Course/advanced/Break-Even Analysis
advanced6 min

Break-Even Analysis

Rolling Options

Key Takeaways

  • Break-even for a sold put = strike price minus premium collected.
  • Break-even for a covered call = stock purchase price minus premium collected.
  • Always calculate break-even before entering a trade to know your real downside.

TL;DR

Break-even is the stock price at which you neither profit nor lose. For CSPs: strike minus premium. For covered calls: stock cost minus premium. Knowing your break-even before entry defines the worst-case scenario and helps you size positions appropriately.

Why Break-Even Matters

Break-even is the stock price at which your trade has zero profit and zero loss. Knowing it before you enter a trade tells you:

  • How far the stock can move against you before you lose money
  • Whether the premium justifies the risk
  • What your true downside exposure is

Always calculate break-even before placing an options trade.

Key Terms

Break-Even Formulas

Cash-Secured Put:

Break-even = Strike price − Premium collected

Example: Sell $50 put for $2.00 → Break-even = $48.00

Covered Call:

Break-even = Stock purchase price − Premium collected

Example: Buy stock at $100, sell call for $3.00 → Break-even = $97.00

Long Call (buying):

Break-even = Strike price + Premium paid

Example: Buy $50 call for $3.00 → Break-even = $53.00

Long Put (buying):

Break-even = Strike price − Premium paid

Example: Buy $50 put for $2.00 → Break-even = $48.00

Example

Break-Even in the Wheel

Full wheel cycle break-even calculation:

  1. Sold $50 put for $2.00 → assigned at $50. Cost basis: $48.00
  2. Sold $52 covered call for $1.50 → expired worthless. Adjusted basis: $46.50
  3. Sold $53 covered call for $1.00 → assigned, shares called away at $53.

Total premium collected: $2.00 + $1.50 + $1.00 = $4.50/share

Stock sold at: $53

Effective purchase price: $48 − $1.50 − $1.00 = $45.50

Total profit: $53 − $45.50 = $7.50/share

Your break-even dropped with every premium collected, giving you an ever-growing buffer against losses.

Pro Tip

Using Break-Even for Position Sizing

Before entering a CSP, calculate: "How far below my break-even would the stock need to fall for me to lose 5% of my account?"

If your break-even is $48 on a $50 put and a 30% stock crash to $35 would mean a $1,300 loss per contract. Is that within your risk tolerance?

This simple check prevents you from selling puts on stocks where the worst case would devastate your account.

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