This Help File is divided into two sections.
Instructions
Make Changes
A Working Example
(Stock, Index or Help)
Step 2 (Symbol)
Step 3 (Options Style)
Step 4 (Price)
Step 5 (Strike)
Step 6 (Expiration)
Step 7 (Volatility)
Step 8 (Interest Rate)
Step 9 (Dividend & Dates)
Step 10 (Calculation)
Step 11 (Implied Volatility)
Definitions
American-Style Option
Call
Days to Expiration
European-Style Option
Expiration
The Greeks
Delta
Gamma
Theta
Vega
RHO
Alpha
Implied Volatility
Interest Rate
Put
Strike Price
Underlying Price
Volatility
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This Options Calculator has been designed so that anyone, from beginner to advanced options
trader, can immediately start using it. The following structured example is provided to get you
started. The DEFINITIONS section is reached by scrolling down.
INSTRUCTIONS
There is no need to struggle searching for all the appropriate option input parameters with
IVolatility.com's Options Calculator. That's because IVolatility.com has relieved you of this
burden by streamlining the input process. What we have done is design the calculator so that all
the input values needed to price an option are determined beforehand from our exhaustive database
and then pop up on your screen whenever you type in the individual stock or option of your choice
and click the "GO" button. Once the "GO" button is clicked, the Options Calculator simply taps
IVolatility.com's extensive options database and then plugs in the appropriate stock price, interest
rate, dividends (if any) and their payment schedule for that particular stock or option. If a stock
is called up, it then automatically brings up the option month that is closest to expiration and the
(p/c) series, which is nearest to being at-the-money.
 MAKE CHANGES
To replace a value or make a change, you can either (1) highlight the value and then type in the new
value, (2) click on the drop-down box and make a choice or (3) click on the increment arrows and
toggle to the appropriate value.
By making changes to the options you can create your own "what-if" analysis. Depending upon what
you think can happen, you can change the option's style, the stock's price, the option's strike,
the expiration date, the days to expiration, the Volatility, the interest rate and finally you can
alter the dividend amounts and the payment schedule of dividends. After you have made the adjustments
you can determine the options' new values by clicking on the top "CALCULATE" button. You only
use the bottom "calculate" button whenever you want to see what implied Volatility rate corresponds
to a new option price that is entered next to it. To RESET all values back to their default values
and remove all calculated values just click the "GO" button again.
A WORKING EXAMPLE
STEP 1
(Stock, Index or Help):
Make a choice between whether you want to price a stock or an index. If it is a stock click on the
appropriate "STOCK" button. If it is an index that you want to price then click on
the "INDEX" button. However, if instead you need help then click on the "HELP" button.
CHOOSE-STOCK
STEP 2
(Stock Symbol, Option Symbol or Symbol Lookup):
This second step serves two purposes. On the one hand, it can be used as a powerful name and symbol
look up function and on the other, it can let you price an option. For example, if you wanted to know
what was the name of the stock whose symbol was MSFT you would type in MSFT, click on the "SYMBOL
LOOKUP" button and find out that it was Microsoft. However, if you wanted to find out what was the
symbol for GoodyearTire Rubber Co., you would type in the name and also click on the "SYMBOL LOOKUP"
button. It would then show you that the symbol was GT. Once you have a symbol you can then use it to
see the stock's price and the closest to expiring at-the-money options. For example, type in MSFT and
click the "STOCK SYMBOL" button. The stock price and nearby at-the-money option for Microsoft
will appear. Finally if you wanted to call up Microsoft's options you could simply type in MSQ and then
click on the "OPTION SYMBOL" button and Microsoft's nearby at-the-money option would show up.
Consequently, if you knew the whole option string for a particular option you could enter
that in (MSQDA) and the Options Calculator would bring you right up to that particular option.
Remember if you don't know the stock name, stock symbol or the option you can now look it up quickly
and easily by using its name, its symbol, its option root or its full option chain. Once you enter
the Stock Symbol, Option Symbol or option root just click on the "GO" button to get the option price.
Example: Stock-Microsoft
Example: Symbol-MSFT
Example: Option-MSQ
CHOOSE-Stock Symbol and then type in MSFT and then click the "GO" button
STEP 3
(American vs. European Style):
The next option pricing choice you need to make is whether to price the option as an American
Style or European Style type option. Here is the difference between the two.
