# Calculating Breakeven Ratios & Profit Margins in Binary Options

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Contents

## Break Even Ratios in Binary Trading

In binary options trading, the break even ratio is the percentage of the correct predictions you need to make in order for you not to lose any money. If your percentage of accurate predictions coincides with the break even ratio, then you will not lose money but you will also not make any money at all. It is therefore your task as a binary options trader to keep practicing your strategies while keeping your risk factors low.

As we have already established, binary options trading allows you to make money if you predict the future movement of an asset. In order to be able to make a prediction, you will have to invest a certain sum of money. Knowing the movement trends and the daily market news is essential to making the right prediction, as we have mentioned in the other articles.

If you make a correct prediction, your trade results “”. You will be paid out with the repayment of your investment plus a certain percentage of that investment. In most cases this percentage is never 100%. This means that correctly predicting 50% of your predictions will not necessarily mean mean that you will breakeven.

For example, say you purchase both a call and a put option on a certain asset with the same expiry. The percentage (ITM%) awards you with 70% of your investment, while the broker (or you) dictate an percentage (OTM%) of 90%. This means that if you win , and lose , the break even ratio will be less than 50% since 70% is not equal to 90%.

In order to break even, meaning not lose anything but also not win anything, you will need have to have a break even percentage of above 50%. Most traders do not even have a clue that this rate even exists. It is up to you to play around with your ITM% and the OTM% plus the other risk factors pertaining to your trade in order to at least break even, if not end up .

## How to Calculate Breakeven Ratio in Binary Trading

Fortunately, with basic algebra and probability theory, it is not that hard to calculate the breakeven ratio. The only things you will have to know about are a few parameters. As we discussed earlier in the example, these parameters include the percentage (ITM%) and the percentage (OTM%). Using these, you will be able to easily calculate your breakeven ratio and optimize your trading techniques.

### Percentage

The percentage (ITM%) is the ratio of the profits you will be making in case you make a correct prediction. In other words, this is the percentage of your investment that is basically the payout percentage offered by brokers. Many brokers offer different ITM% for different assets. Some brokers allow you to modify the ITM% through their options builder.

For example, a payout percentage of 80% means that in case you make an accurate prediction, the broker will repay your investment and offer you a commission of 80% of the investment amount. If you invested \$100, then the total returns you will be getting will be \$100 plus \$100 x 0.8 for a total of \$180.

Take note, ITM% is the percentage of your investment as winnings from the broker.

### Percentage

The percentage (OTM%) is the ratio of your investment the broker will take away in case you do not make an accurate prediction. In most cases, when you make an inaccurate prediction the broker will take away all the money you have invested. In this case, the out of the money percentage is 100%.

But, some brokers also offer rebates or refunds. Rebates basically represent the percentage of your investment the broker will not take away in case of an inaccurate prediction. Most common rebates range between 5% to 15%. So, if a broker offers rebates of 15% on losing trades, then your out of the money ratio is 85%.

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For example, an OTM% of 85% means that in case you make an prediction, the broker will take away 85% your investment and offer you a rebate of 15% of the investment amount. If you invested \$100, then the total returns you will be getting will be \$100 minus \$100 x 0.85 (or \$100 x 0.15) for a total of \$15.

Again, take note that OTM% is the percentage of your investment that the broker takes when you lose.

## Breakeven Ratio Formula

The formula to calculate the breakeven percentage is the following:

BE% = OTM% / (ITM% + OTM%)

BE% – Breakeven ratio

## Derivation of the Breakeven Formula

In binary options, there are only two outcomes to a trade — , or successful, and , or unsuccessful. In probability theory, where the probability of an event is represented by a percentage (or a fractional number from 0 to 1, where 0 means the event is not going to happen and 1 means the event will sure to happen), we can say that the probability of trades plus the probability of trades is equal to 1 (if the trade is not , it’s money, and vice versa).

This binary state allows us to derive the break even percentage, if we equate both probabilities multiplied by both ITM% and OTM%.

So let X be the probability that you are , and Y is the probability that you are .

X + Y = 1 (the probability that you are going to win plus the probability that you are going to lose is sure.) — eqn. 1

(ITM% x X) — (OTM% x Y) = 0 (equating this to 0 means we’re getting the break even percentage, meaning that if we transpose one term to the right of the equation, we get an equality) — eqn. 2

Representing eqn. 1 in terms of Y gives

Substituting eqn. 3 to eqn. 2 and Y is eliminated.

