If you’re new to trading options, then you’re probably eager to learn how to earn profits consistently.
When it comes to calculating how much profit you could potentially make trading options, you’ve probably heard of options profit calculators.
Based on the formulas offered through these calculators, it can be tempting to spend time deciding which options contract will maximize your profits.
If you’re having trouble deciding which trades to enter, check out how David Jaffee teaches his students how to win up to 98% of their trades!
How to Calculate Options Profit
Using an options profit calculator can help you fully understand the potential gains as well as potential risks that accompany a trade.
There are many ways to calculate profits for different options trading strategies.
Let’s look at potential gains made after buying a call option contract.
To calculate the potential options profit, we need to know:
- Premium paid for the options contract (the price of the option)
- Strike price of the option.
- Current stock price.
- Number of contracts bought.
Let’s say 2 months ago you bought 3 call options (each contract is 100 shares) for Company Z . The option’s price was $5. The strike price of the option is $30. The current stock value for Company Z is $45 per share.
Options Trading Formulas
1.) Calculate your total investment.
Multiply the option price / premium paid by the total number of shares purchased – 300 shares in this scenario.
$5 x 300 = $1,500
2.) Calculate your total current stock value.
Multiply the total number of shares with the current stock value.
300 x $45 = $13,500
3.) Calculate the total strike price value.
Multiply the total number of shares with the strike price value.
300 x $30 = $9,000
4.) Calculate your profit.
Profit Formula = Total current stock value – total strike price value – total investment
Your Profit = $13,500 – $9,000 – $1,500 = $3,000.
Keep in mind that this calculation applies only if you decide to exercise these 3 options before expiry.
Note that when calculating profit / loss for positions that are not assigned / exercised, it’s very important to keep track of the current market price of the option, and compare it to the price of the option when you entered the position.
Are you interested in studying the most profitable options trading strategies that can increase your income?
Drawbacks of Using an Options Profit Calculator
If you’re using probability calculations for options profit calculators, these numbers are based on the assumption of stable implied volatility values.
If the market is volatile, it could significantly change the predictions of the options trade.
It is far better to enter good trades than spending time calculating potential gains.
As someone that is focused on making profit, options profit calculators can be very distracting.
David Jaffee prefers his students to work on their discipline, patience, mindset and habits.
Other Considerations before using Options Profit Calculators
If you’re learning to trade the way David Jaffee’s teaches his students (by selling far OTM options), very few of your positions will end up getting challenged.
Most brokerages also explicitly show you the live profit and loss for each position in your account. This removes the need to use an options profit calculator.
David Jaffee believes that people should trade a strategy that is as simple as possible and focus primarily on selling naked puts and calls, and / or vertical credit spreads.
Once a trade is made, a closing trade can be entered as a GTC order that will automatically close the position once the sold option can be bought back for 30% – 50% of the original price that it was sold for (therefore allowing the trader to keep 50% to 70% of the premium).
In the event that a position is challenged, the trader can roll the position for a tiny credit, or debit, and use the time premium to significantly reduce the risk of the challenged position by rolling the strike price of the challenged position to one that’s more favorable.
It may feel intimidating to enter a trade and not know your potential profits or losses.
As a beginner, it may be best to enter a closing order, at your preferred profit target, immediately after opening a new trade rather than spending time using an options profit calculator.
Want to learn options trading strategies that can make a profit consistently?