How to Calculate Gains in Options the Logical Way
Lets say you bought a Call option for $300 one week before earnings.
Just before market close at 3:45 PM the same option is trading at $450.
This means you have 50% gains.
Earnings will be announced after market close.
Lets say you decided to hold on to your option for earnings.
The stock beat the earnings and gave positive guidance and stock moved up big after earnings.
Next day you sold your Call option for $600.
Your return on investment is not to be taken as 100%.
It is calculated as follows:
Your per-earning gains of 50% (gain from $300 to $450)
Your after earning gains of 33.33% (gain from $450 to $600).
Total gains 83.33%
You had the choice to sell your call option for $450 before earnings announcement but you did not.
So you were risking $450 to make $150.
This $450 could have become ZERO too.
So risking 100% to make 33% does not make sense. Unless you know if earnings go in your favor you would make like 200%.
“I worry about return of my investment rather than return on investment”
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