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Breakeven And Strike Price: What’s The Difference? (Explained)

Breakeven And Strike Price: What’s The Difference? (Explained)

A stock market is a place where shares of publicly listed companies are traded. It is the secondary market where individuals can invest in shares of companies. The stocks can only be traded if they’re listed on an exchange. The exchange then serves as a marketplace for people to buy and sell stocks. The buying and selling of stocks take place between investors at the price agreed between them.

The exchanges where the stocks are traded are regulated by the government. It’s also important to know that the stock market also functions as a primary market because it allows companies to list their shares and sell them on the market. The price of a stock depends on its supply and demand.

If the supply of the shares increases but the demand reduces then the price will decrease. However, if the demand for the stock increases then the price will increase.

In this article, I will be covering two main features of stock market trading: the breakeven and strike price. I’ll explain these two differences and I will also give you an insight into where the stock market is headed this year.

A person on an exchange looking through various assets.
A person on an exchange looking through various assets.

Options Trading

The term option means an asset that is based on the value of an underlying asset like a stock, currency, or bond. Since options get their value from other assets they are called derivatives.

An option contract gives the trader two options. To buy the options or to sell them. If the trader chose to buy and the price goes up he will profit and vice versa.

Options contracts have two main types:

  • Put: A put allows the trader to sell the underlying asset
  • Calls: A call allows you to buy the underlying asset

The Definition of Breakeven Price

In options trading, breakeven price is the market price of an underlying asset that has to reach for the option owner to not be at a loss.

When the underlying is equal to the strike price plus the premium paid for a call position, the breakeven point (BEP) is reached. When the underlying is equal to the strike price minus the premium paid for a put position, the BEP is reached.

Assume an investor pays a $5 premium for a $170 strike price Apple stock call option. This means that the investor has the option to purchase 100 shares of Apple at $170 per share at any time before the options expire. The call option’s breakeven point is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this level, the option’s benefit has not outweighed its cost.

The Definition of Strike Price

In options trading, the strike price is the price at which the options contract. It’s the price at which the trader buys or sells the contract.

It’s different from the market price. The difference between the strike price and the market price when an option is exercised represents the option holder’s profit per share.

In an option contract, the contract isn’t executed at the market price but at the strike price.

Types of Trading

Before discussing the types of traders you should know about the types of trading.

The first type of trading is spot trading. It’s when an investor buys an asset with the plan to sell it when it reaches a higher price. This type of trading involves low risk but with the correct analysis, it can give you healthy profits.

The second type of trading is future trading. It is when an investor bets long or short on an asset. By betting long the investor is declaring that he thinks the price of the asset will increase hence he will profit if this happens. Betting short means he’s predicting the price to fall hence if this happens he will profit.

In this type of trading, the investor isn’t purchasing the asset rather he is just betting on its price. Future trading can be more profitable and risky at the same time as the investors can leverage their funds. This simply means that they can borrow extra money from the exchange

Types of traders

In trading, several types of traders exist with different strategies to make a profit and different approaches to the market.

Fundamental traders

These types of traders invest in an asset based on the company’s reputation and the value it is providing. Secondly, they also look at the events of a company taking place. These types of traders usually make investments hoping for good returns in the long term. They buy and hold the asset.

Noise trader

This type of trader invests in an asset without studying it or doing any sort of analysis at all. The only thing he looks at while investing in an asset is how much is the asset being talked about. These types of traders buy very hot assets in the market and everyone is investing in them. He is attracted by noise and attention given to an asset.

Swing traders

These are the type of traders who do their analysis on a larger scale and let their trades run for weeks or even months.

Intraday traders

As the name suggests these types of traders let their trades run for 24 hours max and expect their targets to be hit in that time period. They do their analysis on shorter timeframes and expect lesser but consistent profits.

Top Performing Stocks

Post-Covid things haven’t been going quite well for the financial markets however some stocks have managed to steer through the storm and improve their performance. Following are the top performing stocks for last year (2021):

  • Moderna (NASDAQ: MRNA)
  • Fortinet (NASDAQ: FTNT)
  • Signature Bank (NASDAQ: SBNY)
  • Ford (NYSE: F)
  • Bath & Body Works Inc (NYSE: BBWI)
  • Diamondback Energy (NASDAQ: FANG)
  • Nvidia (NASDAQ: NVDA)
  • Nucor (NYSE: NUE)

Where Is the Stock Market Headed?

Bullish and bearish are 2 terms that are used to describe the market at any given time. Bullish means the market is in an uptrend and most of the assets have seen an increase in their price. Bearish means the market is in a downtrend and most of the assets have seen an overall decrease in their price.

The first half of 2022 has been disastrous for the financial markets with the S&P decreasing 22% in its value since the year started. Markets fell further in June when fear of high-interest rates caused the S&P to decrease further by $ percent in a single day. Since then, analysts have believed that the market has hit rock bottom and a recovery is expected.

However, you should not be fooled and think that it’s going to be all sunshine and rainbows as we go forward. The markets will be highly volatile with big moves up and down triggering a lot of stop losses. However, in the long term, the market will recover and the prices of assets should increase thus the worst thing you could do in this scenario would be to sell your assets.

A video discussing where the stock market is headed in 2022

Difference Between Breakeven and Strike Price

The main difference between breakeven and strike price is the breakeven price which is the price the stock must reach for the trader to not lose money. On the other hand, the strike price is the price at which the option order is executed.

The second main difference is that the strike price is not equal to the breakeven price. For a call option, the breakeven will be the strike price plus the premium paid for opening the position. For a put option, the breakeven price will be equal to the strike price minus the premium paid for opening the contract. From this, we can also conclude that the breakeven price is higher than the stock price for a call option and lower than the strike price for a put option.

Breakeven priceStrike price
It’s the price a stock must reach for the trader to not be at a lossIt is the price at which an option order is triggered
In a call option, it’s higher than the strike priceIn a call option, it’s lower than the breakeven price
In a put option, it’s lower than the strike priceIn a put option, it’s higher than the breakeven price
Difference between Breakeven Price and Strike Price

Conclusion:

  • The stock market is a secondary market that lists the shares of private companies and allows investors to trade them.
  • The strike price is the price at which an option order is exercised. The breakeven price is the price that a stock must reach for the investor to not be at a loss.
  • Post-Covid things have looked quite grim for the financial markets but experts say that the bearish market will soon be over and there are hopes of recovery.
  • Events like the increase in interest rates and high CPI numbers have dealt a serious blow to the market thou.
  • For call options, the strike price is higher than the breakeven price whereas for put options it is lower than the strike price.
  • Several types of different traders exist it is up to you to decide which category you want to fall in by carefully studying each different type. It also helps with deciding which one suits you the best and of course, maximizes your chances of profit.

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