Trying to learn options, “break even point" has got me discouraged

#1

Hey guys, finally decided to learn options trading, but I feel like I’ve hit a wall that’s making me reconsider my decision; break even point. I’ve just begun learning, so there can be mistakes in the question itself, but I’ll try to frame it to the best of my ability:

Taking SBI as an example, the main stock closed at 363.20. I think the price of the stock will go up tomorrow, and as per the options chain on this site https://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=238&symbol=SBIN&symbol=SBIN&instrument=OPTSTK&date=-&segmentLink=17&segmentLink=17 , the closest option to the 363.20 price is the 25th July 365 option, the “ask price" premium for which is 5.80. Assume I bought this call before market closing.

The next day, the main stock opens 60 paisa above the 363.20 price, wouldn’t the 5.80 call appreciate in value? Is there ANY way the call could be worth less than what I paid for it? Because if not, I’m unable to understand how “break even point" applies to me.

Since I’m only trading this call and not going to be the one who’ll exercise this contract on the 25th of July, if the call is worth, let’s say, 5.95 tomorrow, couldn’t I just sell it and make back the 5.80 premium and book the 15 paisa profit? Is there something I’m missing here?

Thanks :slight_smile:

#2

Hey, I’m no expert in options, I’m learning too and started recently. But, yes the breakeven point that you are referring here (spot price from when you start making profit) only applies when you hold till expiry.

Other than that, yes you can make use of the movements of the premium and profit as you have given in the example.

But, also i’m thinking you are aware of it already, the premium of an option contract is not solely based on the underlying price. There are a lot of other things that need to be kept in mind, especially when not holding till expiry.

So, i would suggest you not to get discouraged by breakeven and to continue your learning in options till you get a better picture on how they work and also just observe real-time movements of options and underlying. Then, once you are confident enough you can start trading with small capital.

#3

@techbhogi i think that 370.8(365+5.8) will be your break even point above that u r in profit

In india there are european options so you can excercise your right on expiry but b4 expiry we can sell our right to excercise that option hope ur doubt is cleared

#4

Thanks for taking the time to reply, I literally started learning the day before yesterday, so in the spirit of cutting the learning curve, what factors other than “underlying price" influence the options premium price, especially when the contract is not held till expiry?

Btw, the option premium for the contract I mentioned is exactly 5.95 right now, I’m shook lololol.

#5

Thanks for replying, but I’m still confused, since I don’t intend to exercise the contract, only trade the premium for a profit, how does it matter that the break even point is 370.8? Isn’t this the headache of the person who takes the contract off my hands? I’ll just make the 15 paisa premium profit, won’t I?

#6

As soon as the price of sbi goes above 363 the price of your options will start increasing

#7

Say the qty of sbin is 3000 so as the premium goes above 5.8-6-6.5 you will start earning profit

#8

Haha :smiley: some prediction that!

There are few other stuff like Time value, vloatility and even the effect of underlying price movements on a particular strike price would be different. Not to scare you with all the jargon, but it is a very interesting topic.

I used to trade stocks, but It took a long time for me to even think about starting to learn options, because it seemed like a huge mountain to climb.

But, I have started recently, only a month back. I don’t know from where you are learning, but I started with the Options modules on Zerodha Varsity.

And all I can do is recommend it to anyone i know. The way the concepts are explained in it are very nice and in a structured manner and it is a good read.
So, I’d suggest you not to skip the learning curve and read the concepts on Varisty. It will help you a lot, and most importantly it will keep you interested.

#9

Bro, try to keep things simple. Just some points for your consideration:

  • If you don’t intend to carry your position till expiry, completely forget about the concept of breakevenpoint
  • Option is a depreciating asset, Unless the underlying stock price goes up significantly your premiums will decrease everyday due to time decay.
  • Option Premium values depends on many factors called greeks which you must have read in varsity
  • You can trade i.e. buy LOW sell HIGH or Sell HIGH buy LOW option premiums just like trading any other asset.

I just reiterated what @prash_u and @vaibhavi_Shah have already mentioned

#10

Thanks :slight_smile:

#11

Thanks, I’ve been meaning to check out varsity. Right now, I’m just picking things up from tasty trade, options alpha etc from youtube. There’s a 25 part options course uploaded by an Indian bro on youtube, just wanted to make sure options was worth my time before getting into that haha.

#12
  • If you don’t intend to carry your position till expiry, completely forget about the concept of breakevenpoint

Just what I wanted to hear, thanks for replying! :smile:

#13

Learning it is definitely worth it.

I do recommend Varsity to begin with, as the concepts are explained in an easily understandable manner especially for a beginner like me. Do continue learning and all the best.

#14

Thanks!:smiley:

#15

Dear friend, this is very simple, strike price+premium = break even point, to understand well about options please read the guide of zerodha varsity Module 5. “Options Theory for Professional Trading”.

Thanks and regards,
Biju

#16

If you really want to make money stay with stocks with a backtested model. F&O are potentially weapons of mass destruction & in reality most guys even in this forum would have made losses (my guess so pls don’t react)

#17

Please go through the link.