Calculation of break even point in nifty options
Break even point is the zone where the investment is sealed without profit or loss. In simple, while investing, traders make sure that they don’t get losses once if the scrip reaches their estimated price. Lesser the investment, quicker the break even point for same break even point in call put option.
Calculation of break even mainly depends on premium, strike price and current trading price of the stock. Once again, let us go with nifty options example to make understand better. Let us assume that a trader bought Nifty call option 5500 @ 44 and nifty is trading at 5438. This clearly tells us that the trader is in a view that nifty reaches 5500 and that is the reason he opts to buy nifty call 5500. Here, one thing I would like to inform you that as this is Out The Money, there will not be any intrinsic value and all the premium,44 is time value.
Now, calculation goes this way.
If nifty reaches 5448, the profit is 10 points as nifty moved towards his expected level 10 points (5448-5438)
If nifty reaches 5460, the profit is 22 points as nifty moved towards his expected level 22 points (5460-5438)
If nifty reaches 5482, the profit is 44 points as nifty moved towards his expected level 44 points (5482-5438)
We all know that time value anyhow becomes zero at the end of the expiry. So, if nifty ended expiry at 5482, the trader gets a profit of 44 points because of his good expectation and at the same time, the time value,44 becomes zero. So the final profit/loss is zero which is called as a break even point. So while buying this nifty 5500 CE, his first target would be 5482 where he can cease the investment cost and then look for the profit.
if nifty ended expiry exactly at his level of 5500, he would get a reward of 62 points and loss of 44 (time value). so total profit get around 18 points.
If nifty crosses 5500 and ends at 5550 at expiry, then the profit would be 5550-5438=112 and once again the time value loss, 44 which results in 68 points loss
And finally, if nifty stays anywhere below 5482 which is not even 44 points, say at 5480, profit is 42 points and loss is 44 points leaving the difference -2 points. Fortunately as the loss is limited, trader need not pay the difference and the maximum loss he needs to face is 44 points i.e., Rs. 2200 for 1 lot of Nifty 5500 CE.
Posted on: 2016-07-19 13:12:13 Updated on: 2016-07-19 13:12:13