INTRODUCTION
Options Czar is a program that was developed to help the user design strategies for Equity (Stock) Options or other underlying assets that are traded in the Chicago Board Options Exchange (CBOE). The ultimate purpose of these strategies is to a) improve the risk/return performance of the user's current stock portfolio or b) for profit seeking.
Options Czar reads free 20-minute delayed CBOE market data for one underlying asset and End-Of-Day for all underlying assets so the user can work with the available Options that are offered and demanded in the market at that time. Each file contains the prices, volumes and other information for all the options in the chain. With the text data, the user can perform manual Buy and Sell operations and see how they perform through different underlying asset price behaviors. Additionally, Options Czar provides advanced tools as the Market Trend, where the user can read the market's expectation on the stock price (based on premiums over calls or puts pricing), or the Strategy Maker, which uses the user's expectations on a specific asset price and the available investment cash to calculate the best Options strategies.
Hence, the main purpose of Options Czar is to make Options trading more accesible for the average stock trader or student. In other words, "training wheels" for the Options market. A tool that empowers the trader and helps visualize the outcome of options trades under different market conditions. The user can always present the data to his/her broker for an additional opinion.
What does Options Czar do?
As mentioned before, the CBOE is the market that provides the data for Options Czar. Each underlying asset has a number of options that are traded daily. For example, on a given day, MSFT (Microsoft, Inc.) trades 235 call and 235 put options (not including LEAPSTM). These options go by ticker names like ZQN DP-E, ZQN DP-A, etc.
The purpose of Options Czar is not to help you evaluate whether a particular option is expensive or not (although it is possible through the implied volatility feature). Nor it is a tool for an employee to track his/her particular employee stock options. On the contrary, the purpose of this program is to help you profit by selecting the tools that take most advantage of your predictions for a stock behavior, be it bullish (you think the asset price will increase), bearish (you think the price will decrease) or neutral (you think the price will remain more or less the same). The graphs that are included in the program should allow the user to view the pros and cons of each position in a clearer fashion. The advantage of options is that they allow the investor to profit from a wide variety of stock price behaviors, such as:
- Increase in stock price.
- Decrease in stock price.
- High stock price volatility (price can move to whichever end).
- Low stock price volatility (price stays about the same).
Options Czar will tell you what options you need to buy to achieve a specific Profit/Loss profile. For example, the screenshots below show a Profit/Loss chart for exercising the options, a Time chart (that indicates how the strategy fares in the days until expiration) and the Profit/Loss chart for exiting the options position. These charts belong to a NOK (Nokia) options strategy where the user would benefit from a high volatility (note the green lines
In this example, we have introduced three related variables:
- Stock (or underlying asset) Price
- Profits and Losses
- Time
Options can also help investors limit the losses on their stock portfolio by combining options and stock operations. This is achieved through other strategies that are incorporated into Options Czar. The screenshot below shows an example of another options strategy (a protective put), where the stock owner has bought Puts in order to compensate for the losses in case the stock price drops.
The screenshot above shows the Profit-Loss curve during the period in which the Put option is valid (hasn't expired) which is until the October expiration date. The screenshot below shows the change in breakeven point after the expiration date. Note that the green and red sections should continue beyond the July expiration date.
Note here that stock contracts (as opposed to options) don't expire. So the investor will continue with a pure-stock strategy beyond the options expiration date. Additionally, a Protective Put like in the example above will only "protect" from a drop in stock prices for a limited time. Hence the insurance metaphor. You pay for your house only once but renew the insurance contract periodically. Stretching the metaphor a bit; if you own 10 houses, then you could live without insuring one of them. If you own stock but also have your eggs in other baskets, you don't have to hedge with options always.
To summarize, Options Czar is:
- for the experienced user, a tool to visualize options transactions, using real market data,
- for the average or experienced stock trader, a means to hedge a stock portfolio,
- for the average trader, a tool to calculate the best options strategy to profit from a predicted behavior in the stock price.
Options Czar is not:
- A software to calculate employee stock options,
- A get-rich-quick scheme,
As a tool, it is only as good as the use that is given to it. So please take the time to read the documentation that is available at the CBOE's web site, including the Characteristics and Risk of Standardized Options.
|
