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.
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
Break-Even in the Wheel
Full wheel cycle break-even calculation:
- Sold $50 put for $2.00 → assigned at $50. Cost basis: $48.00
- Sold $52 covered call for $1.50 → expired worthless. Adjusted basis: $46.50
- 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.
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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