When you’re trading stock options, it’s important to understand what’s at stake. You should know the maximum profit you could earn as well as the maximum loss and breakeven point before making a trade. If you don’t, you risk putting yourself in hot water by not understanding how much you stand to lose if an options trade went south. By using an Options Profit Calculator, you can determine theoretical profit and loss levels and have a clear understanding of the risks you’re taking with a trade before you take them.

What Is a Stock Option?

Image via Flickr by mikecohen1872

Stock options are contracts that give investors the right to buy or sell stock at a specific price within a certain timeframe. Stock options give you the ability to earn great returns on very small investments. However, just as stock options give you the ability to earn money in a stagnant market when your stocks aren’t really earning you money, some of the strategies that involve stock options carry substantial risks.

A call option gives you the right, although not the obligation, to buy a specific stock. A put option, on the other hand, gives you the right to sell. The price that you lock in with these contracts is called a “strike price” and you have the right to either buy or sell based on the type of options contract you own.

Understanding the Benefits and Drawbacks

Before I delve into how you can use an options profit calculator, it’s first important to understand the benefits and risks that you accept when you complete different kinds of trades with stock options.

Benefits of Trading Stock Options

One of the benefits of trading stock options is that there is a lower upfront financial investment since you’re not actually buying the stock. The price of buying the option is far less than what you would spend if you were buying the shares outright.

If you’re an options buyer, there’s limited risk. Even if you buy a call or put options contract, you are in no way obligated to take any further action and could simply choose to let the option expire. That means that the greatest risk for options buyers is the amount of money they invest in the option to begin with.

In addition, an option offers built-in flexibility, as the investor can choose to exercise the option and buy the shares, buy them and immediately sell some or all of them, sell the options contract to another trader, or sell an out of the money contract to another investor before it expires, making back some of their money.

Options trading gives traders the opportunity to earn income in a market that is stagnant, where their stock isn’t earning them money.

Risks for Trading Options

As I said above, the risk is extremely limited if you are buying an options contract. The same cannot be said for the seller, or writer, of an options contract. When a seller writes a call or put, they are then obligated to buy or sell within that time frame if the buyer exercises the option, even if the prices are unfavorable for the writer. While the stock can only go as low as zero dollars, there’s no limit for how high the prices can climb.

A trader may sell a call option because they think the price of the stock will stay below the strike price at which the contract is set. The options seller receives a premium payment and hopes that the option will be allowed to expire, worthless. However, if the price goes up without you owning the underlying stock and the buyer exercises the option, the risk is truly unlimited because there’s no limit to how high the market prices can climb and you are obligated to sell the buyer the stock at that price. There is far less risk if you already own the stock, which is called a covered call. You may be forced to sell the shares when you don’t want to but you at least won’t be subject to high market prices.

Investors sell puts when they think that the shares of stock will stay above the strike price. However, if the buyer decides to exercise their option, then the put seller is obligated to purchase shares of the stock, potentially experiencing significant losses when they must turn around and sell the shares at a much higher price than they purchased them at. The only benefit of a put option over a call option is that the stock can only get down as low as zero dollars.

How to Use an Options Profit Calculator

N ow that you fully understand the possible risks of different types of options trades, you better understand why it’s important to use an options profit calculator. This can help you fully understand the potential gains as well as potential risks that could accompany a trade prior to actually taking any risks.

Where to Find Options Profit Calculators

There are a lot of options profit calculators to choose from online. You can also use this options profit calculator for a unique way to view potential returns of different options strategies. There are many others available as well, which you can uncover with a simple online search.

How to Calculate Options Profit

To calculate the return on stock options, you first need to know the premium price for the options contract. You also need to know the value of the asset and the number of contracts you plan to purchase. After that, the steps apply for both call and put options.

1. Subtract the Value of the Asset

Start by subtracting the initial value of the asset in your options contract from the current sale price on the market. For example, if you paid $15 for the contract and you can sell the same asset for $22, the calculation would be $22 – $15 = $7.

2. Multiply By the Total Number of Shares Purchased

The next step is to multiply the value you determined in step one by the number of shares you’re purchasing the option for. For example, if you bought options for 200 shares, the calculation would look like 200 x $7 = $1,400.

3. Subtract the Premium

Next, subtract the cost of the premium you paid. For example, let’s say that you paid $250 for the option to buy the shares. The calculation for this would look like $1,400 – $250 = $1,150. This final amount represents the total profit/loss that could result from the sale.

Other Considerations for Options Profit Calculators

It’s important to note that this is a very basic overview of how you could calculate potential profits from an options trade. The calculator listed above allows you to explore more advanced options trading strategies. It’s also important to remember that the numbers above rely on the assumption that you exercised your option. If you didn’t exercise your option and instead allows the option to expire worthless, then the loss would be the cost of the premium.

There are a few other considerations you should keep in mind as well. First, profit and loss calculations assume that you’ll hold the option position until it expires. However, you can typically close short or long option positions before they expire by selling them. Probability calculations for options profit calculators are also based on the assumption of stabled implied volatility values. If the market is volatile, it could dramatically change the prediction for the options trade.

If you’re trading options, it’s important to start to use an options profit calculator to fully understand the potential gains and losses you could see from a trade. It’s also important to adopt and stick with a particular strategy or set of strategies. Stock options are great for allowing you to earn a strong income through the stock market, even when the market is relatively stagnant.

What’s the difference between a stock warrant and a stock option? For starters, a warrant gives the stock holder the right to buy a company’s shares at a set price on a given date. When a stock warrant is purchased, the shares that are provided to meet the obligation come from the company, not another investor. When it comes to stock options, a contract is created between two investors giving the stock holder the right, but not the obligation, to purchase or sell the stock at the given price and date.

A few key ideas to make note of when it comes to warrants vs. options include the following:

• A stock warrant is issued by the company, not an investor.
• A stock warrant documents the right to buy a company’s stock at a set price and date.
• Investors purchase stock options when they believe the stock is in a volatile stage.
• Investors usually trade options between each other.
• A stock warrant provides future capital for the company that issues the stock.

Defining Warrants and Options

Options are stocks that are bought by investors when they foresee a price increase or decrease of the stock. Whether it’s based on a decrease or increase depends on the type of option. For instance, if a stock is currently trading for $30 and an investor thinks the price will increase to $40 in the next month, then the investor will likely purchase a call option today so they can buy the stock for $30 the next month and then sell it for $40.

Stock options are similar to stocks in that they also trade on a securities exchange. When stock options are exercised, they usually trade between two investors.

Warrants are a source of capital for the stock’s issuing company. When an investor purchases a stock through the use of a warrant, the proceeds go to the company. When the warrant is exercised, the investor receives a warrant certificate. This certificate lists the terms of the warrant, including the expiration date. While a warrant gives a right to a stock, it does not provide immediate ownership of the given stocks. Rather, it simply means that the investor has the right to buy a company’s stocks at a set price.

There are two types of warrants: a put warrant and a call warrant. A put warrant gives an investor the right to sell back stocks at a set price in the future, while a call warrant gives an investor the right to purchase stocks at a set price in the future.

Differences Between Warrants and Options

There are two primary ways that a warrant differs from an option. First, warrants are issued directly from a company. Second, new shares are issued for the warrant transaction. If a company is looking to raise some extra capital using a stock offering, it might choose to issue a warrant. For example, if a company sells its stock at $50 while a warrant is only $5, investors will be more likely to exercise a warrant.

Essentially, stock warrants provide investors with a means to own stock in a company at a price lower than a stock option. When investors exercise their warrants, they help the issuing company raise capital via equity.

Like securities, options are listed on the stock market exchanges. When options are traded, because they are on exchanges, the company of the stock does not actually make any money from those transactions. Another difference between the two is their lifespan. Warrants tend to be more long term, lasting for up to 15 years. Options, on the other hand, are more short term. They usually exist for only a month but will occasionally last up to three years.

Investors in search of long-term investments might find more worth in warrants because of their longer lifespan, while those looking for a quick profit will find a stock option more enticing. In the end, both warrants and options are great investments for earning a profit or hedging a loss due to a share’s price change.

Similarities Between Warrants and Options

While there are many differences between warrants and options, there are also quite a few similarities. The biggest similarity is that both a warrant and an option give the buyer the right to purchase or sell shares of the given stock at a fixed price on a specific date. There are also call and put warrants that operate a lot like call and put options.

Although the lifespans are different, a stock warrant and a stock option both provide investors with the ability to profit off a stock’s price change without actually owning the stock. Furthermore, neither a warrant nor an option gives the buyer any form of control over the stock until it’s exercised. Each also has a standard lifespan, an expiration date, and a fixed price.

When you break warrants and options down to their basic components, you’ll find they’re made up of the same things. They both have a time value and an intrinsic value. The intrinsic value is determined by totaling the difference between the market price of a stock and the exercise price listed on the warrant or option. The time value is used to evaluate the likeliness of a stock trading above its exercise price prior to the contract’s expiration date. This value is determined by totaling the difference between the price of the warrant or option and its intrinsic value.

Lastly, the factors that influence both warrants and options tend to be the same. For example, the exercise price, amount of time until expiration, implied volatility, underlying stock price, and interest rate all play a role in determining the value of options and warrants.

Choosing Options or Warrants

While both options and warrants have their pros and cons, stock options tend to be the more common trading strategy for a number of reasons. For one, options can be used in a larger variety of trading strategies than warrants. Options are also easier to purchase and sell because they are traded on public security exchanges. Warrants take more effort because they are sold over the counter. Furthermore, options provide more versatility and can be used to create spreads by purchasing and writing contracts.

While warrants aren’t the more popular choice, they do come with their own set of benefits. One such benefit is the potential for significant capital gains. Warrants’ prices are typically lower, which means they offer a possibility of a much larger profit. During a bull market, these profits have the potential to take off even more than normal. On the other hand, during a bear market, warrants can provide investors with some additional protection.

When building an investment portfolio, stock warrants offer a wise addition for most investors. They also provide smaller investors with the means to mix up their investments without jumping into the more competitive stocks.

Just like every other investment type, warrants also come with some risk. As with any type of investment, the potential for larger gains also means a potential for greater loss. One way warrants result in a loss is when the value of the certificate decreases to zero. If this happens before the warrant is exercised, any potential value is lost. Lastly, unlike a stock option, warrants do not provide the buyer with any voting, shareholding, or dividend rights within the company.

If you’re looking to make some new investments and are considering both stock warrants and stock options, make sure you understand the benefits and risks that come with both. A great way to gain a better understanding of options and warrants is to ask the pros at Raging Bull. At Raging Bull, you’ll find a host of great resources, including a free stock trading starter pack. Whether you choose warrants or options, the experts at Raging Bull can show you the ropes so that you hit the ground running.

Options volume and price movements in the stock market are reflections of decisions to purchase or sell by millions of options investors. However, the price isn’t the only piece of data successful investors monitor. Open interest and options volume are also important numbers to keep on eye on when buying and selling options. Understanding each of these numbers help investors make better-informed decisions when investing.

Key Takeaways

• Options volume describes the activity level and liquidity of contracts in the options market.
• Options volume refers to how many trades are completed making it an essential measurement of interest and strength of an option
• Open interest refers to the number of options contracts held by investors and traders in active positions, or ready to be traded.

What Is Options Volume?

Trading volume calculates the number of futures or options contracts being exchanged between sellers and buyers. This identifies the activity level for specific contracts. For each seller, there’s a buyer, and each transaction counts towards the daily volume. When reviewing the underlying stock of an option, the volume provides investors insight into the strength of a security’s current price movement. Options volume, like with securities, can be used as an indicator of current interest.

• Example: The volume for call option XYZ, having a strike price of $55 and expiration date three weeks away, didn’t trade any options contracts on a specific day. The options volume would be 0. During the next session, a trader purchases 20 call option contracts at the same time market makers sell 20 call option contracts. This lifts the options volume for this session to 20.

Why Options Volume Is Important

Traders look to options volume to determine the strength of an option. Higher volumes indicate increased interest in the options contract. A higher volume also results in increased liquidity, meaning it will be easier for investors to get out of a contract faster if needed.

It’s important to remember that options volume is relative and should be compared to the underlying stock’s average daily volume. A substantial change in a stock’s price combined with larger-than-normal volume is a good indication of market position in the way of the change. However, a considerable increase in price combined with lower trading volume doesn’t always mean strength. Many times, this combination indicates a coming price reversal.

Open Interest

Open interest shows how many futures or options contracts are currently held by investors and traders in active positions and haven’t been exercised, expired, or closed out. Open interest is a data field found on the majority of option quote displays, along with implied volatility, options volume, ask price, and bid price. Sadly, many investors ignore this information, which can result in unexpected consequences.

Open interest goes down when writers and holders of options, or sellers and buyers of futures close out their positions. To close out a position, they need to exercise their positions or take offsetting positions. Open interest will increase when sellers and writers take on new short positions or traders and investors open new long positions. Open interest will also increase when new futures or options are created.

When investors purchase or sell options, each transaction is recorded as either an opening or closing transaction. If an investor purchases 20 calls from XYZ, they are buying the calls to open with each call representing 100 shares or 2,000 shares in total. This purchase will add 20 to the open interest number. If the investor wants to get out of the position, they will have to sell those same options to close, making open interest fall by 20.

Selling options can also add to open interest. If an investor owns 2,000 shares of XYZ and wants to do a covered call by selling 20 calls, they would enter a sale to open. Since it’s an opening transaction, it will add 20 to the open interest. If they later wanted to rebuy the 20 options, they would enter into a transaction to purchase to close. Open interest then decreases by 20.

Keep in mind that not every transaction is counted in open interest. For example, if an investor buys 20 of the XYZ calls to open, and they are matched with a trader selling 20 of the XYZ calls to close, the open interest total number isn’t going to change.

Why Open Interest Matters

When investors look at the total open interest of a future or option, there isn’t a way to determine if the contracts were sold or bought. This is likely the reason most investors ignore open interest. However, they shouldn’t assume there isn’t important information to be found here.

One way investors can utilize open interest is by looking at it relative to options volume of traded contracts. When the options volume is more than the current open interest of any given day, it likely that trading in that option was unusually high for that day.

Open interest also provides investors important information concerning the liquidity of a futures or option. If there isn’t open interest in a future or option, there isn’t a secondary market for that product. When options and futures have a considerable open interest, it tells investors there’s a significant number of sellers and buyers available. An active secondary market improves the odds of getting futures and options orders filled at favorable prices.

• Example: An investor looks at options on Alphabet Inc. and notices the open interest in 13,500. This suggests that the market in Alphabet options is active, and there are likely many investors in the marketplace wanting to trade. The option’s bid price is $2, and the options offer price is $2.10, meaning it’s likely they could buy a single call option contract at the mid-market price. However, if the open interest is three, it’s indicating minimal open interest for those call options with no secondary market due to hardly any interested sellers and buyers. This would make it difficult for an investor to enter and exit this option at favorable prices.

Options Volume and Open Interest Example

Here’s a more detailed look at the options volume and open interest measurements and how investors can use them in their trades.

