Is there any algorithm to calculate highest possible return on stock market?
Highest possible is meaningless.  Ex: Use 17x Leverage on E-mini S&P 500 Futures, perfectly long before an uptick and short before a downtick every minute. Goes to the moon in a day of 1,440 minutes.  You are supposed to use a Buy-and-Hold SPY, with leverage that makes the Standard Deviation of SPY same as your Portfolio/Algorithm, as benchmark. You can statistically estimate the maximal loss/gain over a period of time T by the highest loss/gain during any of the same length time intervals in during the life of the stock. Using logarithmic prices to be more accurate.
Outside of software that can calculate the returns:  You could calculate your possible returns on that leap spread as you ordinarily would, then place the return results of that and the return results for the covered call position side by side for any given price level of the stock you calculate, and net them out. (Netting out the dollar amounts, not percentage returns.)  Not a great answer, but there ya go. Software like OptionVue is expensive "Great question! While investing in individual stocks can be very useful as a learning experience, my opinion is that concentrating an entire portfolio in a few companies' stock is a mistake for most investors, and especially for a novice for several reasons. After all, only a handful of professional investors have ever beaten the market over the long term by picking stocks, so is it really worth trying? If you could, I'd say go work on Wall Street and good luck to you. Diversification For many investors, diversification is an important reason to use an ETF or index fund. If they were to focus on a few sectors or companies, it is more likely that they would have a lop-sided risk profile and might be subject to a larger downside risk potential than the market as a whole, i.e. ""don't put all your eggs in one basket"". Diversification is important because of the nature of compound investing - if you take a significant hit, it will take you a long time to recover because all of your future gains are building off of a smaller base. This is one reason that younger investors often take a larger position in equities, as they have longer to recover from significant market declines. While it is very possible to build a balanced, diversified portfolio from individual stocks, this isn't something I'd recommend for a new investor and would require a substantial college-level understanding of investments, and in any case, this portfolio would have a more discrete efficient frontier than the market as a whole. Lower Volatility Picking individual stocks or sectors would could also significantly increase or decrease the overall volatility of the portfolio relative to the market, especially if the stocks are highly cyclical or correlated to the same market factors. So if they are buying tech stocks, they might see bigger upswings and downswings compared to the market as a whole, or see the opposite effect in the case of utilities. In other words, owning a basket of individual stocks may result in an unintended volatility/beta profile. Lower Trading Costs and Taxes Investors who buy individual stocks tend to trade more in an attempt to beat the market. After accounting for commission fees, transaction costs (bid/ask spread), and taxes, most individual investors get only a fraction of the market average return. One famous academic study finds that investors who trade more trail the stock market more. Trading also tends to incur higher taxes since short term gains (<1 year) are taxed at marginal income tax rates that are higher than long term capital gains. Investors tend to trade due to behavioral failures such as trying to time the market, being overconfident, speculating on stocks instead of long-term investing, following what everyone else is doing, and getting in and out of the market as a result of an emotional reaction to volatility (ie buying when stocks are high/rising and selling when they are low/falling). Investing in index funds can involve minimal fees and discourages behavior that causes investors to incur excessive trading costs. This can make a big difference over the long run as extra costs and taxes compound significantly over time. It's Hard to Beat the Market since Markets are Quite Efficient Another reason to use funds is that it is reasonable to assume that at any point in time, the market does a fairly good job of pricing securities based on all known information. In other words, if a given stock is trading at a low P/E relative to the market, the market as a whole has decided that there is good reason for this valuation. This idea is based on the assumption that there are already so many professional analysts and traders looking for arbitrage opportunities that few such opportunities exist, and where they do exist, persist for only a short time. If you accept this theory generally (obviously, the market is not perfect), there is very little in the way of insight on pricing that the average novice investor could provide given limited knowledge of the markets and only a few hours of research. It might be more likely that opportunities identified by the novice would reflect omissions of relevant information. Trying to make money in this way then becomes a bet that other informed, professional investors are wrong and you are right (options traders, for example). Prices are Unpredictable (Behave Like ""Random"" Walks) If you want to make money as a long-term investor/owner rather than a speculator/trader, than most of the future change in asset prices will be a result of future events and information that is not yet known. Since no one knows how the world will change or who will be tomorrow's winners or losers, much less in 30 years, this is sometimes referred to as a ""random walk."" You can point to fundamental analysis and say ""X company has great free cash flow, so I will invest in them"", but ultimately, the problem with this type of analysis is that everyone else has already done it too. For example, Warren Buffett famously already knows the price at which he'd buy every company he's interested in buying. When everyone else can do the same analysis as you, the price already reflects the market's take on that public information (Efficent Market theory), and what is left is the unknown (I wouldn't use the term ""random""). Overall, I think there is simply a very large potential for an individual investor to make a few mistakes with individual stocks over 20+ years that will really cost a lot, and I think most investors want a balance of risk and return versus the largest possible return, and don't have an interest in developing a professional knowledge of stocks. I think a better strategy for most investors is to share in the future profits of companies buy holding a well-diversified portfolio for the long term and to avoid making a large number of decisions about which stocks to own." If you have 100% of your money in one security that is inherently more risky than splitting your money 50/50 between two securities, regardless of the purported riskiness of the two securities. The calculations people use to justify their particular breed of diversification may carry some assumptions related risk/reward calculations.  