Break Even On Options Contracts

Question

Given a calendar options contract (sold 1 month out, bought 2 months out same strike price) and someone says to look to adjust/close out the position at the break even points.

Do they mean break even points based on my current profit/loss (points labeled 2 in the image below) or do they mean the expiration break even points (points labeled 1 in the image below)?

EDIT:

There seems to be some confusion about my image and the overall question I am asking.

The image is purely an example to show the two different types of break points someone could talk about. It could have been any options trade with expiration curve and current P/L curve (i.e. iron condor, short naked calls/puts, etc.)

The question I am asking is when someone says to adjust something when price is approaching the break even points, Do they mean the further out in time ones (i.e. break even on the expiration curve) or the closer in time ones (i.e. the break evens on the current P/L curve).

The reason I am asking is simple. When you first place a trade, many times the current P/L is negative and takes a time to become positive. If the underlying moves in a way that negatively affects the contract, you may never be above the current P/L break even points. This makes me think that "take action/adjust at the break evens" mean the break even points at the expiration, but I have never seen any indication one way or the other and thought I would ask here.

Answer 1

Simple answer: Breakeven is when the security being traded reaches a price equal to the cost of the option plus the option's strike price, assuming you choose to exercise it. So for example, if you paid $1.00 for,say, a call option with a strike price of $19.00, breakeven would be when the security itself reaches $20.00.

That being said, I can't imagine why you'd "close out a position" at the breakeven point. You wouldn't make or lose money doing that, so it wouldn't be rational.

Now, as the option approaches expiration, you may make adjustments to the position to reflect shifts in momentum of the stock. So, if it looks as though the stock may not reach the option strike price, you could close out the position and take your lumps. But if the stock has momentum that will carry it past the strike price by expiration, you may choose to augment your position with additional contracts, although this would obviously mean the new contracts would be priced higher, which raises your dollar cost basis, and this may not make much sense.

Another option in this scenario is that if the stock is going to surpass strike price, it might be a good opportunity to buy additional calls with either later expiration dates or with higher strike prices, depending on how much higher you speculate the stock will climb. I've managed to make some money doing this, buying options with strike prices just a dollar or two higher (or lower when playing puts), because the premiums were (in my opinion) underpriced to the potential peak of the stock by the expiration date. Sometimes the new options were actually slightly cheaper than my original positions, so my dollar cost basis overall dropped somewhat, improving my profit percentages.

Answer 2

I found the answer after some searching online. It turns out that when talking options, rarely is the current P/L line considered when talking about making adjustments/taking trades off.

From Investopedia: http://www.investopedia.com/terms/b/breakevenpoint.asp

"... For options trading, the breakeven point is the market price that a stock must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is the strike price plus the premium paid, while breakeven for a put position is the strike price minus the premium paid."

The first sentence sounds more like the current P/L line, but the bold section clearly states the rule I was looking for. In the example posted in my question above, the breakpoints labeled with "1" would be the break points I should consider.