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Options Profit Loss Calculation

 
     
 

 

On this page you will learn how to do the options profit loss calculation - how to work it out when trading calls and puts, and how to find your ROI.

 
     
 
 
     
 
     
 
 
     
 


 
     
 

The profit loss calculation for options trading is different from that of stock trading. While you are still calculating a Return on Investment (ROI) as you would with stocks, the broker commissions are significantly higher, and this has an impact on your net profit.

NOTE: Be very careful when looking at the supposed results presented by a options trading newsletter. Often their results DO NOT include broker commissions, and you could end up disappointed. More than 80 newsletter providers are reviewed here.


At the simplest level, say you buy one call option for stock XYZ at a total investment of $250. After a few days, your trade has gone well, and your option is valued at $500, so you sell, thinking that you have made 100% profit. Well, no....

The broker's fee for this trade could be $2.95, (if you are an infrequent trader). So, let's look at it again:

Example: Trade 1

Buy one XYZ Call @$2.50. Cost of trade = $250 + $2.95 = $252.95

This means that your option MUST go above $252.95 before you have made any profit. But then you have to sell the option again later, also at a $2.95 per contract commission. So your true break-even point is as follows:

Buy and sell one Call @$2.50. Cost of trade = $250 + 2x($2.95) = $255.90.

That is a 2.36% increase in value that you must achieve before you even start to make profits (most swing traders are happy with 2-4% profit on a trade)! However, don't panic, because this kind of growth in value is extremely common in option trading. Most traders aim for at least 50% and usually 100% growth in their trade. If you find a site offering trades which 5% or 10% growth in their trades, check carefully to see whether they include broker's commissions!

What about Profit?

Say the option has doubled in price from $2.50 to $5.00. It looks like you are making a 100% profit. Look again:

Buy one Call @$2.50. Cost of trade = $250.00 + $2.95 = $252.95
Sell one Call @5.00. ROI = $500 - $252.95 - $2.95 = $244.10
TRUE ROI = 244.10/252.95 x 100 = 96.5%

A bit less than 100% profit.....but still profitable! Here is another example:

Example: Trade 2

What if you buy 10 calls, each worth $0.25? A slightly different calculation kicks in, because now you are paying $9.95 per trade plus $1.50 per contract.

Buy ten Calls @$0.25. Cost of trade = $250 + 9.95 +$15 = $274.95

This means that your option price needs to go up to $0.28 before you are into the profit zone - that is nearly 10%!!!

How about the profit calculation? Here it is:

Cost of purchase= $274.95 ($250 + $9.95 + $15). (This is your true investment)
Sell @ $0.50. Profit = $500 - $274.95 - ($9.95 + $15) = $200.10.
Profit from $250 = 80%
Profit from total investment ($274.95) = 72.7%

These are not bad percentages! Nobody will cry about getting nearly 73% profit in less than a week! The sting is that the broker has received 27% of your profit! So, don't think that you are getting 100% just because the value of your option has doubled. A true 100% profit would be when the option value reaches $5.50.

NOTE: Example 1 shows the cost of trading ONE option, and Example 2 shows the cost of trading 10 cheaper options (but more expensive in terms of broker fees). Make sure that you know exactly what your broker is charging you, because it has a significant impact on your profitability!

NOTE: I am using the rates given by ThinkorSwim, which is the broker that I use. OptionsXpress and Interactive Brokers have slightly different formulae. For a comparison of brokers and there fees, go here.

See more on Buying Calls and Puts:

OR: Go back to Profit Loss Calculations, for more on selling options and credits spreads.

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