Starting Out - Describing the Trade

The Option Risk Calculator allows you to describe an option trade consisting of one or more option positions, and (optionally) a position in the underlying stock.

Figure 1: Starting screen with room for one option position. Required fields that do not contain valid values are highlighted in red.

The screen takes the following inputs in the upper section:

Current Stock Price

The price of the underlying stock at the start of the trade. This is a required input.

Initial Stock Position

If this trade includes a position in the underlying stock (such as for a covered call), indicate the number of shares here. A negative value indicates a short position. Leave empty if the trade has no position in the underlying stock.

Dividend Rate

An annual dividend rate, expressed as a percentage of the stock price. Can be left empty if there are no dividends. This value is interpreted as a continuous dividend, and is commonly published by financial sites as the dividend yield.

Risk-Free Interest Rate

The current annual interest rate on risk-free investments. This is a required input.

Volatility

The stock's current annual volatility, in percent. This is a required input. You can input a volatility value, or compute an implied volatility from current option prices - more details below.

Projected Stock Price Growth Rate

The expected trend in the underlying stock price, expressed as an annual percentage rate: positive if the stock is expected to appreciate, negative if it is expected to go down. All option risk calculators require this information to do their work, although most reuse the risk-free interest rate rather than accepting it as a separate input. If this field is left empty, the calculator will use the risk-free interest rate.

Trade Start Date

The date on which the trade starts. Normally, you would leave this empty - the trade starts today. But you can set a date here to study trades with other starting dates. Press the Set button to bring up a date picker that will let you choose a different start date. Or press the Clear button to remove a date from this field.

Below that is a grid allowing you to specify the individual option positions making up the trade. This area is initially empty: use the Add Option Positions button to add rows comprising the trades. Each row expects the following inputs:

Type

Click in this box to select CALL or PUT. This is a required input.

Strike Date

Click in this box to select a strike date - it will bring up a date picker you can use to select a strike date. By default, the picker will only yet you choose from among standardized monthly (Saturday after third-Friday) strike dates. But you can choose - by unchecking the "Restrict to Monthly" checkbox - to select any strike date. This is a required input.

Strike Price

Enter the strike price in this box. This is a required input.

# Contracts

Enter the number of contracts: a positive number for a long position, a negative number for a short position. You can use values from the dropdown menu or enter your own value. This must be a non-zero value.

Premium

Enter the option premium at the start of the trade. If left empty, the calculator will compute the theoretical premium by applying the Black-Scholes pricing model to the stock price, volatility, and risk-free and dividend rates.

Computing Implied Volatility

You can compute the implied volatility for an option position if all other required inputs and a premium value are specified, using the Calculate button - see Figure 2.

Figure 2: Pressing the Calculate button brings up a popup menu that lets you compute implied volatility from any of the fully specified option positions.

The popup menu will let you choose any of the fully specified option positions - when you choose, the volatility field will be initialized with the computed implied volatility.

Generating the Risk Chart

Once all required fields have been filled in, you can move on to the next step: pressing the Generate Risk Chart button at the bottom to view the risk chart. Note that this button will not be enabled until all required fields have been filled in.

Figure 3: Ready to generate risk chart

Menus

Data

The Data menu lets you look up a current option chain online. To use it, click on the menu and select one of the available data sources. This will bring up a dialog requesting the ticker (figure 4).

Figure 4: Supply a ticker to look up.

After you respond, a new window comes up with current data on the option chain (figure 5).

Figure 5: Current data on the option chain.

You can scroll through this window to see available contracts: in-the-money positions are highlighted in green, out-of-the-money positions in red. The various buttons in this window can be pressed to transfer information into the main window, in the following ways:

• The Transfer button at the top transfers the current price and dividend yield into the corresponding fields in the main window.
• Clicking a button in the Bid column will add a short option position in the main window, at the corresponding strike price, strike date, and premium.
• Clicking a button in the Ask column will add a long option position in the main window, at the corresponding strike price, strike date, and premium.

Example Trades

The other menu, Example Trades, offers a collection of example trades. If you select any one of these trades, the input fields will populate with values representing a trade of this type. Note: The values supplied for these examples trades do not represent any real-world securities or options positions - they are fictional numbers meant solely to illustrate the general shape of the trade.

DISCLAIMER: This risk calculator is for educational purposes only, and is not intended as a basis for trading decisions. Use at your own risk.