Imagine it’s the day after expiration, and a new contract period, the June expiration cycle, is shown for option class LMN. An investor, Jack, logs into their online retail trading account and enters a purchase order to purchase 20 June 70 calls. The order is sent to the exchange and executes with Jill, a market maker from one of the U.S. options exchange markets.

Since this is the first day these options are available to trade, open interest is zero at the beginning of the day. Options volume will always be zero at the beginning of the day. Once the trade is complete, both options volume and open interest increases. Jack is long 20, and Jill is short 20. Therefore:

• Options Volume: 20
• Open Interest: 20

Later that same day, another party trades in the June 70 call series. Tom sells 15 calls, perhaps as part of a covered call. Jill is coincidentally the market maker buying the calls from Tom.  Since the trade occurs on the same day, the trade increases options volume by how many contracts traded. However, a new contract wasn’t established; it just switched hands. The two parties to the call are Jack and Tom, while Jill is flat, so open interest stays the same.

• Options Volume: 35
• Open interest: 20

The following morning options volume starts new, while open interest continues from the day before.

• Options Volume: 0
• Open interest: 20

Suppose that Jack decides to sell his 20-lot to close, and Jill repurchases hers at the same time, allowing them to trade with each other. Now, both Jack and Tom have no calls, so they are flat. 20 contracts switched hands, making options volume 20, and the existing contract is closed, so open interest is zero.

• Options Volume: 20
• Open interest: 0

Trading doesn’t happen in a vacuum. Indicators showing investors what other investors are doing can assist in their trading decisions. Open interest and options volume can help identify trading opportunities otherwise overlooked by investors. They are also beneficial in determining if options they are trading are liquid, allowing them to enter and exit trades quickly at the best price possible.

Investors know that selecting a good stock is never easy. The high volume of stocks to choose from, along with the immense amount of data found on the internet, doesn’t make the selection process any easier. In fact, it makes sorting out useful data from worthless information even more difficult. A stock options screener helps traders focus on stocks meeting their standards and suiting their strategy.

What Is an Options Screener

An options screener is an effective filter for when investors have specific ideas about the types of companies they want to invest in. With thousands of stocks available on U.S. exchanges alone, it’s not feasible to monitor and track them on their own. A stock options screener pinpoints stocks investors see to those meeting their unique sets of data. Option screener software has three essential components:

• A database of stocks and companies
• A collection of variables
• An option screening engine that locates companies that meet set variables while generating a list of matching options to choose from

Using a Stock Option Screener

An effective options screener allows traders to search using just about any criterion or metric they wish. Once an investor inputs their information, they receive a list of stocks meeting those requirements. Using a stock options screen is relatively easy and starts by answering questions such as:

• Do you prefer small-cap or large-cap stocks?
• Are you searching for companies that have stocks that have fallen in value or stocks with prices at an all-time high?
• What price-to-earnings ratio (P/E) range are you comfortable with?
• Are you searching stocks within a specific industry?

By keeping the focus on measurable factors that affect the price of a stock, a stock options screener helps investors do quantitative analysis, or screening tangible variables including profit margins, volatility, revenue, and market capitalization in addition to performance ratios like debt-to-equity (D/E) ratio or P/E ratio.

Knowing What to Screen For

The most prominent challenge investors face when using a stock options screener is identifying what criteria to include in their search. With hundreds of variables to choose from, the sheer number of possible combinations is endless.

While options screeners are very flexible, if an investor doesn’t know what they are looking for or why they are looking for it, options screener software won’t be able to provide much help. Some options screener sites have predefined stock screens available for investors to use, which already have basic variables entered.

Some options screener sites offering predefined screens favored by experienced investors are listed below:

• Yahoo! Finance offers three predetermined screens, including Portfolio Anchors, Day Gainers, and Undervalued Large Caps. Yahoo! Finance lists and explains the search criteria used for each screen to help users understand the underlying principles of each of the screens.
• MSN Money includes several popular screens which can be furthered sorted and filtered by category.
• FinViz provides a signal drop-down menu allowing users to filter criteria such as wedges, top gainers, and recent insider buying.