AMERICAN STYLE: All stock options listed for trading on the options exchanges in the United States
are American style options. This means that the option can be exercised at any time prior
to expiration. This early exercise capability is factored into the pricing of the options. There are
some index options that are American style and you should check the product specifications supplied by
the exchange for this information. This Options Calculator uses a binomial model with 100 steps
to create a theoretical price for American style options.
EUROPEAN STYLE: Most (but not all) index options listed for trading on the options exchanges in the
United States are European style options. This means that the option can be exercised only on the
last day of trading prior to expiration. This inability to exercise until expiration is factored into
the pricing of the options. This option calculator uses a Black-Scholes model for European style
options.
CHOOSE-AMERICAN
STEP 4
(Price):
The price shown is last night's closing price. If you want to change it to today's current price
or any other price just enter the price that you want. Notice that the price must be entered in
decimal format (i.e. 105.25)
CHOOSE-105.25
STEP 5
(Strike):
The strike price of the option shown can be changed. The default is the at-the-money strike. The
up and down arrows to the right of the STRIKE box can be used to move the strike price in specified
increments. For strikes below $50 the increment is 2.5 points. For strikes above $50 and below $200 the
interval is 5 points. For strikes above $200 the interval is 10 points. You can also manually replace
the STRIKE price with any strike that you want.
CHOOSE-110.00
STEP 6 (Expiration):
Choose the expiration month (the system automatically calculates the number of days to
expiration) or change the number of days to expiration to any number that you choose.
The default value is the current expiration month and can be changed by toggling the up
or down arrows to the right of the box.
CHOOSE-DEC00
STEP 7 (Volatility):
The default value is derived automatically from the database. Nevertheless, the default Volatility
is derived from last night's implied Volatility for that particular put and call option series. You
can change the Volatility by entering any other value that you would like. See the Definitions section
for a more complete discussion of Volatility and how this number is determined.
CHOOSE-58.25
STEP 8 (Interest Rate):
The default value is derived automatically from the database. Nevertheless, the default risk-free
interest rate is derived from last night's treasury market and is the rate that is equivalent to the
option's expiration term. You can change the interest rate by entering any other value that you would
like.
CHOOSE-6.25
STEP 9 (Dividend Amounts & Dates):
Depending upon whether a stock pays a dividend or not this section may or may not contain data.
If there is data within the fields you can alter it by simply adding in the dividend amounts and
when they will be paid into the fields. The Options Calculator will then price the options
accordingly. The TAB key on your keyboard will move the cursor from one box to another. The dividend
dates that are used in the options pricing model are the ex-dividend dates, the dates when the stock
price is adjusted by the amount of the paid dividend. Dividend dates are input month/day/year.
For example if the ex-dividend date is September 30, 2000, then input 09/30/00. Do not use a dollar
sign for the dividend amount. If pricing an index option this section will not appear, however another
box below interest rate will appear. This box is for dividend yield and can be altered just like the
interest rate box.
A Typical Example - For each dividend date type in this form MONTH/DAY/YEAR
A Typical Example - For each dividend amount type in this form 3.
CHOOSE-Leave blank
 STEP 10
(Calculation):
You are now ready to calculate the call and put prices for this option. We can verify that you
understand how to make changes in all the inputs by making one last change. Recall that the system
automatically updates the difference between today's date and the expiration of the option. To over
ride this automatic feature let us type 35 in the days to expiration field. In this way we will all
be pricing this option with the same parameters. Once you have done this, click
the top "CALCULATE" button and the option price will be calculated from all the values
used above. The price that you should get if you have made the above adjustments is 5.8473 for
the calls and 10.0017 for the puts.
The "Greeks" are calculated in conjunction with the options prices. Greeks (Delta, Gamma, Theta, Vega
and Rho) are mathematical values that measure the sensitivity of an option's price to stock, time,
Volatility and interest rate changes - see DEFINITIONS.
