Option Graph Step 12
to use Basic Option Graph
- Compare Simple Strategies
One way to make use of the multiple legs available to you in Basic
Option Graph is to compare various strategies to each other. For instance,
say you are bullish and are thinking of buying a long call. You can
set up an In-the-Money long call in Leg1, an ATM long call in Leg2,
and an OTM long call in Leg3. Then by just Including or not Including
the various Legs, and updating the graph, you can see the advantages
of each, such as the total investment required, and the reward to risk
If you are expecting a certain bullish move by the Check Date (which
in Basic Option Graph is automatically set halfway between the last
entry date and the first expiration date), you can see which strategy
performs the best by that date, by looking at the gain on the green
Check Date line, at the stock price you expect by that date.
Another way to compare a bullish strategy would be to set up a long
call in Leg1, and a short call at a higher strike price in Leg2. Then
by including Leg2 or not, you can compare the advantages and disadvantages
of a long call and a bull call vertical. This can be especially important
if the Implied Volatility is currently at very high or low levels.
If the volatility is currently at very high or low levels, set the
IV to the current level, but change the Check IV to a more normal IV,
and see how the strategies compare.
Anytime you are considering a strategy with more than two legs, it
can be educational to set up the strategy, and then Un-Include some
legs. This will help show you where exactly the gains are coming from
with the stock movement you expect, and if the additional legs are even
necessary to make those gains. And of course remembering that any multiple-leg
strategy has the built in disadvantage of requiring more commissions
and slippage to enter, and if you need to exit early, even more commissions
For instance, if you are considering a butterfly trade, set it up as
a bear call in Legs 1 and 2, and a bull put in Legs 3 and 4. Include
or Un-Include each part and look at various scenarios such as the stock
rising or falling more than you think it will, or the Check Date IV
being higher or lower than it is now. What do you stand to gain or lose
by just entering a long call or a long put instead of the butterfly
or either of the verticals? What are the risks of selling a straddle
compared to the butterfly?
Basic Option Graph makes it easy to examine the theoretical possibilities
for rolling options such as covered calls.
Set up the current stock price and the strike and expiration date of
the short calls you now have in Leg1. Copy Leg1 to all the other Legs
and Include all the option legs.
Since covered calls are often written against large dividend paying
stocks, remember to enter the yearly dividend per share if there is
In Leg2, change the strike price to the next higher strike, and the
expiration date one month further out. Do the same for Legs 3 and 4,
increasing the strike price and moving the expiration date further out.
Now use the "Find Price and Graph" button.
The graph itself will be meaningless, but the option prices shown on
the Legs will show you the possibilities for rolling. Maybe you can
roll for a credit to a higher strike at the next expiration, or maybe
rolling for a credit can't be done even six months out. Maybe you can
do a better roll if the stock price drops a bit over the next week,
or maybe the stock price moving up strongly over the next week will
make rolling much more difficult. All these things can be checked out
Always check the actual market, since factors such as earnings dates
can affect the IV and therefore affect the actual option prices available.
- Find how a Strategy is affected by changes in IV
You can see how any strategy might be affected by a change in the Implied
Volatility just by setting up the strategy, and changing the Check IV
to a higher or lower value than the current IV. If the green Check Date
line moves to a higher gain at the stock price you are targeting, then
the strategy benefits from the change in IV. If the green line moves
to a lower gain at the stock price you are targeting, then the strategy
is hurt by the change in IV.
Try setting up some strategies that look similar, and compare what
happens to them with higher or lower IVs than when you enter the trade.
For instance, compare a Butterfly with a Calendar. Compare an Iron
Condor with a Double Diagonal.
Make notes of your results. Then you will know which strategies to
favor if Implied Volatilities are currently high or low and you expect
a move back to normal.
- Find if a Strategy benefits from time decay at a
certain stock price
On any strategy you graph, the green "Check Date" line will normally
be between the blue "Entry Date" line and the red "Expiration Date"
line. Just by noting the relative position of the green line versus
the blue line, you can tell if a strategy benefits from time decay,
or is hurt by time decay, at a certain stock price.
