With the options price calculator, users can calculate the theoretical value of an option contract. In options trading, it is important to use a variety of tools to make informed decisions about your investments.

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Varying stock prices to calculate profit/loss

Suppose James is bullish on AAPL, currently trading at $148.79. He has a target price of $160, expecting AAPL to hit the target within the next month. He decides to enter a long call position betting on the upward movement.

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Generally speaking, time decay moves slowly at first, then accelerates within the last 30 days before expiration. To reduce his vulnerability to time decay, James buys an AAPL $160 20 Jan 23 Call at a premium of 3.60 with 64 days to expiration. He intends to exit the position after 30 days even if the trade never hits his profit target or loss limit.

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On the calculator page, James can see a projection of the theoretical value of his OTM call decreasing toward zero as it nears expiration. This is expressed by the blue line, which slopes downward towards expiration, illustrating that options are depreciating assets due to the time decay effect. With the option calculator, James can see that he could lose almost half his original principal in a hypothetical scenario where there is no price movement in the underlying stock.

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We can imagine another scenario in which AAPL goes up to $160 per share one month later, just as expected. We can customize the price of AAPL in the options calculator to $160, which shows us that the profit earned from the long call would be approximately 60% under a stable volatility environment.

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In the real world, the option value is affected by other factors as well, such as time to expiration, volatility, dividend declaration, etc. You can calculate how much the option might appreciate or depreciate by inputting certain parameters in the option calculator. The calculator doesn’t provide predictions, but is a handy tool to quantify the risk-reward profile of your option position.

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Providing insight on how to choose strike prices

Let's go back to the moment James chose his strike price. Instead of the $160 strike OTM call, let's take a closer look at the in-the-money AAPL $140 20 Jan 23 Call. With these inputs plugged into the option calculator, we can see the ITM call option will see a smaller loss (-18.78%) if the price of AAPL stays at the current level, and less profit (+46.85%) if the stock goes up to $160 after 30 days under a constant volatility environment. Using the calculator, we can see that compared to OTM calls, the ITM call is relatively less risky due to its potential lower profit/loss.

Note: To illustrate the concepts, these examples assume a stable volatility environment. In real market conditions, changes in volatility are a critical factor in options trading analysis.

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So, which strike is better? Unfortunately, there is no one right answer for every person. Risk tolerance is an important consideration, as is James’ bullish or bearish outlook on the underlying stock. The more bullish James feels about the stock movement, the higher the likelihood his of choosing OTM calls might be, etc.

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Summary

Options trading involves considering many factors and possibilities both before and after the trade has been placed. The option calculator function can give you a more in-depth look at your trading plan. Here we’ve only shown some basic uses of the tool, but there’s plenty more to explore by yourself.

You can also use the options calculator in paper trading. Try paper trading on the latest version of our mobile app >>>

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Disclosure: All trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations