How would you calculate the most likely profits that you could make off of buying and selling a particular opt

Question

ion position? I would think you would try to watch the average highs and lows of a given stock but how does that correspond to the value of a given stock option?

Answer 1

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The "most likely" profit from buying an option is a loss. Options are a wasting asset which decline in value as time passes absent other factors.

The most you could make is something entirely different and to some extent depends on the option you choose.

<<< I would think you would try to watch the average highs and lows of a given stock but how does that correspond to the value of a given stock option?>>>

A lot of people do compare historical volatility to implied volatility in trying to determine how desirable an options trade is, but I do not think I have ever heard of anyone trying to determine their expected profit based on historical volatility.

Answer 2

There are software packages out there that will calculate theoretical values for you. It's more complicated than just looking at what the options have done in the past in relation to the underlying. The formulas involve (Delta, Theta, Gamma, Vega, Implied Volatility, Historic Volatility).

The broker I use has a simulation section available on their trading platform that allows you to calculate theoretical options values based on the price change for the underlying, the amount of time that has elapsed, changes in volatility, etc.