(ITM% x X) — (OTM% x (1 — X)) = 0 eqn. 4

Eqn. 4 is a linear equation with a single unknown X gives us the break even percentage.

(ITM% x X) — (OTM% x (1 — X)) = 0

Distributing (OTM% x (1 — X)) yields

(ITM% x X) — OTM% + (OTM% x X) = 0

Collecting all X’s together on one side of the equation yields our formula for the break even ratio.

X = OTM% / (ITM% + OTM%) (where X is the probability that you should win in order to break even, or simple the break even ratio BE%)

## Example

In order to understand these better, let’s have an example that involves the breakeven ratio.

Assuming that a broker offers a payout rate of 80%, meaning that the percentage (ITM%) is 80%. The broker also does not offer any kind of rebates at all, meaning that the percentage is 100%, or the broker will take away all loses.

In this case, one can easily calculate the BE% in the following way:

BE% = 100% / (100% + 80%)

Removing the percentages for the calculation’s sake and we have

BE% = 100 / (100 + 80)

Adding back the percentages and we have

This means that in the case of a payout rate of 80% and 0% rebates, you will have to accurately predict 55.55% of your investments in order not to lose any money at all.

## Example With Rebates

What if a broker gives a rebate? Let’s stick to our previous example of a payout rate of 80%, as in, an percentage (ITM%) of 80%. Now, imagine that a broker offers a rebate of 10%. In this case, the money percentage (OTM%) is 100% -minus the rebate, which in this case is 10%, so the OTM% is 90%.

Using the formula we have

and this results to:

As seen in this case, a trader will only have to accurately predict 52.91% of the trades in order not to lose any money at all. It is quite obvious how choosing a broker that offers a rebate is more advantageous as the break even percentage is lower.

In conclusion, calculating break even ratios in binary options trading is important for risk management. As explained initially, knowing the break even ratio from the payouts and the losses will allow you to strategize as to which and percentages are optimal. Understanding the parameters is extremely important if you want to become a successful binary options trader. For this reason, we strongly recommend that you perform these calculations first before entering a trade with your binary options broker.

Speaking of binary options brokers, our site lists the top brokers to date. Pick one and start applying your strategies today.

## Calculate Winning Percentage

In this article I will show you the win rate percentage required to break-even in binary options trading. You will learn how to calculate a winning percentage and you will learn about notions like: profit margin ratio formula, break even margin and breakeven ratio.

Calculating the winning percentage and breakeven rate isn’t as hard as it sounds but you have to understand a few aspects first.

## How To Calculate The Winning Percentage

Due to the nature of binary options trading (high low binary options), you will usually have a payout percentage of under 100% for all your trades.

HighLow binary options trading is the type where you have to predict, whether the price of an asset will go up or down. This is the most popular type of binary options trading.

How can I figure out win percentage in binary options trading?

Lets take the most popular currency pair EUR/USD. You take this asset and invest \$10. The payout is 83% and you think that the price will go up.

If the price goes up then you will get \$10 back + 83% = \$18.3 TOTAL.

If the prices goes down then you lose \$10.

As you see there is a difference of 17%. If you win you get \$8.3, otherwise you lose \$10. This means that, if you win once and lose once you will end up losing money in the long term. You will need a bigger win percentage than 50.1% to make profitable trades.

To calculate the break-even ratio and winning ratio you will have to calculate the following:

If you win you get 83%
Otherwise you lose 100%
Difference = 17% (this means with only 50% success rate)

How to calculate the breakeven percentage: 100% / 183% (100 + 83) = 55%.

Winning trades: 55 * 10 (money you invest per trade) * 83% (payout) = \$456.5
Losing trades: 45 * 10 = \$450

This means that you will have to win 56 trades from 100 to make a profit (\$6.5). A trader with 50% win rate will actually lose money on the long run.

In order to make money with trades that have a 83% payout you will need to win 55% of your trades. If you manage to win lets say 65% of the time then you will have the following profit margin: 10%. After 65 trades of \$10 you will make.

65 * \$10 * 83% = 539.5

How Comes There Are Payouts of 100% And More?

Sometimes the brokers offer trades with 100%-200% payout. The reason is that these outcomes are very unlikely to happen. You will have a very low chance with these types of trades.

Now that you have the winning formula, you can easily calculate it for yourself what winning percentage you need in order to make money with binary option trading. By doing so, not only will you be able to see the numbers clearly, but you will also be able to create a winning strategy.

