Chapter 06 · Section 6.1
Breakeven Point
Market Outlook : VOLATILE
Profit Potential: limited on downside;
unlimited on upside
Loss Potential : limited
Breakeven Points:
The calls used in the construction of this backspread are priced as follows:
Long 110 call: $2.75
Short 100 call: $9.25
To which point must the market fall in order to breakeven?
a) +103.75
b) -106.50
c) -101.00
d) -96.25
e) -106.25
The net premium paid is what must be recouped in order to make a profit.
The net premium is the difference between what you paid for the long calls and what you received for the short calls.
To find the low breakeven point, simply subtract the net premium to the lower exercise price.