How to calculate Risk Tolerance for options trading?

E

Erick Gomez

Hi,

I am able to get the Deltas for the list of options. However my level of risk it is discretionary i look for 90% probability of profit. I am not sure if there is a mathematical formula to calculate a more efficient risk tolerance. Before I get to the long task to implement an Efficient Frontier algorithm. Is there any other Risk Management math formula for Risk/Return optimization?

Thanks in Advance
Erick
 
The calculation of risk is very easy. You simply divide your net profit (the reward) by the price of your maximum risk. If your stock worth $25 went up to $29 per share, you would make $4 for each of your 20 shares for a total of $80. You paid $500 for it, so you would divide 80 by 500 which gives you 0.16. That means that your risk/reward, for this idea, is 0.16:1. Most professional investors won't give the idea a second look at such a low risk/reward ratio, so this is a terrible idea. Or is it?
 
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