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Evaluating a New Position

If you didn't noticed the color coding used on the Quote Entry View, you sure won't miss it on the Evaluation View. Throughout the program, all Call related values are displayed in shades of green, while all Put related values are illustrated in shades of dark red.

        When a New Position is being considered, the Evaluation View is divided into two distinct areas. The upper portion of the view displays the basic components of the position being evaluated. Both the Stock and Option tickers are displayed along with the number of Shares and Contracts being considered, along with the quotes you just entered on the Quote Entry View. 

The Evaluation Table
        Occupying the better part of the lower portion of the Evaluation View, is a table spanning the probable range the Stock price will be within, at the time any open options expire. The limits of this range are defined by plus or minus the Standard Deviation (STD) of the Stock price as defined by the implied volatility, calculated using the Black/Scholes formula. The table is divided into nine equally sized horizontal rows, and seven vertical columns of varying width.

• Table Rows
  The center row of the table (in bright blue letters), describes the situation at expiration if there has been no change in the Stock price - that is, a 'Neutral' position. Statistically speaking, this is the most probable outcome. The four rows above this 'Neutral' row represent various increases in the Stock's price at expiration, the four rows below - various decreases at expiration.

• Table Columns

  • Condition - the Condition column is located closest to the left edge of the Evaluation View. Some of the incremental changes in the probable Stock price are specific, when that is the case, the reason will listed in the Condition column:

    • 'Neutral' - When the Stock price at expiration is the same as it is now, while the position is being considered.

    • 'plus 1-STD' and 'minus 1-STD' - as mentioned above these two values define the limits on the probable Stock range, and are labeled in this column.

    • 'Break Even' - If the Stock is at this price at option expiration, neither a gain nor a loss will be experienced, since initial inception.

    • 'Call Strike' - When the Stock price is equal to the Strike price of any covered call in the position being considered.  

    • 'Put Strike' - When the Stock price is equal to the Strike price of any protective puts. 

    • 'Support and Resistance' - These technical values can be entered at anytime by selecting 'Tools/Enter support & Resistance Values' from the Quote Entry or Evaluation View menus. Once assigned they will appear in the Condition column when the Support & Resistance values fall within the probable Stock price range.

In the Evaluation View table, you will notice that the plus STD is always larger than the minus STD. This is because the probable distribution of the Stock price is defined as a lognormal distribution. That is, there is a limit of zero on the downside, while the upside is unlimited. For more on the mathematics of option pricing, see "Options as a Strategic Investment" by Lawrence McMillan.

• Change - the Change column, directly to the right of the Condition column, displays the percentile change in the Stock price between the Neutral position, and the Stock Bid price as it appears on that particular row.

• 'Stk Bid' - the next column to the right displays the Stock Bid price at the value described in the 'Condition' column.  

• '%' - this column displays the simple rate of return that will be had at expiration when the Stock is at the price listed under the 'Stk Bid' column. This percentage value includes all cost including any Stock and/or Option commissions, plus any dividends recorded prior to expiration. 

• '%APR' - moving again to the right, the values beneath this column heading are the annualized values of the simple values listed under the '%' column. Both the '%' and '%APR' columns calculate their respective values from when the Stock was first purchased, and so reflect the return since inception of the position.

• 'Stat Prob' - Depending on the type strategy being considered, from one to three columns will appear to the immediate right of the '%APR' column. The values posted, which are all displayed in percentile format, deal with different aspects of Statistical Probability as applied to the position being considered. The column farthest to the left is dedicated to any probability values related to covered calls, the column to the extreme right, to protective puts. While the center column is dedicated to statistical probability relating to any support or resistance values that you have entered. Always keep in mind that the Statistical Probability calculations are based on the assumption that the movement of the Stock is random. There was a time that the movement of a Stock's price was said to be a "random walk", but this theory is no longer widely held. So don't take the Statistical Probability values as gospel - they should be used as a guide, just another tool in making buy/sell decisions.

• 'Action at Expiration' - The far right and last column in the table describes what will happen at option expiration when the Stock is at the various values listed in the 'Stk Bid' column. In the example illustrated above, the 300 shares will be called away if the Stock price is at or above the Call strike of 40.

        Just to the right of the 'Action at Expiration' heading are two command buttons. The default setting for the upper most button is 'Call Away Stock', which describes the action at closing if the Stock price is higher than the Call strike at expiration. When this button is clicked, the label and the action at expiration will change to - 'Buy Back Calls', the alternative to letting the Stock be called away when the Stock price is higher than the Call strike price. The lower of the two buttons displays the label 'Sell Puts' as a default. All the calculations are based on any in the money Puts being sold just prior to expiration. Clicking this command button will change the label and the closing strategy to 'Exercise Puts' - all in the money Puts will be used to buy the underlying Stock at the Put strike price. Clicking either of these buttons will recalculated all the values displayed in the Evaluation table to reflect the change in the closing strategy and subsequent changes in the closing cost. 

        Returning to the upper right hand portion of the Evaluation View, as shown below, you will see five of a maximum six command buttons displayed. Each of these buttons represents one of the combination of expiration dates and strike prices that were selected from the Initial View and subsequently quoted on the Quote Entry View. The label of each button has an abbreviated description corresponding to the expiration date and strike price of the options being considered in that particular position. Clicking any of these buttons will display the results of the calculations related to that position. The label of the button representing the position currently being displayed will appear in bold font.

The Evaluation View Graph
        Also displayed near the upper right hand corner of the Evaluation View are two command buttons. The first is labeled 'Graph' - when clicked, a separate form will open to display a graphic representation of the option strategy being considered on the Evaluation View:

        The values graphed on the Evaluation Graph are taken directly from the Evaluation View table, only the manner of presentation is different. The values displayed at the ends of the double headed arrows, just beneath the graph, are the statistical probability of the Stock being above or below the value the arrow is centered on. For instance, the statistical probability of the Stock price being at or above the Call strike of 40 is 52.4%, and 47.6% of being beneath the 40 strike at expiration. While the chances of being at or above the Break Even point of 39.59 is 61.4%, with a 38.6% probability that the Stock price will be beneath the Break Even price at option expiration.