Calculating Profits and break-even with Options Trading

Calculating profits and establishing break-even points are an important part of managing your trades, and as such you need to be aware of the key concepts.

As with money management, the different trading strategies have different calculations. You need to consider two steps: what is your break even point (so that you know where your profit starts to kick in); and what your profit will be as the trade progresses
the simplest level, you simply calculate the amount of value by which the stock has grown, and record it as a percentage.

So, if you purchased 100 shares of a stock worth $25, your total trade is $2,500. If your stock climbs to $28, you have made $3 profit per share, which is 12% profit. Or, your total trade is worth $2,800, which is $300 profit, and is still 12%.

Your TRUE profit however, must include broker's fees and commissions. So, for a stock trade, you may pay $0.015 per share. The above trade would therefore work out as follows:
Buy 100 shares @$25 = $2,500 + $1.50 = $2,501.50
Sell 100 shares @$28 = $2,800 - $1.50 = $2,798.50
True profit = $2,798.50 - $2,501.50 = $297 = 11.88%
Your break even point is $2,501.50, and you are only into profit zone AFTER you have crossed that threshold.

So, what's the big deal? Your trade cost $3, or you dropped 0.12%. Small change!

Well, with options, it is a big deal, because options are expensive to trade in the first place, and as soon as you start working with combinations like spreads and butterflies and so, the commissions rack up pretty quickly. This is offset by the huge profit potential of options, but you still need to calculate it so that you know what your true profit is.


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