Watch Out for These Limitations

While a stock options screener can be a handy tool, they do have limitations that investors need to keep in mind:

• The majority of options screeners only include quantitative factors, with many qualitative factors left to consider. No stock options screener provides information on things like customer-satisfaction levels, pending lawsuits, or labor problems.
• Options screeners utilize databases that are updated on various schedules meaning investors must check the timeliness and relevance of all data. If an options screen is providing outdated or irrelevant data, the search could be meaningless.
• Be aware of industry-specific blind spots like very few tech companies showing up when searching for low P/E valuations.

Do Your Research

While investors are often thankful for tools such as stock options screeners that can make life easier, it imperative to remember nothing beats doing individual research. Just because an options screener provides investors with a stock list that meets their criteria, it’s essential to take all this information with a grain of salt.

A stock options screener doesn’t know about news potentially affecting some companies. Investors need to use this information as a starting point and working from there. Take time to read up on any economic or legal issues affecting companies listed, anything that can make a dent in their bottom line.

Free Options Screener Options

Free stock options screeners are valuable resources for searching for the right investment as they can help narrow information and provide investors with a place to begin when selecting the best stock for them.

• Yahoo Finance Stock Screener
  An excellent place for investors to begin their investment research with a home page providing detailed stock market information, including current market conditions being live-streamed for Standard & Poor’s 500 Index, NASDAQ, and the Dow. It also includes information on the value of the U.S. dollar against the euro and current oil and gold values.Once investors receive information on the current state of the market, they can continue to narrow their search by index membership and category before tightening it even further by entering specific share data, they are looking for, including dividend percentage and maximum and minimum prices. Finally, they can filter growth estimates, sales, and valuation ratios. Once done, the best matches are generated by clicking the “Find Stocks” button.
• Fidelity Stock Screener
  Investors don’t need to be a Fidelity customer to use its very detailed options screener. While it does have a slightly higher learning curve, there are video tutorials available. In addition to the standard options like dividends and price, the Fidelity options screener provides investors with a list of the most popular search information other traders are using while letting them filter options based on the growth potential and company value. Fidelity also offers several predefined screens. Investors can click on a category to see the entire list of investments recommended.
• CNBC Stock Screener
  CNBC’s stock options screener provides investors with the option to create custom screens or use predefined screens for steady performers, high dividends, and small-cap values. Criteria are organized into nine different categories, including performance history, analyst estimates, growth trends, and more with filters available for investors to narrow their search even more.

Paid Options Screener Options

If an investor is ready to get serious about trading, they need to find a great stock options screener with most experts agreeing that paying for an options screener isn’t a waste of money. Using a high-quality screener typically provides investors with high-quality results. Paid stock options screeners to consider include:

• TradingView Stock Screener
  A web-based charting software, TradingView offers investors with excellent charts and a stock options screener with many fundamental and technical criteria combinations investors can use to located trading opportunities.Many investors like that TradingView covers world economic data, Forex, Futures, and International stocks. At least 39 International stock markets are covered, including several European countries, Japan, Singapore, Hong Kong, Australia, Canada, and the UK. Other useful features include a fundamental stock screener with an excellent range of fundamental criteria for investors to select from, a technical stock screener with several technical indicators to further refine a search, Forex screener, and Cryptocurrency screener.
• Finviz.com
  Another web-based stock options screen, the Finviz.com screener, helps investors find potential stock trades easily and quickly. While charting software of the past usually only offered technical criteria for options scans, Finviz.com does an excellent job of combining both fundamental and technical data. An excellent tool for investors looking to do more in-depth research into stocks with features including premarket screener, ability to export scan results to excel, stock chart patterns screener, and financial and news statement links.

The Bottom Line

Stock options screeners are not a magic pill for finding the right stock and should never replace careful research and continued experience.