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

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

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

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.
====================================
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
====================================
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
=====================================
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.

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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.

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