Options allow investors the right to buy or sell a stock at a certain price.
Although they are the most risky investment vehicles available, with the potential to lose all of your capital, they can provide great returns on small investments. An option to buy a stock at a certain price is a "call", while an option to sell a stock at a certain price is a "put".
The specified price is the "strike price".
The Basics of Options Profitability
Options expire on the every Friday of each week. Some stocks have less frequent option expirations.
At this time, the owner of the option can excercise the option's right or it will expire worthless. Confirm with your stock broker how they handle options upon expiration, especially if they expire with value. People invest in options to gain the underlying right, or they speculate on the value of the option increasing before the option expires.
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The value of the option depends on the price of the underlying stock, the time remaining before expiration, and market psychology. The "intrinsic value" of the option is price difference between the strike price and the underlying stock's price.
An option to buy a stock at $40 when the stock is trading at $45 would have an intrinsic price value of $5. The "premium" of the option is the price above its intrinsic value.
The premium is directly related to the time remaining before expiration. An option is worth more with plenty of time before expiration, and its premium decreases as the option expiration date approaches.
Market psychology can also increase the premium of an option. Stocks with bullish sentiment can carry higher premiums on call options at any price above the current stock's price. Premiums are a market driven value.
The significant risk of options is that they can become worthless if they expire "out of the money".
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An option to buy a stock at $50 when the stock is trading at $45 would be worthless upon expiration. All of an initial investment can be lost.
Options Profit Calculator is based only on the option's intrinsic value.
It does not factor in premium costs since premium is determined by the people of the market. The profit is based on a person buying an option at low price and selling it at a higher price before the option expires.
Options are sold in contracts, with each contract representing 100 options. Here's how the Options Profit Analyzer works. This calculator can calculate for puts and calls.
Option Contracts - Profit Calculations
To calculate profits for a call option, place a higher expected stock price than the strike price. To calculate profits for a put option, place a lower expected stock price than the strike price.
Puts increase in value as the stock price moves down.
Calls increase in value as the stock price moves up.
Input Values = Option Price Paid, Strike Price, Contracts, Expected Stock Price
Profit = ((Expected Stock Price - Strike Price) * Contracts * 100) - (Option Price Paid* Contracts * 100)
Call intrinsic value = stock price - strike price
Put intrinsic value = strike price - stock price
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