March 22nd, 2009Model A Stock Option Collar With Op-Eval Pro Software
The new stock options book by James Bittman, Trading Options as a Professional, also includes a free copy of the Op-Eval Pro software. The free software is not as full featured as the many fee based options software packages, but it will do the trick. The software has 6 main functions for modeling stock option price behavior over time – single option analysis, spread option analysis, Graph view, Table view, portfolio view and distribution view. The images below are snapshots from the portfolio view.
First, if you are not familiar with stock option collars, go review the following:
- Bring Your Collar Into These Volatile Markets
- Married Puts, Collars, And Hybrid Hedging
- Portfolio Protection And Adjustments With Stock Option Collars
The first image below is the initial setup of the collar in op-eval pro software, with the following assumptions:
- Initial Greeks: Risk free rate is 1% and volatility is 45%
- Purchase 100 shares of stock at $100 per share: $10,000 total
- Purchase a 95 strike PUT 40 days prior to expiration: Initial purchase price is $359
- Sell a 105 strike CALL 40 days prior to expiration: Initial premium collection is $395
The second screen below was created in the software by advancing time forward 20 days. Notice a few things that this free software will show you:
- The new prices of the PUT and the CALL have been adjusted on the left hand of the screen, based on the new time to expiration: only 20 days. The new prices shown are based on an unchanged $100 stock price, but with only 20 days until expiration.
- The graph on the right side added an extra line. The original gray line models the profit/loss of the combination of all three positions (stock, put, call) on the initial purchase date, with 40 days left to expiration.
- The second orange line models the combination after 20 days, with only 20 days left to expiration.
- As you can see from the orange line, a stock option collar limits both your maximum gain and maximum loss. At 20 days until expiration, the combined position has a maximum loss of about $450 near an $80 stock price. The maximum gain is also about $450 at about the $120 stock price. Note: At expiration, the maximum gain occurs at or above the 105 CALL strike price, and the maximum loss occurs at or below the 95 PUT strike price. The software allows you to move forward or backward and time from the initial 40 days all the way down to zero days (expiration day), and view the potential profit/loss at each day.
Software Limitations – The software is great for modeling simple positions or combinations through time. But the profit/loss graphs would be much better if they could be broken down into the various components – stock itself, and each option. The real power of options comes from the ability to monitor and adjust your options as time goes by. As an example, consider the possibility that the underlying stock in the example above goes from $100 to $80 in only 5 days. The stock loses values, but the PUT option and the Covered Call both GAIN MONEY. At this point, the experienced option trader would analyze the situation and possibly make an adjustment. One possible adjustment would be to take profits on both the PUT option and the COVERED CALL. If a quick share price recovery is expected, then you could feasibly wait for the recovery, and then RE-APPLY the COLLAR. Or, if a recovery in share price is not expected, a new collar could be placed near the new $80 strike price (after taking profits on the first collar components). These types of scenarios would be very difficult, if not impossible, to model in the Op-Eval Pro software.
Despite the limitations, the Op-Eval Pro software is decent and functional, and for the price (included with the book), you can’t beat it. It is probably adequate for beginner and intermediate option traders, especially when combined with James Bittman’s book Trading Options as a Professional. The book is great for option traders at all levels, from beginner to advanced. It is one of the best organized books I have seen on stock options. It goes into great and well written detail on the nuts to the bolts of the option market – the fundamentals, the greeks, synthetic relationships, arbitrage, volatility, a few spread systems and strategies, greek neutral trading (Brilliant write-up on this topic), and position risk and money management.
Click below to purchase James Bittman’s new book on options:
For a detailed view on how to better monitor and adjust option positions, then buy the book below with it: