Options trading is a specialized field with its own lingo. Learning the “language” of trading options starts with learning how to calculate profit. Calculating profits from options trading can be tricky, especially for those just getting started.
You can use an online binary options profit calculator at first. But even with solutions traders have at hand these days, it’s still important to understand the variables involved, and be able to calculate your profits and make more informed decisions when placing trades.
This article will help you understand what an options contract is, how options trades work, and how to determine your potential return on investment.
Understanding the Option Contract
In order to make a trade, you and the broker or platform provider sign a contract. This contract specifies certain terms, including the underlying asset, investment amount, expiration date, payout rate, and whether the option is a put or call.
A contract for options is basically a financial deal between two parties about an asset. In binary option trading, the buyer of an options contract gets the right to buy or sell at a predetermined price known as the strike price.
The trader will decide whether to buy (call) or sell (put) at expiration based on their prediction about future market movements and potential returns. A call option is profitable if the price of the underlying asset goes up above its strike price by the time it expires. A put option is also profitable if the price of the underlying asset goes below its strike price by the time it expires.
Option contracts also carry predetermined payouts, which represent expected returns in the case of either successful calls or puts. For example, traders can expect to receive 70% of any correct predictions when buying a contract worth $100.
This means that you will gain $70 in direct profits upon expiration should your prediction turn out to be correct ($100 plus 70% profit). Options contracts are an important part of trading because they represent an agreement between two parties that allows people to potentially make money off speculation and risk management rather than just pure luck.
How to Calculate Options Profits
As already mentioned, the payout size is predetermined before you enter into any trade. The payout will depend on the underlying asset price at expiry time compared to the strike price set when opening the trade. If you were right and the asset’s closing price was higher than the strike price, you will get a profit equal to a certain percentage of your initial deposit.
For example, if you bought a contract on gold worth $100 that pays out 70%, then if gold closes above your strike price at expiration, you will receive $170 in return ($100 plus 70% profit). If you have multiple positions open at the same time, keep in mind that profits and losses are calculated separately for each position rather than as a single total.
It is also critical to understand how much money you could potentially lose with any given trade if your prediction is incorrect. This can be done by calculating what’s known as the “maximum loss” on a particular trade; this figure will represent 100% less any potential winnings from that particular trade.
For instance, if you were to buy an option contract on gold worth $100 that carries a maximum loss of 90%, your total potential loss in the event of a loss would be $90 ($100 minus the 90% maximum loss). Traders can make better investment decisions and get the most out of their investments over time if they know how to calculate profits and losses. By knowing these simple rules, traders can make more money and improve their chances of success in the world of options trading.
Bottom Line
When you first start trading binary options, it can be hard to figure out how to figure out your profits and losses. But if you know what factors are at play, you can make trades that are based on good information.
Knowing how to figure out how much you could make from a successful trade and how much you could lose if you were wrong can help traders make the most money overall and come up with a better plan for future investments. With some practice, anyone can become an expert at calculating profits and losses.