The main method to calculate a Put Option is to use one of the different Option profit calculators in the market. Through these calculators, you can obtain information on profits or losses and plan the decisions in order to take them more adequately.
We will try to understand how the Call Option calculation works in the profit calculators. But, to understand this, we must know other things first, starting with what an Option contract is.
What are the options and how to invest in them?
Options are an investment tool. Specifically, they are a derivative financial product. The concept of a derivative financial product is based on its value derived from the performance of another financial product to which it is referenced.
There is no single model for a derivative financial product, just as there are many assets to which it can be referenced. From stocks to market indices, commodities, etc., these are all underlying assets to which the performance of an option contract can be linked.
If one had to make a simple definition, one would say that an Option contract is a derivative product that you will use to speculate (and earn) on the evolution of a chosen asset.
There are two different types of Option contracts:
These options give you the right to acquire assets in the future at a specific price.
An important difference concerning other derivative products is that the right does not carry an obligation with itself. That means there is no obligation to buy at the time of execution.
The purchase is made at an agreed-upon price when entering into the Options contract. In this way, what is facilitated is that the price at which the purchase has been agreed upon is lower than the actual price at the time of executing the purchase. Here is where the investor’s benefit lies.
Logically, the investor would face losses if the price does not evolve positively.
In the case of Put Options, understandably, the operation is exactly the reverse of Call ones.
When Call Options are acquired, the rights to make a sale at a given price of an underlying asset are established.
The operation is very similar to Call Options, but with the concept of sale: a profit is sought on the difference in price between the signing of the Call Option and the moment of executing the purchase.
In this type of operation, therefore, what is sought is for the price to fall below the pre-set value. If the price rises, losses are obtained; if the price drops, profits are obtained.
How to calculate the profit of a Call Option in an options calculator?
Option profit calculators are financial simulators. They are found on different web platforms and will generally assess information such as:
- The purchase prices and the target price. These would be the prices on which to trade and, therefore, those that influence when contracting the options.
- The strike price is the determined price of the asset at which the call option can be exercised depending on the variation,
- Option prices are the valuation of the contract price as the dynamics of the gain or loss it represents develop.
These are not the only elements taken into account in these Option calculators. You can also value the purchase cost in the case of commodities, how many contracts are to be purchased, etc.
When you simulate with an Options calculator, you will get an estimate of whether it can be a profitable trade or not. The more advanced ones, which also require more data, can give you an approximate profit range.
In general, it is understood that these financial tools can be useful when assessing an investment trend. They are often used in combination with other technical and fundamental analysis tools.