Calculating option profit is defined by the sum the investor earns when purchasing a call option or selling a mature option. In other words, if you have entered a call option agreement, you expect the asset's underlying price to be higher than the strike price, on maturity. The income for the investor will derive from having the right to buy the underlying asset at the strike price, and later sell at market price.
HOW TO CALCULATE OPTION PROFIT
EXAMPLE
Fred owns 100 shares in a Detergent manufacturing company, they currently trade at $55. Fred expects the price of the stock to go up, as everyone needs detergent and the company is achieving excellent results in the recent quarter. Fred buys a call option at a strike of $50, expecting the stock to rise considerably before maturity, and pays $200 for 100 shares at $2 each.
When the stock price rises to $65, Fred can exercise his option call and buy 100 detergent shares for $50, and then sell them on the open market for $65 thus realizing a profit.
STOCK ANALYSIS
Analyzing stock is important in preventing loss, however, how to calculate option profit is probably more important.
When a trader buys a call option, he realizes that he can suffer a loss from the trade. So he waits until the value of the asset reaches the strike price and then he exercises the trade. Knowing when to sell an option, is when you earn the profits. When he does not choose to exercise his right he won't get reimbursed the premium paid when buying a contract. The amount of the premium fluctuates depending on the risk and time left before the option expires. If the underlying asset price is less than the strike price when the option expires, the call option writer makes a profit.
HOW TO CALCULATE LONG CALL OPTION PROFIT
When purchasing a long call option you expect the underlying asset price to rise above the strike price before it expires. The profit percentage is hard to predict and calculate, as long as it does rise there is no limit as to how high it will go before expiration. However, you will get an idea of how much you can earn. To get a more exact idea you need to consider various factors and they are:
* Breakeven point
* Strike Price
* Premium paid
* Profit
If your prediction is wrong and the stock price falls your call option will be worthless, and you will suffer a loss. When we start trading we need to be prepared to sustain a few shocks.
You also have to pay brokerage on the trade to your broker, and the cost varies. Open a Demat account with a reliable broker or stockbroker and that will provide you with some structure through brokerage plans.