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The Expected Return Calculator
The Expected Return Calculator is McMillan’s proprietary analytical software that uses statistical analysis to evaluate complex option positions, in order to give the trader an idea of whether or not there is a probability of success in a trade.
Expected Return is the return one could expect to make from a position over a large number of trials. Unfortunately, in the real world, each position we invest in has only one result – not a large number of results that we can average.
However, in the long run, if one consistently invests in positions with superior expected returns, then he should show superior returns in his portfolio or trading account. All the facets of a strategy are incorporated into expected return – in particular, the probabilities of making or losing money and the size of profits or losses are both factored in.
The results from The Expected Return Calculator can easily help investors and traders decide whether a particular option position is worth establishing. Furthermore, expected return analysis is the only way that a trader can accurately compare different strategies to see which is best: is a diagonal spread or a covered write the best trade? Or maybe a simple option purchase is best. Expected return can help you decide.
First, the trader defines his position, which can be extremely complex – involving multiple options and expiration dates, as well as a possible linear volatility skew.
Click the “Summary” tab and outputs are calculated swiftly and accurately, and all can be printed and exported to Excel. Tabular outputs include position “greeks” as well as expected profit calculations at any number of user-defined dates during the life of the position.
Under the “Plot” tab, graphical outputs show how the position is expected to behave at the user-defined intervals. The Expected Return calculator allows you to easily visualize exactly how much money you’d expect to make or lose at any underlying price and at any time throughout the life of the position.
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