Do u know how to calculate the break even point of a strategy eg straddle BEFORE the date of expiry? I've scoured dozens of websites that only talk abt the break even points at the date of expiry. Why doesn't anyone explain this? Or is there no such formula to calculate this and its just a best guess?
How to calculate break even point before date of expiry?
- Thread starter dwaynek
- Start date
By "break-even point", are you referring to those strikes on either side of the straddle's center that represent where the straddle position value (whether long or short) will switch from positive to negative?
This value is routinely calculated -- it *needs* to be done frequently, as it's affected by each of time, volatility, and changes in the underlying. It's out there. It's good to roll your own, though. (Always, IMO.
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This value is routinely calculated -- it *needs* to be done frequently, as it's affected by each of time, volatility, and changes in the underlying. It's out there. It's good to roll your own, though. (Always, IMO.
)
Simply use an option risk grapher to chart the day you want. Your broker should have one, or there are many online for free. https://optioncreator.com/
Of course this will just be a rough estimate. Implied volatility (calculated volatility based on current price) must remain the same. And commissions and b/a spread losses will be in the mix too.
Of course this will just be a rough estimate. Implied volatility (calculated volatility based on current price) must remain the same. And commissions and b/a spread losses will be in the mix too.
In accounting, the break-even point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those which do not change depending upon the number of units sold. Put differently, the breakeven point is the production level at which total revenues for a product equal total expenses.
Assume an investor buys Microsoft stock at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP, because they are not making or losing anything.
Assume an investor buys Microsoft stock at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP, because they are not making or losing anything.
Using an option pricing formula, you can calculate the value of an option on any given day in the future and therefore, the future value of your straddle. You vary the price of the underlying up and then down to determine when the straddle's value equals what you paid for it. Those will be the break even prices. The only unknown variable will be what the future volatility input will be and unless your are projecting a change due to pending news, you use the current implied volatility.
There are web sites as well as programs provided by brokers that do this. Here's one:
http://www.option-price.com/index.php
There are web sites as well as programs provided by brokers that do this. Here's one:
http://www.option-price.com/index.php