Nevertheless, as they say, good things need time to emerge. As time goes by I elaborate new details and features. I have thought about several new features that make me pretty excited.

Amongst others, for example, I want to include a possibility of multiple-thread events. So you will able to compare your options strategy (portfolio) directly against itself under different conditions on the market.

The user interface will be more friendly and visual, too (than first planed)

Aaaaanyway…. The work is progressing, stay tuned!

Here’s a small screenshot, everything you see is pretty much self-explanatory. There are a few other dialogs that are switched off right now, I don’t want to show them… yet

There are already a bunch of features. It’s a fun thing to play with, although I didn’t add the main graphical simulation module yet. I can already let this thing calculate chances and possible profits though

You’ll be able to save your simulations, too. Of course.

Alright, back to work! Stay tuned!

Basically you will work with your portfolio/trades and simulate your “arrangements” under different market events/circumstances (which you will define yourself). As a result you’ll get a risk/profit-profile, and a probability calculation (if you wish). Break-even points calculation is provided, too, of course.

The best part of it is that you may add as many options or shares in your portfolio as you want, short or long. This allows you to simulate/calculate virtually any strategy with options that you may find out there… or even better: without getting too deep into financial mathematics, you’ll be able to create visually strategies of your own (and name them with silly names like “double split condor iron spread” hehehe)!

I’m even thinking about providing a tool to finally allow a comparison of two strategies.

There is still a lot of work to be done, the first version for testing purposes will be online within this month though, hopefully .

First of all I need short positions. In many cases (and those of you who do have some trading experience with options will agree) going long with options is to your disadvantage. You have certainly heard that over 80% of all options expire worthless without ever being executed. The reason for this is, that once you understand the probabilities, you can write (go short) with options that look profitable for the buyer, but never get into-the-money. People who write options usually understand the statistics and probabilities pretty well. It takes a pretty dumb and careless trader to write options (maybe even naked ones?) blindly without checking carefully one’s chances.

Anyway, I don’t want to convert this into a rant about dumb trading strategies. I might continue this in another post sometime.

What I was trying to say is this: going short in options is statistically more profitable than going long, because people who go short usually understand options better.

Therefore I decided to add this new feature to the calculator. Instead of going in and out of long positions, I also decided that it would be handy if you could simulate short (and mixed) positions as well.

Secondly I want to add trades of the underlying (short and long) to the simulation. For many option strategies out there you need the underlying in your positions.

So with these new features you will be able to simulate a whole new range of other option strategies. (E.g locking a covered calls in C/R)

Several improvements are on the way:

• Some bugs within the calculation module have been fixed
• Graphical Module has been improved
• User interface and functionality have been improved (e.g. now you do not have to hit a “calculation button”, calculation is done dynamically as you type new values into the fields)
• Probabilities module has been added

Now this probabilities module is something I’m pretty proud of. Its core is the simple fact that deltas calculated within the black-scholes module allow you to roughly approximate the probability that certain levels of the underlying’s market-price will be reached.

For example: If the actual market value (AMV) of a stock is 15 and you get a delta of 0.25 (for a call’s strike of 19) then the probability of that stock finishing above 19 is 25%. Deltas are a pretty good approximation-basis for these probabilities. Sure, you cannot rely 100% on these probabilities. But since the Brownian motion of stocks is still a pretty solid theory, deltas may at least help you in understanding statistical chances of your position. Now I have implemented deltas as probability-indicators within the calculator in two features.

First. If you click on Analysis->Probability of Profit you will get a message box telling you how likely it is whether you finish with a profit in your pocket or not.

Second, you can click and drag an area on the graph which will represent the limits of the underlying. These limits will tell you how likely it is that the underlying will stay within those limits at the expiration date of your options.

These new features give you the chance to even better analyze and understand straddle positions. I have already some additional improvements in mind so stay tuned! Btw, I receive a pretty limited feedback, it’d be nice if those who download these software told me their opinion. Thanks!

As I am continuously improving this software, updates may be coming almost on a daily/weekly basis. Therefore I suggest that you click often on the news button to know when the next improved version is available.

Imagine a stock XYZ trading currently at $12 a share. You know the company and the market niche very well as you conduct regularly research and analysis of its financial reports. So, at some point, you decide for yourself that it is unlikely that within the next year the company will be subject to any turbulence. For example you may find that:

• The debt levels are low,
• there is more than enough free cashflow,
• a steady/strong return on equity,
• it’s almost the market leader in a growing market (a market that is unlikely to change drastically)
• and the management has got a lot of experience and always did the right things in the past.
• The market value of the company as a whole compared to the book value is pretty low.

