So, I'm new to option trading and wanted to buy a $116 Disney (Dis) call expiring on Nov. 30. Limit price is $5.40 with a quantity of 1. The Disney stock price is currently $118.98. Can someone please help me learn how I can calculate my potential profit earnings if it reaches it's strike price? Thank you in advance.
If DIS is at the 116 strike price at expiration, your profit would be zero...in fact, you would have lost your $540 investment altogether. Just to break even, you'd need DIS to be at 121.40 at expiration: 116 strike + 5.40 call price paid. Anything above 121.40 at expiration would be profit (minus commission/trading fees, of course). The above calcs are for DIS *at expiration,* when all of the time value of the call option has evaporated. You might be able to break even or realize a profit on the 116 strike call before expiration if DIS goes higher for some reason...it depends on how much time value remains and any associated volatility baked into the price. (and what I just wrote is very much an over-simplification of option price determination.
I greatly appreciate your help. Obviously I'm very new to this and everything I've read hasn't been nearly that simplistic. I didn't even know the call price was to be added to the strike price. Is there any software or program you know of that would help me calculate potential profits for option trading? Also, any good option traders you recommend to follow to learn more?
It's just a way of figuring out your break even point. The $ you invest in the option is called "premium". The price of an option (in other words, the premium of the option) consists of "intrinsic value" and "time value". What we calculated above for your DIS example was the intrinsic value at expiration. There would be no time value left because, well, at the expiration date there is no time left. There's a lot of calcs out there, although most of the easy to use ones sit behind a paywall. But every option trading platform I've used offers either a calculator or depicts your potential profit/loss in a chart. I currently use Ameritrade and ALLY Invest (Ally Bank bought Trade King), both with robust options trading platforms that will depict profit and loss. Just bear in mind that your profit/loss potential when you enter an option position will change (and often dramatically) as market conditions change. Which is to suggest you should not treat an option investment as buy-it-and-forget-it...one should continuously monitor any open option positions. Not really. Most of them charge a fee to share their options strategies. That said, check out https://www.optionsplaybook.com. This website is aimed at beginner options traders and does a good job of explaining fundamental concepts. On their homepage, you should find a link to their free online webinars where once or twice a week they offer a real-time option trading example that you can follow with your own account or, better yet, on paper until you get a good feel for how whacky option pricing can be.
