# Best Tools To Calculate Option Profits

## How to Price Target Option Trades using "Analyze" Tool in Think Or Swim

After I sell and buy my options as outlined in the previous article, I complete my trading plan by consulting a few additional tools to estimate my risk exposure and the probability of making a profit on that trade.

My downside will become apparent within the expiration date of the out-of-the-money (OTM) call that I sold. The call will decay and become worthless by April 21 if all goes according to my charts.

I used a simple Monte Carlo simulator to check risk and potential profitability from one of the options calculators.

I am using the calculator at http://www.optionstrategist.com/calculators/probability for a simple analysis.

While these calculators are not completely accurate, they provide simple indicators for average probabilities of a trade.

I chose today’s prices for the current stock price, then the strike price for the target. I used the VIX reading for today as the percentage volatility.

The odds seem to be in my favor for a profitable trade, with a 75% chance that the call I sold for April 21 will expire worthless.

Now for calculating the potential for profit.

The farther out the simulation runs, the less reliable the results will be.

Still, it gives a perspective that the likelihood of earning a profit is higher by 5% (30%-25%).

One general note about options trading. The farther out you buy your option, the less the time decay of the option will affect you.

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As you might remember, time decay is the decrease in the value of the option based on getting closer to the expiration date of the option.

In this example, I used in my favor the near-term time decay of the call I sold. The time decay for the May call is not quite as fast as the April call, with about a 30-day difference, giving my call more time to move potentially into the money.

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Please note the simplicity of my trade plan. You can use a spreadsheet for setting up your own trade plan. You do not need anything complex and you do not need an automatic trading system.

Sector: Large-cap Index

Sector Major Trend: Bullish

Underlying Security: DJIA

Option(s) Traded: Sell: April DJIA Call @215; CBOE ID: DJX1721D215-E

Buy: May DJIA Call @215; CBOE ID: DJX1719E215-E

Expected Trade Duration: Between April Call going worthless and highest profit point reached before May Call expires based on trend analysis: probably 25 days.

Max Loss Allowed: Amount of trade \$1,000

Triggers for Quick Close: Not necessary as downside is limited.

Potential Upside: Unlimited based on the price of DJIA rising.

Potential Downside: Limited to cost of entering the trade at \$1,000

Probability of Profit: 75% chance the call I sold expires worthless and 70% chance that the call I bought goes in-the-money (ITM) based on Monte Carlo simulation.

Once we set up our trades, we can use a variety of tools and calculators to estimate probabilities of earning a profit.

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Using the theoretical calculators, or Greek calculators as they are commonly known, is typically less helpful than doing basic analysis of the underlying security for the option, choosing a trend, then verifying the option’s potential profit through either our brokers’ calculators or the simple ones mentioned here.

It has a relatively low cost and it carries only modest risk.

There are high-risk versions of this trade, but we will use the low-risk version because that is the focus of this guide.

##### Tools

Here is a list of a few tools we need.

Options calculator: http://www.optionsprofitcalculator.com/

And my preferred simple calculator: http://www.optionstrategist.com/calculators/probability

These online calculators will help us identify risk levels, potential profit and general probability for profit with a particular options trade.

After the example for an index (DJIA) here, I will go down the check list and repeat the same steps for another example in a future article.

However, this time I will use an equity to review the process one more time.