What Is a Breakeven Point (BEP)?

In business and finance, break-even points are used in a number of areas. In accounting, it refers to the point at which total production revenue equals total production costs. On the other hand, investment break-even points are reached when initial costs equal current market prices. When an underlying asset's market price reaches a break-even point in options trading, the buyer will not suffer a loss.

A trade or investment's breakeven point (breakeven price) is determined by comparing the market price of an asset with its original cost. When the two prices match, the breakeven point is reached.

Also, break-even point (BEP) is a term used in accounting to describe a situation in which a company's revenues and expenses are equal. Basically, it means that there were no net profits for the company or no net losses for it. It can also refer to the amount of revenues needed to cover expenses incurred during a particular period.

Company A, for instance, spent $100,000 on manufacturing costs and earned $100,000 in revenues. The company in such a scenario achieves its break-even point, so they don't lose anything, but they don't make anything either.

Understanding Breakeven Points (BEPs)

The concept of breakeven points can be applied to a variety of situations. As an example, the breakeven point would be when the homeowner generates enough money from the sale of a property to cover the net purchase price, including closing costs, taxes, fees, insurance, and mortgage interest, in addition to maintenance and home improvements costs. This price would allow the homeowner to break even, neither making or losing money.

Also, traders use BEPs in their trades, calculating the exact price that must be reached for a security to cover all associated costs, such as taxes, commissions, and management fees. A company's breakeven is also calculated by taking its fixed costs and dividing them by its gross profit margin.

Stock Market Breakeven Points

Let's say an investor buys Microsoft stock for $110. That is now their breakeven point on the trade. If the price surpasses $110, the investor is earning profits. If the stock falls under $110, the investor is suffering losses.

If the price stays right at $110, they are at the BEP, because they are not making or losing anything.

Options Trade Breakeven Points

(1) Call Option Breakeven Point Example

For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is reached when the underlying is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying is equal to the strike price minus the premium paid. The breakeven point doesn't typically factor in commission costs, although these fees could be included if desired.

Let's suppose that an investor spends a $5 premium for an Apple stock call option with a $170 strike price. That means the investor is given the right to purchase 100 shares of Apple at $170 per share at any time before the options expire. The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 breakeven price, or $15 per share.

(2) Put Option Breakeven Point Example

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock at $180 per share until the option's expiration date. The put position's breakeven price is $180 minus the $4 premium, or $176. If the stock is trading above that price, the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $170, for instance, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170).