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 Options Strategy Evaluation Tool

Feature Highlights

Options types: Equity, currency, index and futures.

Exercise styles: American and European.

Pricing models: Black-Scholes (European options), and the Cox, Ross, and Rubinstein binomial model (European and American options).

Payoff diagrams used to show strategy profitability:  Profit at expiration plus profit at "time now" shown for any range of underlying asset prices. The range of asset prices can be shown as absolute $ values, or as percentage change from underlying asset price at deal date.

Time decay: Time to expiration (ie the "time now" line) can be varied a day at a time, or shown for a specific date to show effects of time decay on your strategy. The Options Strategy Evaluation Tool will automatically cycle through time to expiration if requested and the pay-off diagrams will show results in "animated" form.

Breakeven analysis showing all breakeven points for five discrete times slices prior to expiry and the probabilities of falling within each of the breakeven ranges.  The impact of changes in volatility after the deal has been entered into, on breakeven points, probabilities and profitability, can be dynamically modelled simply by clicking a spin button.

"What if" scenario analysis: Two strategies, for the same or different underlying assets, can be compared on the same pay-off diagram. This enables, for example,  the impact on a strategy of changing key variables (eg strike prices, volatility) to be easily compared with the unchanged version.  The effects of time decay can be viewed simultaneously for both strategies. 

Tables and graphs: Profitability for individual trades and net position can be viewed in tabular form as well as graphically.

Dividends on underlying assets can be either a continuous annual yield or up to four discrete payments.  If discrete, an amount and ex-dividend date are specified for each dividend payment. Dividends are taken into account in option price calculations and dividends received (or paid) by holding (or shorting) the underlying asset are included in overall deal profitability calculations.

Hedge parameters ("Greeks") delta, gamma, vega, theta, rho, calculated  for individual trades and net position. "Greeks" can be viewed graphically and in tabular form for any range of underlying asset prices both for individual trades and for net positions. The position "Greeks" can also, optionally, be superimposed on the pay-off diagram to enable hedging information to be viewed in the context of profit and loss information. As for pay-off diagrams, the effects of time decay on the "Greeks" can be viewed graphically and in tabular form.

Automatic position hedging:  Strategies can be automatically adjusted to achieve target neutrality outcomes with respect to delta, delta and gamma,  vega,  delta and vega,  or delta, gamma, and vega.  A pop-up control panel lets you dynamically examine various alternatives before either reverting to the original strategy or retaining the newly hedged position.

Backtesting: Actual market data (underlying asset price histories and, optionally, option price histories) can be applied to any strategy to see how profitable they would have been if closed out at any time between deal date and expiry. 

Sensitivity analysis:  Key option parameters, such as volatility, stock price, expiration date and strike prices, can be varied using slider bars, and the impact of these changed assumptions is instantly reflected on all graphs and tables. The changed parameters from the sensitivity analysis can then either be retained or discarded.

Implied volatility calculator:  Implied volatility can be specified, or calculated using the in-situ implied volatility calculator, for each individual option trade thereby taking account of volatility smiles, bid/ask spreads etc. The calculator correctly takes account of dividends.

Financial analysis: Maximum profit, maximum loss, and "static" returns are calculated by strategy. For each category (eg maximum profit), the type of profit or loss (capped, unlimited), the dollar value and, where there is an initial net debit, the percentage return for the period and the annualized ROI  are shown.  In addition these numbers are also calculated for any user-selected target price at expiry.

Risk assessment - probability analysis:  Tabular and graphical  analysis of "end of period" and "at any time during the period" probabilities. Probabilities are superimposed on the payoff diagram for each strategy to enable the probability of hitting key targets, such as breakeven and maximum profit/loss to be read directly from the graph.

Percent-to-target analysis: Shows for each option trade the change in underlying asset price required to produce a user-specified change (positive or negative) in option price. Percent-to-double is one example of this analysis.

Deal funding costs/revenues: The cost of carrying the underlying asset, interest earned on option premiums and dividends received etc. can optionally be included in overall deal profitability figures.  This enables more meaningful comparisons to be made of strategies, like conversions and other arbitrage plays, which have identical payoffs but quite different funding requirements.

Optimal early exercise thresholds:  The underlying asset prices and dates at which early exercise could be optimal for American options are identified on an early exercise report. The probability of hitting each early exercise threshold is also shown.

On-line underlying asset prices: The prices for most underlying assets stock exchanges can be automatically retrieved from Yahoo finance or in real-time from any of the streaming quotes providers supported by the Finance Add-in for Excel..

On-line option chains: Complete option chains can be retrieved from various free on-line sources, and from a number of real-time data feed providers and trades can be selected from available options by a simple point and click. You can step through an entire option chain evaluating a given strategy for all strikes for a given expiry date, all expiry dates for a set of strikes, or both.

Sentiment indicators: Open interest and current volume put/call ratios are calculated for option chains.  Open interest configuration charts are produced showing open interest for puts and calls by strike. "Max pain" is displayed by expiry date.

Standard strategies: Approximately 20 "standard" strategies (covered call writing, straddle, bull spread...) provided for illustrative purposes and to provide starting points for building your own strategies.

Build your own strategies: You are not limited to using the standard strategies and any strategy can be constructed, and saved, out of the basic building blocks of buying/selling puts and calls, and buying/selling the underlying asset.

Save strategies: An unlimited (for practical purposes) number of individual strategies each consisting of up to ten option trades and two trades in the underlying asset can be saved for future use. Saved strategies can be retrieved by name amended and re-saved.

Re-use of underlying asset details: Same underlying asset details (dividends, default volatility) can be used for multiple strategies thereby saving on data entry.

Simple to use:  All navigation and selection done by clicking buttons, selecting from combo boxes etc. 

Industrial strength: A serious tool used by professional traders and financial training organisations.

Free, to download and use.