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Call Option Profit Calculator

Options Trading 101 - The Ultimate Beginners Guide To Options

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by Gavin in Blog
July 24, 2020 0 comments

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Options are increasing in popularity by the day due to commission free brokers such as Robinhood and celebrity day traders like Dave Portnoy.

Long calls are probably the easiest strategy for beginners to understand but you may be wondering how to calculate the profits?

In today’s article, I’ll show you just that and even provide a nice calculator for you that you can download and use for yourself.

What Are Call Options?

A call option is a contract between a buyer and seller. The contract will be for the right to purchase a certain stock at a certain price, up until a certain date (called the expiration date).

Up until the contract expires, the buyer of a call has the right to purchase the stock at the agreed price.

On the other hand, the seller of a call option has an obligation to sell the stock if the buyer exercises the option.

If you’re new to options, you may want to check out my 11,000 word beginner guide by clicking the button below.

Download the Options Trading 101 eBook

If you’re a more advanced trader, you will want to check out these articles.

Call Option Premium

For receiving the right to buy the underlying shares, the call option buyer must pay to the seller a premium.

This is the seller’s to keep no matter what happens.

When determining the profit for the call option buyer we need to take into account to cost of the premium.

Calculating Profits For Call Options

When calculating the profit on a call option, there are two different scenarios depending on whether you are the buyer or the seller of the option.

CALL OPTION BUYER

For the buyer, the return on the trade is calculated by taking the ending stock price, minus the strike price and the premium paid.

Let’s say a trader purchased a $22 strike call and paid $2 in premium.

If the stock finished at $26 on the expiration day, the profit would be:

26 – 22 – 2 = $2 per contract

As each contract represents 100 shares, the total profit to the investor would be $200.

The breakeven price on the trade is $24 because we need to add the premium paid to the strike price.

Breakeven Price = Strike Price + Premium

Which in this case is:

22 + 2 = 24

If the stock moves lower, the most the trade can lose is the premium paid which would occur if the stock finishes below the strike price of $22.

CALL OPTION SELLER

The profit scenario is reversed for the call option seller because the maximum profit they can achieve is equal to the premium received and the potential losses are unlimited.

The breakeven price for the call seller is also $24 and anything above that level will see them suffer losses on a one to one basis.

If the stock rises to $30, the call seller would lose $6 per contract or $600 in total.

The profit calculation above is at expiration only. The calculation for interim profits is much more difficult to predict and is best done with options software such as Interactive Brokers Risk Navigator or  Option Net Explorer or the tools provided by your broker.

Excel Profit Calculator

The calculations above are all quite straight forward, but if you want to visualize this in excel along with the payoff graph, you can download the handy calculator below.

The bonus is you can also use the calculator for most of the major option strategies.

Step one is to download the file using the button below.

Download the Option Profit Calculator

If you’re a call buyer use the Long Call tab and if you’re a call seller use the Short Call tab.

Then simply enter the strike price, the number of contracts (position) and the premium. Depending on the stock price, you will likely have to adjust the values in Centre and Increment.

Don’t worry about anything else, the calculator will do the rest.

Calculating Interim Profits

As mentioned this excel sheet will help you visualize the profit at expiry, but if you want to estimate the interim profits it’s best to use some more advanced software.

The below screenshot is from Option Net Explorer and gives you an estimate of the profit at interim dates which you can specify.

Summary

The profits and losses on call options will vary depending on whether you are the buyer or seller of the options.

Call option buyers have limited risk and unlimited gain potential whereas the opposite is true for call sellers.

Profits and losses at expiration can be easily calculated using the handy excel tool available for download above.

Calculating the interim profits is more complicated and requires advanced software such as Option Net Explorer.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options Trading 101 - The Ultimate Beginners Guide To Options

Download The 12,000 Word Guide

Get It Now