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Ways to Use the Options Calculator

     Here are some actual situations you might come across when trading options, where the option calculator will be useful.

  • You want to know how much a stock must rise for a long call you buy now to be a "double" today (or any future date).
    • Input all the current information on the option, including the midmarket option price. You do not need to enter the IV.
    • Click the "Find IV" button. The IV that matches the option price will be displayed.
    • Change the entry date if you want to find the "price to double" on any day after today.
    • Keep raising the stock price by about .10 and clicking the "Find Price" button until the long call is worth twice what it was worth at the current stock price.

Note: You can also find the "price to double" on a long put by the same technique, except LOWERING the stock price instead of raising it.

TIP: This trading technique is usually called "percent to double" and uses percentage stock movements so that the percentage can be compared between different stocks. "Price to double" is just as useful if you are only interested in one stock. The "price to double" will always be lower if the stock moves today rather than later. Less price movement is needed for a double on OTM options if the stock moves today, but more if it moves later.

You can see a full explanation of the "percent to double" theory on option-info.com at http://www.option-info.com/optionstradepercentdouble.htm

  • Your trading discipline is to take "doubles" (100% gains) on long options whenever you can get them, but take only 30% losses if the stock moves against you. In this way you can be correct on the stock movement needed for a double only 1 time out of 4 and still not lose money. How do you know what stock price will represent a 30% loss on the option? How do you know what strike price to use?

First, if you believe the stock movement is going to happen today or very soon, you should favor OTM options. OTM options move much more quickly percentagewise if the move happens soon. The downside of this percentage movement is that they can become a 30% loss very quickly, especially if there are wide bid-ask spreads.

Using ITM options will require much more stock movement than OTM options for either a double or a 30% loss, and using ATM options represents a tradeoff between the other two.

You can easily check the validity of the above statements by using your calculator and checking option prices at different strike prices. For instance, find the stock price for a double using the OTM strike, then the ATM and the ITM strike. The OTM strike will require much less stock movement if the movement happens soon.

As far as the stock price that represents a 30% loss, the technique is exactly the same as finding the "price to double", except you will lower the STOCK price in increments until you find the call price that is 30% lower than it is now. (Or raise the stock price to find the put price that is 30% lower than it is now.)

  • You want to buy a long call when a stock returns to a support level, but you cannot sit in front of your computer all day waiting for that level. How can you find in advance what a fair price for the option will be when the stock is at that support level?
    • Input all the current information on the option, including the midmarket option price. You do not need to enter the IV.
    • Click the "Find IV" button. The IV that matches the option price will be displayed.
    • Change the stock price to the price you think will be a support level.
    • Click the "Find Price" button. The calculator will show the new option price that matches the new stock price, using the IV you found previously.
    • Enter your limit order in the market at the option price you calculated. IF the stock does return to that support level, you MAY be filled.

Note: you can use the same technique to find the price to SELL an option at a future RESISTANCE level. Or if you think a future higher price is going to be a breakout, you can find what the option price will be if the breakout occurs, and use a Stop-Limit order to go long.

Actually, in all the above situations it may be safer to use your broker's alert system if possible, to alert you to the STOCK PRICE reaching some target, and then enter your option order if you wish. But you could still use the above technique to prepare for a trade ahead of time, and actually enter it later.

  • You have found that a certain stock's Implied Volatility usually rises about 5 percentage points in the 2 weeks leading up to the day of their earnings report. If you buy a long call today, what will it be worth in 2 weeks, if the stock rises 1.00 and the IV goes up 5 points?
    • Input all the current information on the option, including the midmarket option price. You do not need to enter the IV.
    • Click the "Find IV" button. The IV that matches the option price will be displayed.
    • Change the stock price $1 higher, the entry date two weeks from today, and the IV 5 points higher than what was calculated previously.
    • Click the "Find Price" button. The calculator will show the new option price that matches all the new information.


    Note: you can use the same technique for other situations where you expect the IV to change. For instance, a stock just had a sharp sell-off that caused the IV to go very high. Now the stock is holding steady at the lower level. If it continues to stay at this level, you expect the IV will drop dramatically. What will happen to the price of a put if you sell an out-of-the-money put now, the stock holds steady, and the IV drops by 10 points in the next week?

  • You are sure enough that a stock is going to have a big up move tomorrow (or any future date) that you want to buy a call this afternoon. You want the biggest reward for the amount of risk you take on. How can you determine which strike price to buy?

    First, make yourself a paper list or a spreadsheet. In a column on the left put an OTM strike price, an ATM strike price, and an ITM strike price. Across the top put "Price today", "IV", "Price Tomorrow".

    Do the following 3 times, once for each of three strike prices you are considering:

    • Input all the current information on the option, including the midmarket option price. You do not need to enter the IV.
    • Click the "Find IV" button. The IV that matches the option price for the strike price will be displayed.
    • Make note of the IVs for each strike price.

Now do the following 3 times, once for each strike price, and make note of the option prices that result:

    • Set the strike, change the entry date to the future date, and set the IV to what was calculated previously at this strike price. Set the stock price to how high you think it will be tomorrow or on the future date.
    • Click the "Find Price" button. The calculator will show the new option price that matches the new information.

Now you have enough information to calculate risk/reward ratios and possible dollar gains across each of three strike prices. You may be looking for the biggest dollar gains, or the biggest percentage gain on what you want to risk, but now you will be able to see which strike price gives what advantages.

  • A stock is undergoing wild price swings because of buyout speculation (or any other reason). The option bid-ask spreads are very wide. Trying to find the IV at the bid, the midmarket, and the ask gives three very different values. You might want to take a chance on a long call, but how do you know what is a fair price?

