How to Calculate Breakeven Point for Write A Put

Understanding the breakeven point for writing or selling a put option is crucial for options traders. This guide explains how to calculate it, provides a calculator, and offers practical insights.

What is the Breakeven Point for Write a Put?

The breakeven point for writing or selling a put option is the price at which the underlying asset must reach for the writer to recover the premium paid to the buyer. At this point, the writer's profit equals the premium received.

For a put option, the breakeven point is calculated differently than for a call option. A put gives the buyer the right to sell the underlying asset at a specified price (strike price).

Key Point: The breakeven point for a put is lower than the strike price because the writer must cover the cost of buying the asset if the put is exercised.

Breakeven Formula

The breakeven point for writing a put option can be calculated using the following formula:

Breakeven Price = Strike Price - Premium Received

Where:

Strike Price - The price at which the put option can be exercised
Premium Received - The amount paid to the buyer of the put option

This formula works because the writer must buy the underlying asset at the breakeven price to cover the cost of exercising the put.

How to Calculate Breakeven Point

To calculate the breakeven point for writing a put option:

Determine the strike price of the put option
Identify the premium received from selling the put option
Subtract the premium received from the strike price
The result is the breakeven price

For example, if you sell a put option with a strike price of $50 and receive a premium of $2, the breakeven point is $48.

Remember: The breakeven point for a put is always below the strike price. This is different from call options where the breakeven is above the strike price.

Worked Example

Let's calculate the breakeven point for a put option with the following details:

Strike Price: $45
Premium Received: $1.50

Using the formula:

Breakeven Price = $45 - $1.50 = $43.50

This means the underlying asset must fall to $43.50 for the writer to recover the premium paid to the buyer.

If the asset price falls below $43.50, the writer makes a profit. If it stays above, the writer incurs a loss equal to the difference between the breakeven price and the current price.

FAQ

What is the difference between breakeven for put and call options?

For put options, the breakeven is below the strike price, while for call options, it's above the strike price. This is because put writers must buy the asset to cover the cost of exercising the option, while call writers must sell the asset.

How does the breakeven point change with the premium received?

The breakeven point moves closer to the strike price as the premium received increases. Higher premiums mean the writer must recover more, so the breakeven is lower.

Can the breakeven point be negative?

Yes, if the premium received is greater than the strike price, the breakeven point can be negative. This means the writer must buy the asset at a price below zero to recover the premium.