Step 1

Under the "Underlying assets, settings" tab, enter the following parameters:

  • stock code
  • volatility
  • any dividends due
  • interest rates

You can find information on volatility and dividends in Dividend and volatility parameters.

Dividends can be specified as:

  • discrete payments during the life of the option (i.e. dollar amounts at specific ex-dividend dates), or
  • continuous (i.e. an annualised rate).

For most short-term stock options it is better to specify discrete dividend payments if possible; continuous dividends are more useful for longer term stock options and are appropriate for options on stock indices and futures contracts.

Volatility - an annual volatility must be specified for each stock.

Interest Rate - you need to specify the risk free interest rate under the "Underlying assets, settings" tab.

Step 2

There are already several stock codes set up, including "SAMPL" which is the stock code used to illustrate sample scenarios. You can change these or add new codes for your own stocks. The easiest way to see how to fill in the yellow fields is to refer to one of the sample saved scenarios. Then press "cycle through time to expiration" to see how the time line changes as expiration approaches.

To set this up yourself, go to the "strategy evaluation" tab and set up a trade for a particular stock by filling in the sections highlighted in yellow. The stock code is entered at the top left hand corner of the page and must have been previously set up on the "Underlying assets, settings" tab.

A trade may consist of up to five option trades and three stock trades. For each options trade you must specify four variables:

  • an action (buy/sell)
  • the option type (call/put)
  • the number of options
  • the strike (exercise) price.

The tool will then automatically calculate the option price for each options trade using the specified calculation mode (Black-Scholes, or binomial).

To check the available option series for a given stock, click on the button labelled 'ASX Code List'. This takes you to a separate worksheet, where you enter the ASX code for the underlying stock. The worksheet will then display a list of option codes and contract details for that particular stock.

Note that the list of codes is not automatically updated. Click on the link to the ASX website to download a current list of option codes. The OptList.csv file should be downloaded to the same directory the Strategy Modelling Tool spreadsheet is in.

Step 3

In addition to the above four items you can also choose to enter the following optional items for any of the individual option trades:

  • implied volatility: in order to evaluate a strategy, the volatility you have specified under the "Underlying assets, settings" tab, covering all options for a stock, will often be sufficient. However, you can specify an implied volatility separately for each option trade to handle the 'volatility smile' associated with the underlying asset . An implied volatility calculator is supplied as part of the tool to help you estimate implied volatilities based on market prices.
  • trade expiration date: if your strategy involves options with different expiry months, you will need to specify those expiry dates which are different from the expiry date of the first leg specified. If you leave the expiration date field blank, the Strategy Modelling Tool will use the expiry date that was first entered.
  • override option price: If you want to override the option price calculated by the tool then enter a price here. You might want to do this, for example, when you have been quoted a specific price for an option, or you are looking at the forward profit profile for an option previously bought or written.

    You may also do this in order to calculate the implied volatility for a given option price. In this case, after entering an override price, click on the "Calculate implied volatility" button for the trade.

Step 4

To compare two strategies:

  • press "Copy strategy to comparison area"
  • press "Switch to comparison area" to view the strategies, and to change any part of the copied strategy.

The copied strategy and the original strategy will both be visible on the same pay-off diagram. You can use the comparison area to compare two strategies for the same or different underlying assets.

Step 5

For more detailed analysis press the "Show Greeks" button. This will let you view the Greeks (delta, gamma, theta, vega, rho) and profit figures for each trade in the strategy separately, and for the overall strategy.

As is the case with the pay-off diagrams, you can change the days to expiration, either a day at a time or automatically, to simulate time decay.

At any time you can change the pricing calculation method by selecting the appropriate tool from a combo box on the main evaluation page. The choices of pricing calculation method are:

A different calculation tool can be specified for the "Strategy comparison area" thereby enabling those of a theoretical leaning to see the effect of different pricing tools on deal profitability on the one pay-off diagram.

As well as viewing the profit results on pay-off diagrams, you can see them in tabular form by pressing the "Switch to table" button. In this view you can also see all the position Greeks for a range of stock prices.