Break-Even Price
A break-even price is the amount of money, or change in value, for which an asset must be sold to cover the costs of acquiring and owning it. It can also refer to the amount of money for which a product or service must be sold to cover the costs of manufacturing or providing it.
In options trading, the break-even price is the price in the underlying asset at which investors can choose to exercise or dispose of the contract without incurring a loss.
Definition: The break-even price is the amount or value change that must be sold to cover the cost of acquiring and owning an asset. It can also refer to the amount a product or service must be sold for to cover the cost of manufacturing or providing it. In options trading, the break-even price is the price of the underlying asset at which the investor can choose to exercise or dispose of the contract without incurring a loss.
Origin: The concept of the break-even price originates from corporate financial management and investment analysis. It was initially used to calculate the minimum price a company needs to achieve when selling products or services to ensure no loss. With the development of financial markets, this concept was gradually introduced into the investment field, especially in options trading.
Categories and Characteristics: The break-even price can be divided into the following categories:
- Product Break-even Price: The minimum price a company needs to achieve when selling a product to cover production and sales costs.
- Service Break-even Price: The minimum price a service provider needs to achieve when providing a service to cover service costs.
- Investment Break-even Price: In the investment field, especially in options trading, the break-even price is the price of the underlying asset at which the investor does not incur a loss when exercising the option.
Specific Cases:
- Case 1: A manufacturing company produces a new product with a production cost of 50 yuan per unit and sales and administrative expenses of 20 yuan per unit. Therefore, the break-even price of the product is 70 yuan. If the company sells the product for less than 70 yuan, it will incur a loss.
- Case 2: In options trading, suppose an investor buys a call option with a strike price of 100 yuan and an option fee of 10 yuan. To avoid a loss, the price of the underlying asset must reach 110 yuan, which is the break-even price of the option.
Common Questions:
- Question 1: Does the break-even price include taxes?
Answer: Typically, the calculation of the break-even price does not include taxes, but in practice, companies and investors should consider the impact of taxes. - Question 2: Is the break-even price fixed?
Answer: The break-even price is not fixed; it will adjust with changes in costs, market prices, and other factors.
