Let us see what is meant by break-even point.

In any business, when you do not make any profit or incur any loss, it is called break-even. The price at which one must sell to avoid a loss is the break-even point. It is also the price at which he also doesn’t make a profit. The break-even price is arrived at by taking into consideration all expenses connected with the purchase and sale transaction.

To arrive at the break-even for options, one has to consider three factors.

Option premium

Strike price

Transaction costs. (brokerage and taxes)

Let us see the break-even point for a call option holder.

The following formula can be applied to know whether your trade has the potential to make a profit.

Break-even price = Premium cost + Strike price + Brokerage and transaction cost.

If one were to buy ITC November call with a strike price of Rs.200 at a premium of

Rs.8.50 and transaction cost is Rs.1.50, then the break-even price will be Rs,200 + Rs.8.50 + Rs.1.50 = Rs.210 per share.

This means that to profit from this call option, the price of ITC shares must go above Rs.210 a share.

The maximum amount a call option holder can lose will be the premium amount paid and the transaction cost. Rs.10 per share.

Now let us see the break-even point for a put option holder.

The following formula can be applied to know whether your trade has the potential to make a profit.

Break-even price = Strike price - Premium cost - Brokerage and transaction cost.

If one were to buy ITC November put with a strike price of Rs.200 at a premium of

Rs.8.50 and transaction cost is Rs.1.50, then the break-even price will be Rs,200 - Rs.8.50 - Rs.1.50 = Rs.190 per share.

It would mean that to profit from this put option, the price of ITC share must go below Rs.190 a share. The maximum amount a put option holder can lose will be the premium amount paid and the transaction cost. Rs.10 per share.

It is necessary that even if an option is in-the-money, it has to cross the break-even point to make a profit.