Breakeven in option spreads

Discussion in 'Options' started by tradeabc, Jul 30, 2010.

  1. tradeabc


    What is breakeven in option spreads? I know the technical definition of it. But what does that mean to us if we execute a option spread?

    Lets say for example i execute a bull call spread. so breakeven is

    break even = put sold - net credit

    so what does that mean. can we exercise the spread if the strategy is going against the spread to avoid losses?
  2. stoic


    Your question is somewhat confusing.
    First you state a "Bull Call Spread" which would be a debit spread.
    Then you have:
    break even = put sold - net credit

    Examples for Break Even for Credit and Debit Spreads both put and calls is this:
    These examples are on RIG Sept. Options. All sell to open are @ the Bid, all buy to open are at the ask.
    Prices after the close 08/02/10

    Debit Call spread. (Bullish)
    sell to open Sep 55 @ 1.99
    buy to open Sep 50 @ 4.20 net debit $2.21
    Break even = long call strike + net debit. Or 50 + 2.21 = 52.21.
    At that point the long 50 calls are 2.21 ITM.
    Credit Put Spread (Bullish)
    sell to open Sep 50 @ 3.60
    but to open Sep 45 @ 1.87 net credit $1.73
    Break even = short put strike - net credit, or 50 - 1.73 = 48.27
    At that point the short 50 puts are 1.73 ITM
    Credit Call Spread. (Bearish)
    buy to open Sep 57.50 @ 1.34
    sell to open Sep 52.50 @ 2.91 net credit $1.57
    Break even = short Call strike + net credit, or 52.50 + 1.57 = 54.07
    at that point the short 52.50 call is 1.57 ITM
    Debit Put Spread (Bearish)
    buy to open Sep 52.50 @ 5.05
    Sell to open Sep 47.50 @ 2.44 net debit
    Break even = long Put strike - net debit, or 52.50 - 2.44 = 50.06
    at that point the long 52.50 put is 2.44 ITM.

    The attached screen shots are for the examples above from a options calculator I found on-line.
  3. stoic, what is the source for the be spreads.pdf? I'd like to download the working spreadsheet. Thanks.
  4. stoic


    They were screen shots from a Windows based program "Prime Options Calculator" it also does calculations for all the standard option spreads, naked, and combinations w/ all the margin calculations, plus Black & Scholes, & Binomial Option Pricing Model, & Buy Writes with up to 3 roll Outs.
  5. OptionGuru


    The term exercise is used to describe the right of selling or buying the underlying at the option strike price. 99% of option traders have no intention of trading the underlying or exercising the options.

    I think you mean to close the trade to avoid additional losses or to lock in the gains. In that case YES you can buy-to-close or sell-to-close the options at anytime. But due to the volatility of options you run the risk of closing too early and watching the trade turn a profit after you have exited.