To use a live version of the calculator, click here to visit the Wanderer Options Calculator Page.
The Option Calculator can be used to easily calculate the quantity of at-the-money options you should trade in order to maximize your profit, while managing your risk.
Let’s say you are looking to buy GM call options. GM is currently trading at $39.75 and you expect it to go to $41.50. However, if it drops to $39.25 you will exit the trade because the support level will have been broken.
Here is the option chain for GM:
You can see in this example that the $40 calls are currently trading around $1.31 and have a delta of .49. So let’s enter the information we know into the calculator.
Assuming you have a $50,000 trading account portfolio and are willing to risk a maximum of 1% per trade:
We can see quickly that the reward-to-risk on the stock is 3.5/1, which is high enough to warrant a trade. Now by entering the Option Price and Delta we get the number of contracts and estimated max. risk:
So, in order to manage our risk, and keep possible losses to our 1% threshold on the trade, we should trade a maximum of 20 contracts of the GM $40 calls.
Eventually, with experience, and some quick calculating in your head, you’ll be able to figure these numbers out. In the meantime use our calculator in order to effectively manage your risk—the number one rule of trading.