How to Calculate Profit in Options Trading? – Basics of Options Profitability
Understanding Option Trading Profit Calculation: Options are regarded as one of the most complex products encountered by traders in the stock market. As a result of the high risk involved, both novice and experienced traders tend to avoid this segment.
However, one must remember that the high risk associated with options also carries a high reward in the form of high returns. So, with sound judgement and the implementation of appropriate strategies, options trading can be an excellent way to increase your net worth.
In this article, we will look at how to become profitable in options trading. However, before we discuss how to calculate profit in options trading, let us first review the fundamentals of options trading.
What Are Your Alternatives?
Let us first define options before delving into the conceptual analysis of various methods for calculating profit in options trading. To understand options in layman's terms, you must first understand what a futures contract is.
A futures contract is an agreement between two parties made through an organised exchange in which one party agrees to buy and the other agrees to sell a commodity or financial asset at a pre-determined price on a future date. So, on the expiration date of the futures contract, the buyer must buy and the seller must sell the commodity or financial asset, regardless of profit or loss. This is where your choices come into play.
An option contract is similar to a futures contract in that the buyer has the right but not the obligation to execute the order (i.e. to buy or sell the commodity) when the contract expires.
