Calculating Profit Potential and Max Loss on an Options Trade.

The first thing to determine is whether the trade is a debit trade, where you pay money for the trade, or a credit trade, where you get money. Iron condors and credit spreads are two examples of credit spreads. Butterflies and Calendar Spreads are debit spreads.

With a debit spread, the max you can lose is the amount you paid for the trade. The max you can gain is harder to determine. I do it using the Analyze tab on my broker’s platform. On a butterfly you can make up to 200% of the debit and sometimes more. On a Calendar you can make 100% of the debit. But you normally will not. At expiration, the profit zone becomes very narrow and the Greeks (delta, gamma, theta, and vega) become very volatile and option prices make huge swings up and down.

On either of these trades, 20% profit is a good number [...]