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## Price your goods with enough margin to cover costs and earn profits

### Not what you’re looking for?

• Calculate your gross margin and net margin
• Set your sales price using the markup calculation to cover costs and earn a profit
• Calculate your breakeven point and start making profit

### Important

Review your financial statements regularly to check your margin, markup and breakeven calculations are still correct. Doing this check provides a good way to spot any increase in expenses so you avoid losing money.

Enter your sales and expenses information into our Financial statements template below to calculate your margin, markup and breakeven figures within the profit and loss, balance sheet or cash flow statements.

## Calculating your price of goods to earn a profit

There are two margins that need to be considered when monitoring your profitability – gross margin and net margin.

Knowing these figures helps set prices for goods and calculates your sales targets. Figures used in the examples below are included in the example profit and loss statement that you’ll find in the Financial Statements template above.

## Gross margin

### Definitions

• Gross margin is money left after subtracting the cost of the goods sold from the net sales and can be a dollar value (gross profit) or a percentage value – gross margin is not commonly used for service businesses as they usually don’t have cost of goods
• Net sales are the total value of sales for a given period less any discounts given to customers and commissions paid to sales representatives.

### Formulas

Gross profit and margin can be calculated as follows:

• Gross Profit (dollar value) = Net Sales less Cost of Goods Sold
• Gross Margin (percentage value) = (Gross Profit dollars / Net Sales dollars) x 100

Once you have your gross margin, you can calculate your net margin.

### Example: Joe’s Tyres

• Gross Profit: \$52,000 – \$31,200 = \$20,800
• Gross margin: \$20,800/\$52,000 x 100 = 40%

Joe’s Tyres has a gross profit of \$20,800. The business’s overhead expenses must be less than this to earn a profit.

## Net margin

### Definition

Net margin is your profit before you pay any tax (tax is not included because tax rates and tax liabilities vary from business to business).

### Formula

• Net Profit (dollar value) = Net Sales less total of both Cost of Goods Sold and Overhead Expenses
• Net Profit (dollar value) = Gross Profit less Overhead Expenses
• Net Margin (percentage Value) = (Net Profit dollars / Net Sales dollars) x 100

If the net margin is 10 percent, then for every dollar of goods sold you will make 10 cents in profit before tax – after all the cost of goods and overhead expenses have been paid.

### Example: Joe’s Tyres

• Net profit: \$20,800 – \$15,600 = \$5,200
• Net margin: \$5,200/\$52,000 x 100 = 10%

Joe’s Tyres will earn 10 percent of \$52, or \$5.20 from every tyre sold.

## Markup

### Definition

Markup is the amount of money above the cost of purchase or manufacture you sell your goods for. The price of goods sold needs to cover the cost of goods plus overhead expenses, and allow for profit to be earned.

Markup is generally used when referring to the sale of products rather than services.

### Formula

• Markup percentage value = (Sales less Cost of Goods Sold / Cost of Goods Sold) x 100
• Markup percentage value = (Gross Profit/Cost of Goods Sold) x 100

### Example: Joe’s Tyres

66.67% = (\$52,000 – \$31,200/\$31,200) x 100

Joe’s Tyres markup percentage is 66.67%.

To reach the gross profit of \$20,800 by selling tyres bought for \$31.20, Joe will multiply his unit cost price by the markup percentage (\$31.20 x 1.6667 = \$52 ).

Each tyre will have a minimum price of \$52 each to earn enough money to cover business expenses.

### Definition

The break even calculation identifies the number of sales to be made, (in dollars or units), before all the business expenses are covered and profit begins (before tax).

If you know the unit’s sale price and cost price and the business operating expenses you can calculate the number of units you need to sell before you start making a profit.

Breakeven analysis is helpful information when preparing and updating your business plan and can be used to set sales targets.

### Formula

Use the following simple calculation to find where profit really starts:

• Breakeven dollar value needed before net profit = Overhead expenses/ (1 – (Cost of Goods Sold / Total Sales))
• Breakeven number of units to be sold before net profit = Overhead expenses / (Unit selling price – unit cost to produce)

### Example: Joe’s Tyres

• Breakeven dollar value: \$15,600/(1-(\$31,200/\$52,000)) = \$39,000
• Breakeven number of units to sell: \$15,600/(\$52-\$31.20) = 750

Joe’s Tyres will need to sell \$39,000 worth of stock – or 750 units – before the business earns any profit (before tax).

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