After you set up the trade and generate the risk chart, the calculator will display a risk chart for the trade as of the first expiration date.
The chart shows two plots:
As you move the mouse over the red plot, a flyover window will show some statistics about the value and probability of the trade at the cursor position:
Below the chart is a scrolled text area describing the trade and some statistics from the computation
At the bottom of the window is a scrollbar that lets you view the value of the trade before its expiration. By moving the scrollbar, you can choose any date between tomorrow and the expiration (figure 8). This allows you to view the probability distribution and the effect of the option's time value throughout the life of the trade.
The Option Risk Calculator functionality described so far is conventional - many brokerages offer similar online tools. Risk charts have limitations, however: while it's easy enough to understand the profit and loss as a function of price, these charts do a poor job of conveying the likelihood of various P/L outcomes. Also, risk charts are useless for analyzing a trade with multiple expirys once you pass the first expiry: the composition of the trade changes, and risk charts do not lend themselves to representing trades with multiple phases.
To address these weaknesses, the Option Risk Calculator offers an alternate view of a trade, based on Monte Carlo simulation methods. This new view is called the Outcome Probability Chart.
To generate the Outcome Probability Chart, use themenu. The menu will offer one or two types of analysis:
To learn more, visit the documentation for the Outcome Probability Chart.
In addition to themenu, this window offers the following features through menus:
DISCLAIMER: This risk calculator is for educational purposes only, and is not intended as a basis for trading decisions. Use at your own risk.