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?

Thanks for reading and for any responses!

The following user says Thank You to everestinv for this post:

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?

The following 2 users say Thank You to futs for this post:

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.

Best regards, Myrrdin

The following 4 users say Thank You to myrrdin for this post:

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.

That's the confusing part. Usually if you are just buying an option you are looking for a directional move, which would be determined by your TA.

I seldom buy options, I sell options and base my stop (if used) on my R/R and backtesting results. When I do buy, I assume my max loss will be the debit paid.

I understand that is the way to calculate the stop loss (you are suggesting) and I understand it's up to me to be able to make the right read/prediction. But, what I'm asking is slightly different. I'm asking if there is a database, calculation, application that will analyze my option bought and calculate/track the probability of an investment return based on all the possible outcomes. ie. (you have x days left and if it goes up y you will make money, etc) I know its complicated and overkill, but I do have a use case for the data that will help me with analysis of when to sell my options.

The following user says Thank You to everestinv for this post:

1. Figure out expected movement in spot/underlying
2. Plug in values into option pricing model applicable to your expiry style, values corresponding to your traded strike price
3. In place of current market price plug in value of from point number 1. Example: Expected bounce of 30 points in underlying, then Current underlying price + 30 = Value you should calculate for
4. Option pricing model will give you expected CE/PE value at that expected underlying value for the given volatility/days to expiry/rate of return (all of these are adjustable)
5. How these mentioned entities effect the price is something you have to read under relevant greeks.

This exercise will give you payoff/scenario calculations along with good looking graphs of your traded strike for the "Expected movement in underlying".

There are lot of free calculator available, usually they are there on broker terminal too. You just have to plug in values in it and click calculate. You can also make them in excel or anything else that you may using with some advanced mathematical functionality. Google, you will find it somewhere for free as these are very basics, complicated is whole another ball game, there are people who have invented their own option pricing model on this very site.

Books worth reading if you are trading options and plan to stick to it:
Options, Futures, and other Derivatives - John C. Hull

Trust me, it will help in long run.

If this is not what you are looking for then forgive my ignorance, I'm sure expert sooner or later will help you.

The following user says Thank You to LastDino for this post:

There is no reliable way, the only reliable probability is the probability at open.

The analyze tab will provide you with information stated in other responses. However, it seems like you are asking for a program to decode the BSM pricing model and perform some AI with difference variables. --- It probably doesn't exist and if it did the big boy bankers would not share.

If you want an answer from an options research group that has been trying to figure out a simple way to assist when to get out of a trade, email the tastytrade research team. They have mentioned creating a variable like POP or P50 that would help you know when to get out of a trade. I think one of their emails is Anton@tastytrade.com.

The following user says Thank You to futs for this post:

It does exist, its just that one of the variables, IV is not something you can just calculate as its "expected forward" movement. One of the reasons BS is used by everyone is due to it being one of the only popular pricing models that has only one such an input, others are measurable like time.

So, to be more precise, if you really want to get around and develop some kind of AI to "Predict option prices", your first step should be estimating Implied volatility. Note that I again use word estimate, so even if you managed to re-invented the wheel, it will be still just an estimate.

If you do decide and make any progress in that direction, I would love to hear it.

IV is a result of BSM, not an input. Its the one variable you don't have.

So you agree you can't calculate directional move with option pricing, but you still think there is a way to determine the of a direction move and the length of the move to determine its probability? Then your first step is to estimate IV?

Do you have any data or references to your view on this being available or is this a hunch?

Algo's that read tweets and news have been trying to predict for years, No individual will accomplish this before one of the big trading firms with funding for teams of mathematicians and data analysts.

I'm very confused about what you are trying to argue atm. Is it my view that I think it maybe possible for some genuise to derive or is it my words that it is "input"? Or something else?

Oh, I see now, your issue seems to be this line of mine

I'm quite familiar with BS equation and how to back calculate IV from price you get from auction market or current market price.

Here I was trying to say, if you want to "predict" future price of option, you will have to "estimate the IV" for that calculation to work as you are trying to "predict option price", which you are "yet to get from auction market".

You can't work with one unknown to "predict or solve" other unknown. Choice of words may not have been clear back then, I hope its clear now? In fact, I think we agree on everything, from BS backward solving for IV from cmp to this statement of yours

Just to be more clear, I'm just trying to make OP aware of gravity of word "predict" with option price.