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.

Options are a very powerful tool that traders use to hedge their risk. Discover your stock options are and how they work!

An option gives its owner the right (but not obligation) to buy or sell a stock at a specific price on a specified date in the future. The value of an option depends on the difference between the current market price of the underlying security and the strike price of the option.

What Are Options?

Options give investors the opportunity to profit when the price of a stock moves in one direction or another. They allow investors to speculate on whether a stock will rise or fall without actually buying the shares themselves.

The Basics of Options Trading

A call option gives its owner the right (but not obligation) to buy 100 shares of a particular stock at a certain price within a specified period of time. If the stock rises above the strike price during the option's life, the holder of the option gets to exercise his right to purchase the shares at the higher price. In other words, he makes money if the stock goes up. On the other hand, if the stock falls below the strike price, the option expires worthless.

Hedging with Options

Hedging is the practice of offsetting one investment against another so as to reduce risk. This is done through the use of derivatives such as options.

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.