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More about the strategy modelling tool

The Option Strategy Modelling Tool enables you to construct various strategies made up of combinations of trades in puts and calls plus trades in the underlying asset. Four types of options are handled: equity, currency, index and futures.

The tool will price all options using either the binomial model or the Black Scholes model.

Options may be either American or European-style exercise.

Dividends paid on the underlying asset can be specified as:

  • discrete (consisting of an amount and an ex-dividend date, as for stocks); or
  • continuous (yield per annum, as for indices)

You then use the tool to show graphically - using a pay-off diagram - or in tabular form, the impact on your profit and loss profile of changes in stock price and time.

Pay-off diagram

Pay off diagram 1

The above picture is an example of a pay-off diagram from the tool. By letting you decrease the time from trade date to expiry, it shows how time decay affects your strategy. At expiry, the time line (the bottom line in the example above) merges with the pay-off line.

You can vary the time to expiry by selecting a specific date, or by changing the time remaining a day at a time. You can also get the tool to automatically cycle though the days to expiry thus producing an animated picture of the effects of time decay.

You can also compare two strategies, either for the same or different underlying assets, by displaying them on the same pay-off diagram, as in the following example:

Pay off diagram 2

The impact of using different option pricing models (Black-Scholes or binomial) and different exercise styles (American or European) can also be observed by displaying two versions of the same strategy, but with different pricing models and exercise styles, on the same pay-off diagram.

The 'Greeks'

For each strategy (which may consist of multiple option and share trades) the tool will calculate the Greeks (delta, gamma, vega, theta and rho) for each individual leg, and for the strategy as a whole. The Greeks can be viewed in tabular form or graphically for any range of underlying stock prices. The following diagram gives an example of a strategy's delta plotted against a range of stock prices.


You can also view the impact of time decay on the Greeks by changing the time to expiry a day at a time, by specifying a particular date, or by getting the tool to automatically cycle through the time to expiry.


The tool contains most of the standard strategies such as:

  • covered calls and buy/writes
  • straddles
  • strangles
  • ratio spreads
  • butterfly spreads
  • bull and bear spreads
  • calendar spreads

These act as templates for evaluating common strategies. However the tool is not limited to these standard scenarios. You can construct any strategy out of the basic building blocks of buying and selling puts and calls, and buying or selling the underlying stock.

> more strategy information

Implied volatility calculator

The tool lets you specify one volatility covering all options for a particular underlying asset. This is often sufficient for strategy evaluation purposes.

However, in the marketplace volatility can be skewed, depending on how close to the money the option is. For example, an at-the-money option may not have the same volatility as an out-of-the-money option. This is called a 'volatility smile', because of the shape of the graph formed when volatility levels are charted against an option’s closeness to the money.

To handle volatility smiles and the different volatilities implied by bid/ask spreads with a greater degree of precision you can specify an implied volatility for each options trade in the strategy.

To help you estimate the volatility implied by the market prices for each option type and strike price the options Strategy Modelling Tool includes an implied volatility calculator. The calculator takes account of the option pricing model used and any dividends paid during the life of the option.

> more about the volatility calculator

Optimal early exercise thresholds

For American options the tool will produce a report listing, for each option trade in a strategy, the underlying asset price and date(s) at which early exercise could be optimal.

This report can be used to highlight the risks for option writers and the opportunities for option holders of early exercise.


Please read the disclaimer before you download the program. Downloading the Strategy Modelling Tool indicates your acceptance of the terms of the disclaimer.

Download the tool to your PC (2MB exe file). Microsoft Excel ('97 or above) needs to be installed on your PC to run the model.

To download the file follow the procedure outlined below:

  • click the Download button above
  • choose the directory to save the StrategyModellingTool.exe file to
  • click Save
  • to open the file double-click on the StrategyModellingTool.exe icon
  • choose the folder to unzip the files to, and press the Unzip button
  • locate the folder you have unzipped the files to, and read the readme.txt file
  • double-click on the setup.exe icon to install the tool.

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