If the green line is above the blue line, the strategy is helped by
time decay at that stock price.
If the green line is below the blue line, the strategy is hurt by time
decay at that stock price.
You can see both of these effects in action if you set up a bull call.
Anywhere above the breakeven price, time decay helps the position -
you will realize more of a gain by waiting, as long as the stock price
stays at least at that level. Anywhere below the breakeven price, time
decay hurts the position - your losses will increase if you keep holding
and the stock stays at that level or goes down.
You can use this information as possible points to either "let your
winners run", or "cut your losers short".
- Find the earliest expiration that will enable a
Stock Rescue at no additional cost
In the notes for the Option Calculator Project, we showed how you might
find if a "stock rescue" strategy would work on a stock you own which
is currently under water. Using the Calculator, the method involves
a lot of steps and seems quite complicated. But using Basic Option Graph
it becomes much simpler.
Say you bought 1000 shares of a stock at $30, and it is now $25. In
Basic Option Graph, set up 10 long calls in Leg1 using strike price
25, and 20 short calls in Leg2 using strike price 27.50. Use the current
stock price and IV. Now keep advancing the expiration date in both Legs,
and clicking the "Find Price" until the Entry Value shows a credit for
entering the trade.
The first expiration date that gives a credit represents the least
amount of time you must wait in order to get out of your stock at breakeven
overall, with no additional risk.
When the Entry Value is a credit, you can set up the Stock Leg with
your 1000 shares bought at $30, and Include the Stock Leg.
The Graph should show that $27.50 (less any credit from entering) is
now the new breakeven.
As a rule, the higher the current IV, the closer the expiration date
is for a stock rescue. If the IV is low, a stock rescue might not be
available for over a year, or at all.
If you cannot find any expiration that lets you enter for a credit,
it means a risk-free stock rescue is not possible at the current stock
price or IV.
You can read more about the "stock repair" strategy on option-info.com
- Graph option examples, notable trades, Guru trades,
If you are studying options, try setting up some of the trades you
read about in books or hear options Gurus talking about. This will help
you understand things like an author saying "this is a good trade for
when a stock has just fallen and the IV is very high". You can set up
the trade, with a high current IV, and set the Check Date IV to a more
normal value, and see how the trade benefits.
Many option trading sites also give information about notable trades
for the day, such as "a large institutional investor entered the following
trade on 10,000 contracts of XYZ". You can set up the trade in Basic
Option Graph, and see what the large investor might be trying to achieve.
If the number of contracts is more than Basic Option Graph can handle,
just use half or 10% of the number - the graph of the trade will be
the same. The max gain or loss on the actual trade will be twice as
much or ten times as much as shown.
Never blindly follow any of these institutional trades with trades
of your own unless you understand the risks involved. Many times the
institutional investors are trying to hedge a stock portfolio with their
trades, and there is no way to know how many shares of stock they are
long or short.
If an institutional trade does not make sense to you, it is probably
because of this type of hedging. Try adding Long or Short stock shares
to the strategy and see if it makes sense.
- How To Save a Picture and/or Print a Graph
Basic Option Graph does not have a built-in way of saving a graph or
printing, but you can easily do that with standard Windows features
and a graphics program such as "GIMP".
GIMP is a free open source graphics program - you can find it by doing
a Google search. Other programs such as Adobe Photoshop will work as
well, if you already have them.
To save an image of any graph, just press SHIFT-PRINTSCREEN when the
graph is displayed in Windows. (The Printscreen key is normally just
to the right of the F12 key on your keyboard). This will put an image
of your entire Windows Screen on the Windows clipboard.
If you use GIMP, you can use "File - Create - From Clipboard" to get
the image into the program. Then you can use the "Rectangle Select"
tool to select whatever part of the image you want to save or print,
and use "Image - Crop to Selection" to get rid of everything else.
Now you can save the image as a jpeg or any other format, or print
the image to your printer.