This calculator allows you to view a one-day calculation of Theta. However, you can calculate any
amount of theta decay by altering the days to expiration. For example if you wanted to calculate the
time decay cost associated with a 10 days passage of time you would simple subtract 10 days from the
option's time until expiration and then compare that option's price to the original
option price.
STEP 11
(IMPLIED VOLATILITY)
By holding constant all the variables in the options pricing model except Volatility, the user can
enter alternative prices for either a call option or a put option to see what Volatility must be used to
create that options price. This Volatility is called implied Volatility - see DEFINITIONS.
The implied Volatility is calculated as follows:
- Enter an option's price. This price can be a theoretical price or one directly observed from the options market where the option is traded.
- Click on the bottom "CALCULATE" button and the implied Volatility will be displayed.
DEFINITIONS
AMERICAN-STYLE OPTION
- A put or call that can be exercised at any time prior to expiration. Most listed stock options,
including those on overseas exchanges, are American style.
CALL - An option in
which the holder has the right but not the obligation to buy the underlying security at a specific
strike price for a limited time.
DAYS TO EXPIRATION -
The number of days remaining in an option's life before it expires and becomes worthless or is exercised
and equals its intrinsic value.
EUROPEAN-STYLE
OPTION - A put or call that can be exercised only on its expiration date. A number
of European-style options have been introduced in recent years, particularly on stock index and currency
options. One of the most notable European-style options is the S&P 500 Index (SPX).
EXPIRATION -
The date on which the option expires or becomes void. The expiration date for listed stock options is
the Saturday after the third Friday of the expiration month. An options holder who intends to exercise
an option by expiration must give exercise instructions to his or her brokerage firm before the firm's
cut-off time for accepting exercise instructions on the last trading day before expiration.
THE GREEKS - A Greek
letter designates an option's sensitivity to certain kinds of movements. Examples include Delta, Gamma,
Theta, Vega, Rho and Alpha - all identified by the English language spelling of their respective Greek
letters.
DELTA - The amount an
option's price will change for a corresponding one-point change in the price of the underlying
security.
GAMMA - The change in
delta divided by the dollar change in the price of the underlying security's price. It is
the measurement of the rate of change in an options price with respect to the underlying price.
THETA - A measure of
how much an option's price decays over time with the price of the underlying security and implied
Volatility remaining unchanged.
VEGA - The measure of
change in an option's price in response to a percentage point change in Volatility.
RHO - A measure of
change in an options price in response to a percentage change in the risk-free interest rate.
Alpha - Alpha is
a ratio of Gamma over Theta. Thus Alpha indicates the relative value of owning gamma relative to the
current level of theta. Alpha has been described as a "bang for your buck" measure. It is a measure that
allows for comparison of several different options on the basis of how much they cost daily to own (daily Theta)
versus the potential gamma derived return (profits from movement) from owning them. The greater absolute value
of Alpha the more potential for profits exists against the loss from Theta for long positions. The converse
is true for short positions.
IMPLIED VOLATILITY -
The Volatility value that option buyers and sellers appear to accept from the market price of the option. It is obtained by plugging the current option price into an option pricing model and finding this unknown Volatility on an iterative
basis.
INTEREST RATE -
The cost of using money as determined at a rate per period of time, usually one year (i.e., annual
rate of interest). Options buyers and sellers usually track the risk-free interest rate of U.S.
Treasuries.
PUT - An option in
which the holder has the right but not the obligation to sell the underlying security at a specific
strike price for a limited time.
STRIKE PRICE -
The price at which the security or index underlying an option can be purchased (for a call option)
or sold (for a put option) throughout the life of an option. Also known as
the "exercise price."
UNDERLYING PRICE -
Stock/Index -The present price of the stock or value of the index that is the subject of
an option.
VOLATILITY -
A measure of the amount by which an underlying security may tend to fluctuate in a given period of time.
Usually measured by the variance or annualized standard deviation of the daily price changes in a
security. It is said to be high if the price changes dramatically in a short period of time. Volatility
is one of the most important elements in evaluating an option because it is usually the only valuation
variable not known with certainty in advance.
The Option Calculator is best viewed at a minimum screen resolution of 800 by 600 pixels. If you cannot
view the entire calculator on the screen, then the resolution on your screen is set at 640
by 480 pixels.
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