But these particular justifications don't change the fact that spreading your money across different assets protects your money from value variances of the individual assets.  Splitting your $100 between Apple and Microsoft stock is probably less valuable (less well diversified) than splitting your money between Apple and Whole Foods stock but either way you're carrying less risk than putting all $100 in to Apple stock regardless of the assumed rates of return for any of these companies stock specifically. Edit: I'm sure the downvotes are because I didn't make a big deal about correlation and measuring correlation and standard deviations of returns and detailed portfolio theory.  Measuring efficacy and justifying your particular allocations (that generally uses data from the past to project the future) is all well and good.  Fact of the matter is, if you have 100% of your money in stock that's more stock risk than 25% in cash, 25% in bonds and 50% in stock would be because now you're in different asset classes.  You can measure to your hearts delight the effects of splitting your money between different specific companies, or different industries, or different market capitalizations, or different countries or different fund managers or different whatever-metrics and doing any of those things will reduce your exposure to those specific allocations.   It may be worth pointing out that currently the hot recommendation is a plain vanilla market tracking S&P 500 index fund (that just buys some of each of the 500 largest US companies without any consideration given to risk correlation) over standard deviation calculating actively managed funds.  If you ask me that speaks volumes of the true efficacy of hyper analyzing the purported correlations of various securities. If you are looking at long-term investments then you can look to Dheer's answer and see that it doesn't matter whether the money is large or small, the return will be the same.  When it comes to shorter-term investments, it can actually pay to be a smaller investor. Consider a stock that may not be trading in high volume. If I want to take a position for 2,000 shares, I can probably buy it quite quickly without moving the market considerably.  If I was managing your hypothetical portfolio opening a position for 1,000,000 shares, it can cause the price to go up significantly because I have to execute the order very carefully in order to not tip my hand to the market that I want a million shares.  Algorithmic traders will see the volume increasing on those shares and will raise their asking price. High speed traders and market makers will also cause a lot of purchasing overhead. Then later when it comes time to sell, I will lose a percentage to the price drop as I start flooding the market with available shares. Another one I have seen mentioned used is Equity Feed. It had varies levels of the software depending on the markets you want and can provide level 2 quotes if select that option. http://stockcharts.com/ is also a great tool I see mentioned with lots of free stuff. Information is useless in this case.  IR is useful when you are trying to replicate the risk exposures of an index and beat it. I.E.If I am a tech fund, I would compare myself to the tech S&amp;P.  IR is useless in this case as it is just the ratio of excess returns over the benchmark to vol.  From a trading sense he needs a rate of wins to losses, so a sharpe like construct of R/SemiDeviation. Essentially his avg return divided by negative volatility.  Going further on that is omega which introduces a threshold as in trading you care more about the equity curve so MAXDD is probably more relevant. "The previous answers make valid points regarding the risks, and why you can't reasonably compare trading for profit/loss to a roll of the die. This answer looks at the math instead. Your assumption: I have an equal probability to make a profit or a loss. Is incorrect, for the reasons stated in other answers. However, the answer to your question: Can I also assume that probabilistically speaking, a trader cannot do worst than random? Is ""yes"". But only because the question is flawed. Consequently it's throwing people in all directions with their answers. But quite simply, in a truly random environment the worst case scenario, no matter how improbable, is that you lose over and over again until you have nothing left. This can happen in sequential rolls of the dice AND in trading securities/bonds/whatever. You could guess wrong for every roll of the die AND all of your stock picks could become worthless. Both outcomes result in $0 (assuming you do not gamble with credit). Tell me, which $0 is ""worse""? Given the infinite number of plays that ""random"" implies, the chance of losing your entire bankroll exists in both scenarios, and that is enough by itself to make neither option ""worse"" than the other. Of course, the opposite is also true. You could only pick winners, with an unlimited upside potential, but again that could happen with either dice rolls or stock picks. It's just highly improbable. my chances cannot be worse than random and if my trading system has an edge that is greater than the percentage of the transaction that is transaction cost, then I am probabilistically likely to make a profit? Nope. This is where it all falls apart. Just because your chances of losing it all are similarly improbable, does not make you more likely to win with one method or the other. Regression to the mean, when given infinite, truly random outcomes, makes it impossible to ""have an edge"". Also, ""probabilistically"" isn't a word, but ""probably"" is." Just a few observations within the Black-Scholes framework: Next, you can now use the Black-Scholes framework (stock price is a Geometric Brownian Motion, no transaction costs, single interest rate, etc. etc.) and numerical methods (such as a PDE solver) to price American style options numerically, but not with a simple closed form formula (though there are closed-form approximations).