Close Above Break-Even Point

Index XYZ is above break-even point of 516 at expiration



Buy 1 XYZ 505 Call at $11


If index XYZ closes above the break-even point of 516 at expiration, at 520 for instance, the option will be in-the-money and worth its intrinsic value, or its cash settlement amount (difference between the strike price and index level):

520 XYZ index level
-$505 call strike price
$15 intrinsic value (cash settlement amount)

If you sell the XYZ 505 call for its intrinsic value of $15 then you would see a profit:

$15.00 intrinsic value received at call’s sale
-$11.00 premium initially paid for call
$4.00 profit

This profit of $4.00 ($400 total) represents a return on an initial investment of $11 premium paid for the call ($1,100 total) of approximately 36.4% over the 3-month life of the call contract.

With XYZ at 520 at expiration, the in-the-money XYZ 505 call could also be exercised. The exercise settlement value would be the closing index level of 520. The cash settlement amount would be: 520 (settlement value) – $505 (call strike price) = $15. The profit would be the same as if the call were sold for intrinsic value at expiration:

$15.00 settlement amount received at call’s exercise
-$11.00 premium initially paid for call
$4.00 profit

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