| This Help
File is divided into two sections.
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.
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.
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 Symbol or Index Symbol, Option Symbol or Help):
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 "Go!" button choosing "Stock Symbol or Index Symbol" from the dropdown menu. The nearby at-the-money option for Microsoft will appear.
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 using "Symbol lookup" in the top of the page. Once you enter the Stock Symbol, Option Symbol or option root just click on the "GO" button to get the option price.
However, if instead you need help then click on the "Calculators Help " link.
CHOOSE-Stock Symbol or Index Symbol and then type in MSFT and then click the "GO" button
STEP 2 (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.
STEP 3 (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)
STEP 4 (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.
STEP 5 (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-Jan 19, 2013
STEP 6 (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.
STEP 7 (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.
STEP 8 (Dividend Amount, Date & Frequency):
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 amount and when they will be paid into the fields. The Options Calculator will then price the options accordingly. Do not use a dollar sign for the dividend amount.
STEP 9 (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 10 (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.
- 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.
- 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).
- 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.
- The amount an option's price will change for a corresponding one-point change in the price of the underlying security.
- 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.
- A measure of how much an option's price decays over time with the price of the underlying security and implied Volatility remaining unchanged.
- The measure of change in an option's price in response to a percentage point change in Volatility.
- A measure of change in an options price in response to a percentage change in the risk-free interest rate.
- 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.
- 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.
- 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.