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 a row for one option position.
Required fields that do not contain valid values are highlighted in
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. The price of this stock will be included in the
initial trade cost when computing P/L for the trade.
- 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.
- 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 forecast probabilities, 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. Click in the text box
to bring up a date picker that will let you choose a different start
date. Or press the
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 initially contains one emptyrow : use the
button to add positions as
needed to describe the trade. Each row expects the following inputs:
- 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. This is a required input.
For standard monthly options, select the Saturday after the third
Friday of the expiration month.
- 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. This must be a non-zero
- 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 button - see Figure 2.
Figure 2: Pressing the
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.
Obtaining Stock and Option Data
As you configure trades for analysis, the Option Risk Calculator
has the ability to assist by obtaining market data. From the
menu, select the menu item. That will bring up this dialog:
Figure 3: This window lets you request option chain and stock price
data. Enter the ticker into the box, and click the OK button.
After you click OK, your browser will obtain current market information
from Yahoo Community Tables, informing you of its progress as it runs. When
done, it puts up a window showing all contracts (weekly, monthly, quarterly, and LEAPs)
it retrieved. For each contract, it shows the bid and ask if they were provided:
Figure 4: This window shows all the option chain data retrieved by the
request. There is a section for each strike data and, within each section, the
bid and ask prices are shown for calls and puts at each strike price.
This window contains buttons that let you transfer information to the
main trade setup window. Clicking any call bid price button will add a short call
position to the trade, at that strike and (if known) premium. Clicking a call
ask price will add a long call position to the trade. The put buttons
behave similarly for put contracts. The display provides hints to help you understand
Figure 5: Flyover hints help explain the function of the buttons in this window.
The current stock price and dividend rates are shown at the bottom.
Pressing the button next to either will transfer that number to the appropriate
field on the main setup screen
Be aware that, when using this capability, you are obtaining data from Yahoo - with
no guarantees about the quality or availability of the data. Use this data at your
own risk. Please see the FAQ if you would like to learn more
about this data source.
When you are done transferring data from this window, you will need to close it to
return control to the trade setup window.
Generating the Risk Chart
Once all required fields have been filled in, you can move on to
the next step: pressing the risk chart.
Note that this button will not be enabled until all required fields have
been filled in.
button at the bottom to view the
In addition to the menu, the interface
offers the following menus:
This menu contains a
button that can be used to clear all fields and remove the current
The 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
menu 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
Outcome Probability Charts
Analyzing the Full Trade
Theory of Operation
Frequently Asked Questions
DISCLAIMER: This risk calculator is for educational purposes
only, and is not intended as a basis for trading decisions. Use at your