Today I want to talk to you about something very important.
In fact, I’d say it’s critical.
Every time you do a trade you need to know what your breakeven is.
And just so we’re on the same page, by “breakeven”, I mean the price at which you neither gaining or losing on the stock.
It’s a critical number to know so that you know when the trade starts working against you.
Now, that seems so simple, but I’ve seen so many traders enter a trade without ever calculating their breakeven ahead of time.
Sometimes that number is simple to calculate, for example, if you’re just buying a stock at $120, that’s your breakeven. Simple.
But let’s say you’re selling a covered call on a stock you own at $120. You earn $3 for the covered call. Your breakeven is now $120 – $3 = $117.
Or let’s say you’re doing a naked put. Your breakeven would be your strike price minus the premium you received.
The same thing goes for spreads:
On a bull put spread, your breakeven is the net credit you receive subtracted from the higher strike price.
On the other hand, with a bear call spread, your breakeven is the net credit you receive added to the lower strike price.
Now, I know it might sound boring, but you’d be surprised how many people freak out about their trades without even knowing their breakeven.
We recently had this happen with Nvidia (NVDA), and I’ll be talking more about that in a future update.
For now, I want you to grab a pen and paper and write it down: Know Your Breakeven.
Write it big, write it bold, and keep it somewhere you can see it every day.
When you know your breakeven, you can make smart decisions about your trades.
If you’re getting close to your breakeven and you want to get out, you can do it without panicking.
But if you don’t know your break even, you risk making poor, emotional decisions that could cost you.
So, let’s go back to Trading 101. Always know your breakeven. It’s a small step that can make a big difference.
Trade well,
Jack Carter
P.S. Some folks are freaking out about NVDA’s drop, but it’s still one of the top stocks I’m trading. Check out how I’m doing it here.
