whole stack out from your own numbers.