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Is there a tool/software that anyone recommends to help calculate stop/loss for an option trade. I'm looking for a calculator that will calculate the percentage probability of making money goal profit percentage for an option.
For example, when I purchase a call option and it starts to go down I'm losing money, but if it recovers quickly I'll make money. Options aren't easy to just say "how much money do I want to lose?" because I've had options drop 30% and then recover and I've made 50% on the same options. However, over a long enough time period the probability goes down to zero and I'll never recover my investment.
So, is there a tool that will allow me to put in my call and then track the percentage/probability using time left and volatility to calculate when to sell before it's too late?
Your research and trading plan will determine the stop loss. TOS, ETrade and TastyWorks each have option analyzers within them. But its you research (Back testing) that will determine what stop loss you will use for your trading plan.
Do you understand option greeks? 30 delta = 70% chance?
I trade a lot of options, but never was successful calculating a "standard stop loss" for options. Instead I get out of a trade if
1. an essential support / resistance in the underlying future is broken. Usually I choose end of day stops. The support / resistance line should correspond to an acceptable loss in the option.
2. the fundamentals of the commodity change significantly.
That's how I'm doing it today, but I find that often I make a good read, but I'm a day or two early, so I get out and then the stock bounces and I miss gains. I'm looking for a weight/metric to add to the health of the option once I've made the investment.
futs thanks for replying. I do use greeks to figure out which investments, but I'm looking for a way to calculate all the probability once I've made the investment.
Can you expand on this piece? "30 delta = 70% chance"
Is there a chart or calculation that translates delta into probability?
This is strategy exclusive, and if you want to dive deep into it, you not only have to figure out what your SL is but also Tgt. And if possible with your own option pricing model.
From what you've posted so far it seems you not only lack SL calculation but also tgt. With options you need to figure out what exactly you want to trade, some trade delta, some trade volatility, some don't even open greeks and do only in-out trade in 20 min solely based on underlying movement.
For example, if you are latter category trader where you are reliant on underlying movement, decide SL according to that, best case scenarios with SD calculations, which is more or less basic risk proxy.
Don't make it too complicated with all the equations, its never a "perfect" thing. Experienced option traders would even tell you that the conventional options pricing models like BS are not even that efficient. Because we lack one key thing, ability to predict exact "volatility", which is effected by too many variables to count, at least on retail end.
If you need, research more into hedging using Greeks on directional trades rather than perfecting or predicting "how much drop is okay till its too much to bounce back", fact of the matter is, there is really no such a thing in options, also why many people like futures.