First, find the historical volatility. Some brokers have this information available, or you can find it from web sites such as http://www.cboe.com

    • Input all the current option information. Set the IV to the historical IV. You do not need to set the price.
    • Click the "Find Price" button. The calculator will show the option price that matches the historical volatility.

Now you at least have a basis for making a decision. You may find that if you can enter at midmarket, the option price is not much different than what it normally would be. Or you may find that even if you could get filled at the bid, you would be overpaying based on historical volatility. Either way, at least you can make a decision with your eyes open.

  • You want to know the Delta of an option you currently own, without looking it up somewhere. You know that the Delta of any option is how much the option will move if the stock goes up by $1.
    • Input all the current information on the option, including the midmarket option price. You do not need to enter the IV.
    • Click the "Find IV" button. The IV that matches the option price will be displayed.
    • Change the STOCK price $1 higher.
    • Click the "Find Price" button. The calculator will show the new option price that matches the STOCK price $1 higher.
    • A call option Delta = (the option price at the higher stock price- the option price at the current stock price). A put option Delta is the negative of that.

In the same way, you can find the option Theta by advancing the entry date by 1 day and making the same calculation, you can find the option Vega by increasing the IV by 1 point and making the same calculation, and the option Rho by increasing the interest rate by 1 percent and making the same calculation.

Note: for those who want to try some programming, it would be fairly simple to add a NumericUpDown control for Delta to the calculator. Then you would make a function that runs every time the "Find Price" or "Find IV" button is clicked, and follows the above steps IN CODE, in other words, finding the option price now, finding the option price if the stock price was $1 higher, performing the subtraction, and setting the NumericUpDown for Delta to that value.

  • You are studying some historical option prices. You know the date, stock price, strike price, expiration date, and option price, but would like to know what the IV was at the time.
    • Enter all the price and date information you have, including the yearly dividend amount if you know the stock paid dividends at the time you are checking.
    • Click the "Find IV" button to show the IV that matches the historical prices, at that strike price (Different strike prices can trade with different IVs.
  • You trade covered calls and often want to know the best time to roll out to a later expiration, if any.

First, if your stock is trading below the strike price you sold and you expect it to stay there, it is usually best just to wait for expiration or until one of the situations described below occurs. That will allow you to realize every penny of time value you sold. You can then sell new covered calls after the expiration if you wish. If you buy back time value unnecessarily, rolling almost never makes sense.

Rolling starts to make sense if the stock is trading over the strike price you sold, and you expect it to stay over the strike price. And of course if you do not want to be called out of your stock.

Rolling almost always makes sense if the stock is over the strike price by the amount you sold the calls for, and you do not want to be called out of your stock.

Rolling is necessary if you do not want to be called out of your stock, the stock price is over the strike price, and the time value of the calls is just a couple cents. This usually happens sometime in the week before expiration.

Rolling is also necessary if your stock pays a dividend, the stock price is over the strike price, the ex-dividend date is near, and the dividend is more than the remaining time value on the calls you sold. Another trader would be willing to pay the time value left in the calls in order to capture the dividend, and he would do that by buying calls and immediately exercising them to call you out of your stock. You would realize the time value you sold originally, but lose both the stock and the dividend.

In any case, you already know what your calls are trading for now, and you can use the calculator to show what the calls should be trading for at a later expiration, just by changing the expiration date. You can then see how much of a credit, if any, you should get for rolling.

You can also try raising the strike price to a higher one on a later expiration date and check to see if you can still roll for a credit, or if you need to go out to an even later expiration date at the higher strike price.

Remember to double-check the actual market prices, since calls on different expiration months can trade with different IVs, especially if there is an earnings date before the expiration date you roll to.

  • You bought a stock that has gone down, and you want to know if you can use the "stock repair" strategy to get out even, and at what strike prices and what expiration date.

If you don't already know what the "stock repair" strategy is, read about it on option-info.com at: http://www.option-info.com/optionstraderepair.htm

First, you must use the strikes closest to the stock price you paid, and the higher strike must be the same or less distance away from the stock price as it is from the lower strike.

For example, say you bought a stock at $30 per share. If you can enter a stock repair as outlined below using the strikes 25 and 27.50, then you should be able to get out even if the stock is over $27.50 at expiration, because you will make $2.50 on the options and lose $2.50 on the stock.

If the highest strikes you can find that meet the criteria are 22.50 and 25 , then a stock repair will not work. You would make $2.50 on the options if the stock is over $25.00 at expiration, but lose $5.00 on the stock.

If you can only find available strikes like 26 and 27 in the market, a stock repair will not work because you would make $1.00 on the options if the stock is over $27.00 at expiration, but lose $3.00 on the stock. But if there are 26 and 28 strikes available that meet the conditions, that would work.

    • Set the calculator to all the current price information, using a strike price 2 strikes below the stock price you paid and an expiration date about 3 months away.
    • Find what the price for a long call at that strike price and expiration is. This is the strike price of the call you will buy.
    • Set the calculator 1 strike price higher and check the price of a call. This is the strike of the two calls you will sell.
    • If twice the price of the higher strike call is more than or equal to the price of one lower strike call, then you can enter a stock repair at no additional risk.
    • If the above condition is not met, go out to later expiration(s) and check prices again.
    • If there is no expiration date where the condition is met, it means your stock has fallen too low for the stock repair strategy to be effective.

In all cases, you need to check the actual market before trading. Our example assumes the IV is the same on different strike prices and different expiration dates, and this is often not the case. But using the above technique will show you if a stock repair is even a real possibility or not.

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