How to Calculate Risk/Reward on Advanced Trades
Master risk/reward calculations for options spreads, naked positions, and futures trades.
Common Strategy Calculations
Single Call Buy
- • Max Loss: Premium paid
- • Max Profit: Unlimited
- • Break-even: Strike + Premium
- • Probability: ≈ Delta
Cash-Secured Put
- • Max Loss: Strike - Premium (to $0)
- • Max Profit: Premium collected
- • Break-even: Strike - Premium
- • Assignment Prob: ≈ Delta
Vertical Spread (Debit)
- • Max Loss: Net debit paid
- • Max Profit: Strike width - debit
- • Break-even: Long strike + debit
Iron Condor
- • Max Profit: Net credit collected
- • Max Loss: Wing width - credit
- • Break-evens: Short strikes ± credit
Futures Risk Calculation
Formula:
Risk per Contract
Tick Value × Stop Distance in Ticks = $ Risk
Example: ES futures, $12.50/tick, 20-tick stop = $250 risk per contract
Position Sizing
Account Risk (1-2%) ÷ Risk per Contract = # Contracts
$10k account × 1% = $100 ÷ $250 = Use micro futures (1/10 size)
Key Principles
Risk Management:
- Always include fees and slippage in calculations
- Use delta for rough probability estimates
- Track expectancy: (Win% × Avg Win) - (Loss% × Avg Loss)
Optimization:
- High win rate vs. high reward ratio—optimize expectancy
- Build a spreadsheet to track all trades
- Backtest strategies for historical expectancy
Master Risk/Reward Analysis
Proper risk/reward calculation is the foundation of profitable trading. Know your numbers before you trade!