Trying to calculate your options call profit? Get a step-by-step guide on how to do it right with this comprehensive tutorial!
Calculating your options call profit can be a complicated process, with the potential for mistakes costing you your hard-earned money. In this tutorial, learn how to calculate options call profit accurately and maximize your earnings.
1. Determine the cost of the option. Options are bought and sold for a price known as the premium. The premium is the cost of the option and should be taken into account when calculating profit.
2. Determine the strike price. The strike price is the price at which the holder of the option has the right to buy or sell the underlying asset.
3. Determine the stock price at the time of expiration. The stock price at the time of expiration will determine if the option is in the money or out of the money. An in the money option will have a higher profit potential than an out of the money option.
4. Calculate the profit or loss. To calculate the profit or loss, subtract the cost of the option from the difference between the strike price and the stock price at the time of expiration. If the resulting number is positive, then the option has made a profit. If the number is negative, then the option has made a loss.
5. Take into account commissions and fees. Commissions and fees should be taken into account when calculating profit. These costs will reduce the overall profitability of the option.
Determine the Options Premium.
The options premium is an important part of options call profit and it is the price of the option determined by supply and demand in the open market. To determine the options premium, you must evaluate factors such as strike price, time to expiration, underlying asset volatility, current stock price, and other factors. By researching these factors, you can estimate what the marketplace will be willing to pay for a given option contract.
Calculate the Maximum Possible Profit from the Call Option.
Your maximum profit from a call option is calculated by subtracting the cost of the option from the strike price, multiplied by the number of contracts. In other words, it’s the difference between what you paid for the contract and what you would receive if you exercised your right to buy at the strike price, times the number of contracts purchased. For example, if you bought one contract with a strike price of $50 and paid $2 per option, your maximum profit would be ($50–$2) x 1 = $48. If your options ended in-the-money when they expired, this is how much profit you could make on them.
Calculate Breakeven Point for the Call Option.
To calculate the breakeven point for the call option, you need to find out how much you already paid for it and how much more you will have to make to break even. This simply means subtracting the cost of the option from the strike price of the option. For example, if you bought a call option for $2 and it has a strike price of $50, then your breakeven point is ($50–$2) = $48. This means that in order for your options contract to break even, the market must move to or above this amount when it expires.
Understand Cost and Risk Involved in a Call Option Trade.
It’s important to calculate potential costs and the risks involved in a call option trade. Calculating potential cost requires considering two factors: the price of the option contract, which is what you pay upfront when you initiate the trade, and the premium paid for each additional contract in case you want to purchase or sell more contracts. You also need to be aware of other factors such as liquidity, implied volatility, time decay, and market sentiment. Knowing these basics will help marketers better understand their options trades and position themselves for a profitable return.
Analyze Scenarios That Could Lead to Loss or Profit for Your Call Trades.
To estimate the possible loss or gain for a call option position, it’s important to calculate the intrinsic value and extrinsic value of the trade. Intrinsic value is the difference between the underlying asset's strike price and current market price. Extrinsic value, on the other hand, is the amount left over after subtracting intrinsic value from the total cost of a call option trade. Then add in potential taxes and fees that you may incur to get a better understanding of your potential call profit.
Profits from Buying a Call Option: Payoff Diagram