When you purchase a call option, you give yourself the right, but not the obligation, to buy the option's underlying security at the option contract's strike price on or before option expiration day. Each contract gives you the right to purchase 100 shares of the underlying equity. If you intend to exercise this right, you'll want to pay attention to the breakeven point of the trade. Breakeven represents the price the underlying stock must reach for you to avoid losing money if you choose to exercise your option.
1. Locate the strike price of your call option. For example, if you purchased a GE March 2012 $30 call contract, the strike price is $30.
2. Find the premium of the option contract you would like to figure breakeven for. For example, if the GE March 2012 $30 call trades for $2, your premium is $2. This is price you would need to pay to purchase one GE March 2012 $30 call. As with a stock price, option premiums fluctuate throughout the trading day because of a wide variety of factors.
3. Add the strike price and premium together. The result is the breakeven point for the trade. In the aforementioned example, the breakeven is $32 ($30 strike price + $2 premium). To avoid losses on an exercise of a call with a $30 strike for which you paid a premium of $2, the underlying stock needs to reach $32.
- When you purchase a call option, you do not have to exercise the contract. Instead, you can sell the contract back to the market at a premium that is higher or lower than what you paid for it. In this case, you would not have to be quite as concerned with the breakeven point of the trade.
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