timothy sykes logo

Trading Lessons

How to Calculate Profit in Options Trading

Timothy SykesAvatar
Written by Timothy Sykes
Updated 4/21/2023 9 min read

Calculating profit in options trading is one of the keys to becoming a self-sufficient trader.

How do you know if your strategy is working? If it isn’t profitable, it isn’t working.

All traders want to profit. But how do you calculate the profit in options trading? Different types of options trades need different profit-calculating methods.

Let’s dive into how to calculate options trading profits!

Options Profitability 101

Every trading instrument has the possibility of profits and losses. If they didn’t, why would anyone want to trade?

Both call and put options have their own routes to profit.

What Is the Profit in Options Trading?

tim sykes and mark croock selfie in 2023
© Millionaire Media, LLC

Profit in options trading is the money you make from a successful options trade or contract exercise. Different options types have different ways to gain profit.

You can divide options traders into two types, buyers/holders and sellers/writers. Here’s how both sides profit from an options exercise:

Call buyers can profit if the underlying asset’s price rises above the strike price. This means they can buy the asset at a lower price, then sell it to make a profit.

Put buyers can profit when the asset price falls under the strike price. That means they can sell the asset at the strike price, then re-buy it at the lower price.

Call sellers can profit if the asset price doesn’t go above the strike price. That means the options contracts they write expire worthless, and they get to keep the premium.

Put sellers can profit if the asset price stays over the strike price. If that happens, the buyer won’t exercise the options contract, leaving the seller to collect the premium.

Buyers can also sell their options contracts at any point before expiration. This is a good way to lock in profits or limit losses — unlike the initial sellers, they don’t carry any obligations from the contracts they sell. Those obligations still fall on the original options seller.

The flip side to profit is risk. Learn more about why options trading is risky.

Options Buying vs Writing

What’s the difference between buying and writing options?

Options buyers have the right, but not the obligation, to exercise the contracts they buy. Options writers must fulfill the option they’ve sold if it’s exercised.

Options buyers don’t want an option to expire worthless — unless they can trade it for a profit at some point along the way. Options writers always want the options they’ve written to expire worthless.

Call option buyers have unlimited profit potential and limited risk. If the option doesn’t look like it will reach the strike price, they can let it expire or trade it.

On the flip side, writers of uncovered calls have potentially unlimited risk along with limited profit potential.

Why do some traders like this risky strategy?

Their premiums are guaranteed. They earn the premiums upfront, regardless of what happens to the contract afterward.

Consider Your Risk Tolerance

timothy sykes in matera in 2022
© Millionaire Media, LLC

Risk tolerance is an essential part of your trading strategy. Here’s a scenario to gauge your risk profile and tolerance:

You buy 10 call options for Company X stock at $0.50 per contract. One options contract represents 100 shares — in total a $50 premium for each contract (not including broker fees). 10 contracts would cost you $500.

Your maximum risk for this trade is $500 — or whatever you have written into your trading plan. Your potential gain is unlimited.

If you sell the same 10 options contracts, you’ll be guaranteed a $500 gain. Here, you are exposed to unlimited potential losses. But you set the rules, and your chances of losing the trade are typically lower.

You have two choices here:

  1. Risk a small amount of money for potentially large gains.
  2. Get a guaranteed amount of money but potentially incur big losses.

Each choice has several risks associated with it. Some strategies, like covering the calls you write and spread option trading, will minimize the risk of both.

Looking to delve deeper into options trading? Learn more about spread option trading and margin in options trading.

How to Calculate Max Profit

As an options writer, your premium is your maximum profit. You just have to calculate trading fees (and taxes, if you’re diligent) to calculate your max upside.

As an options buyer, you’ll need a formula to calculate your max profit. There are slightly different formulas for calls and puts.

With calls, you calculate the maximum profit by subtracting the options premium from your stock’s current market price. Here’s the formula:

(Current market price – Strike price) – Premium = Call option profit

Puts use a similar formula, with strike and current market prices flipped around. That’s because put buyers profit by buying at the price of the asset at the option’s exercise, then selling it for the strike price. The formula is:

(Strike price – Current market price) – Premium = Put option profit

Here’s two sample scenarios to get a better feel for both…

Call Options Profit Calculation Example

Post image

Get my weekly watchlist, free

Sign up to jump start your trading education!

Let’s say Company X’s stock price per share is currently $30. You think its price will rise, so you buy two call contracts with a strike price of $33 for a $1 premium. That comes out to $100 per contract, plus fees (we’ll leave them out to make it simple).

Before your calls expire, the stock price of Company X rises to $36. So, you exercise the option and buy 200 shares for $33 each, totaling $6,600. Selling the shares at market price means you get $7,200.

So, your max profit would be:

($7,200 – $6,600) – $200 = $400

You’d make a max profit of $400 from this trade. You can also trade your contracts to lock in profits before expiration.

Put Options Profit Calculation Example

Let’s say you think the price of stock in Company Y, currently valued at $40 per share, will fall. So, you buy two options contracts with a strike price of $38 for a $2 premium — $200 each contract.

These are covered puts, because you own the underlying shares.

Company Y’s stock price falls to $33 by expiration. Here’s how much you’d profit:

($7,600 – $6,600) – $400 = $600

The same disclaimer about making trades on the way applies.

Alternative Ways to Calculate Profit in Options Trading

Tim Sykes checking his top penny stocks list in Italy
© Millionaire Media, LLC

Calculating profit manually is subject to human error. Here are two better methods:

Use an Options Profit Calculator

The easiest way to calculate profits is to use a calculator. Many websites offer online options profit calculator tools. All you need to do is plug in the numbers and let the calculator work its magic.

Some of the more advanced calculators even cover complex option strategies.

Calculate Profit and Losses in Excel Spreadsheets

You can also calculate options trading profit and losses with Excel. It’s easy with their programmable formulas.

Once you have your spreadsheet set up, you’ll just need to enter the numbers. Excel will do the rest for you.

The right options trading broker won’t get in the way of your trades. Read my list of the best options brokers here.

Key Takeaways

Your options strategy is only as good as the profits you can make through it. You can save yourself a lot of grief later on by calculating your potential profits, and seeing if they can meet your overall trading goals.

Options trading is one of the hardest things you’ll ever learn. Becoming a successful options trader takes hard work and dedication. I recommend getting some expert guidance. In the options world, I think there’s no better mentor than my former student Mark Croock.

Mark has racked up $4 million in career earnings, mostly from trading options. He’s done this by adapting my penny stock trading strategies to options. Before he was a teacher, he was one of my best students — watching every single webinar in the Trading Challenge 2 or 3 times!

Now he’s got his own mentorship program, called the Evolved Trader. Check it out for strategy sessions, trade alerts, a great chat room, and more!

How do you work profit into your options trading plans? Let me know in the comments!

How much has this post helped you?

Leave a reply

Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”