Reasons to Use a Call Options Calculator for Your Daily Trades
It is essential to understand what is at stake when you are trading stocks. Before you make a trade, a call options calculator lets you know the maximum profit you could earn and the maximum loss and breakeven point.
By using a calculator, you can determine your theoretical profit and loss levels. It helps you in providing an understanding of the risks that you are taking in a trade.
What is a call option?
Call options refer to financial contracts that offer the buyer a right, but not the obligation, to buy an underlying asset in a predetermined time at a predetermined price. A call buyer has to pay a premium per share to the call seller.
For instance, an underlying stock price is going to increase. You can consider buying a call option rather than buying the stock outright. However, if you think the underlying stock’s market price will not move up or down, consider selling or “writing” a call option.
If the underlying stock price climbs in your favor as a call buyer, you can always choose to “exercise” the call option. That means that you can buy the underlying stock at the strike price.
Role of Call Options Calculator
Buying and selling call options feel a lot like gambling. As a trader, you can pay a relatively small amount of money upfront, and whereas, in a call option, you can buy the stock at a future date. Call option traders usually expect the underlying stock to rise significantly. They can make a potential profit instead of owning a stock outright.
But, with profits come the losses too. If you are a seller or writer of an options contract, you are obligated to buy or sell within that time frame if they buy places with a call option. So, if the prices are down, you may have to sell at losses. The stocks can also go to zero.
As a trader, you sell a call option because you think that the stock price will remain below the strike price at which the contract is set. But what if the price goes up without you owning the underlying stock?
Then, if the buyer exercises the option, the risk is truly unlimited. You don’t know how high the market prices can climb. Since you are obligated to sell the buyer the stock at that price, you may incur deep losses.
The trade comes with its set of potential gains and potential risks, and a calculator can tell you how maximum or minimum your profits or losses could be.
How to Calculate Profit in Call Options
First, you need to know the premium price for the options contract. Also, the asset’s value should be known, and you can decide on the number of contracts you plan to purchase. Based on a simple formula, you can find out your profits or losses.
1 .Find the Value of the Asset
Initial value of the asset in an options contract – Current sale price in your options contract
For example, if you have paid $20 for the contract, you can sell that same stock at $30. The calculation is $30-$20=$10.
2. Multiply By Number of Shares You Want to Purchase
Multiply your first step value by the number of shares you are thinking of purchasing.
For instance, if you buy 100 shares, the calculation is 100*$10=$1000.
3. Subtract the Premium
Now, minus the cost of the premium you paid. For example, you paid $100 for the option to buy the shares. The calculation is $1000-$100=$900, and this final value is your profit or loss from the sale.
But remember, this is a fundamental overview of your profits or loss. If you want to explore more advanced options, you should take the help of a call options calculator, which considers other factors to arrive at a reasonable value.