You decide that the numbers can only get better within the next year. Sure, there will be ups and downs on the stock markets, but at the end the financial success of your company shall prevail. At this point you could buy some stocks of this company. Let’s say you have got $1200 available. You could invest them and purchase 100 shares at 12$ a share. If the stock trades at $14 a share in 200 days (shortly after the next annual report) you would have made $200 (or simply 16.67% on the invested capital of $1200).

Now since you did your homework well, you decide that you may as well risk the whole amount of $1200 and aim at higher returns. That’s when you decide to rather purchase call options with $12-strike that expire in 200 days. The fair price of those options according to the Black-Scholes Model for European-type-options would have been $1.15 for each option (In this example, to make thing simple, you need 1 option to acquire 1 share). The market offers them for $1.20 though. Oh well, you buy 1000 of them. You know that, if the stock reaches 14$ in 200 days your options will be worth $2 a piece. That is $800 (or 66,67%) profit.

Simulation:

Now, as you may see in the second picture your break even still lies at $13.20. That means that unless the stock reaches that level in 200 days, you’ll rather lose some money. Okay, back to the example. You have bought those options. Now you sit and observe. 60 days after this trade an important expert within your market niche makes an official statement where he concludes that this market niche will grow above the expected level within the next year. Suddenly people on the stock markets get crazy and start buying shares of the companies that work within that niche – XYZ among them. You stay cool though, you know the dangers of speculation.

As the price of your stock reaches $19 a share you decide to take this opportunity and lock your position in profit for good. You play safe. Although the volatility of your stock jumped from 30% to 45%, the puts (expiration in 140 days, strike $14) are available on the market at a mere $0.42 a piece (pretty high, since Black-Scholes Model gives us a fair value of $0.28).

You buy 1000 of these puts. Congratulations you have created a lock with a decent profit. No matter what happens now your profit is guaranteed.

In the worst-case scenario the stock lands between $12 and $14 in 140 days, leaving you with a minimal profit of $380 (23.46%). Now it doesn’t matter if your stock keeps growing or crashes for some unexpected reason. For example, if it should suffer a minor crash and stay at $15 (losing about 21%), you’ll still make a monstrous profit: 85%.

Besides, the statistical chance (according to the deltas from black-scholes model) that you will actually “suffer” the minimal profit are just about 27%. That means that in 73% of all cases you will make more than $380! Look for yourself:

If a fire breaks out and burns your company to the ground leaving everybody else with worthless shares, you would still make $12380 (far above 700% )

In general this is a nice scenario. It is only possible though if:

1. You are more than sure that your company will succeed in the near future
2. A sudden movement upwards happens within the maturity period
3. You acquire middle- to long-term options

More on this soon! Please comment!

Ratio means the “amount of options needed to buy one unit of underlying“. Especially in European Options you may find different ratios (the most common are 10 and 100 though). So if you decide to buy options for 100 shares of a stock XYZ and you know that you need ten options to be able to buy one share, you’ll have to enter 10 in this box.

The online calculator itself is not really gone. I developed a whole new version of the Straddle/Strangle Calculator (or Simulator) . Now it works directly on your home PC, without the need to go online. Any of the latest Windows versions should do. The new calculator is more flexible, can do more and more fun to experiment with. Break-even points, maximal loss, expected profit, Black-Scholes option pricing and other features are included within this software. You may find the complete description here.

The purpose of this site will still be to deliver software that makes it easier to develop strategies in financial markets – strategies that rely on options (and other warrants) as risk-hedging and profit-maximizing tools. In my posts I will show you how to use these tools to analyze your option strategies.

I already want to announce the development of the Risk Profile Simulator which will give you dynamically insights about your risk/profit at any point of time. You’ll be able to introduce your trades and watch how your risk/profit changes dynamically under different circumstances. In a way it will be the big brother of the straddle/strangle calculator. Keep tuned!

At this point it is my responsibility to warn you about the risks of options trading. Options are a powerful financial instrument that, as fire, may serve you or burn you… financially. I recommend to conduct a deep research before you go anywhere near a trade with options. To protect me against any legal responsibility I strongly recommend NOT TO USE my software for any decisions in your real trades. This software serves educational/academic purposes only!

Now, I will also use this blog to share my experiences and know-how in option trading strategies. I may also share about how to analyze companies. I expect you to be at least somewhat fit in finances. Still, I like to keep things simple, so anyone can understand what we are talking about.

Keep tuned for the next posts!