OptionEdge is a stock option trading application for use with Microsoft Excel. The program utilizes the Black-Scholes option pricing model to simulate and analyze various stock option trading strategies. OptionEdge 2.1, the latest version of the program, can be freely downloaded through the download section of this website. Please note, however, that Microsoft Excel 2000 or higher must be installed for the program to function. screenshots
- Explore what-if scenarios.
- Detailed graphs show break-evens and profitability information.
- Save and print your created positions.
- Test your option trading strategies.
Information about Options
An option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The buyer pays a premium to the seller for this right. There are two kinds of options: calls and puts. Calls give you the right to buy the underlying asset and puts give you the right to sell the underlying asset. The cost of an option is referred to as the option premium.
Stock options are available with various strike prices depending on the current price of the underlying stock. For example, if QQQ is currently trading at $100 per share, you may choose to buy a call option at $95, $100, or $115, depending on what strike prices are available. If you decide to buy an August QQQ $100 call, you would have the option to buy QQQ at $100 per share until the expiration date in August (typically the third Friday of the month). If the price of QQQ rises to $110, you can profit from the $100 call by either exercising the option and buying QQQ at the lower price or by selling the option for a higher premium. If the price of QQQ falls below $100, then your optionís premium will also decrease.
Option pricing is a complex process. Seven components typically affect the premium of an option:
- The current price of the underlying stock.
- The strike price of the option in comparison to the current market price.
- The type of option, call or put.
- The amount of time remaining until expiration.
- The current risk-free interest rate.
- The volatility of the underlying stock.
- The dividend rate, if any, of the underlying stock.
The OptionEdge application, available for download on this site, utilizes the Black-Scholes option pricing model to show theoretically how the premium of a stock option can change given changes in the components listed above. For example, if the underlying stock price of QQQ increased, the application will show how the premium of an August QQQ 100 call would be expected to change based on the Black-Scholes pricing model.
Option Trading Strategies
Options can be used alone or in combination with one another to take advantage of certain market conditions. There are six basic strategies:
- Long Stock
- Short Stock
- Long Call
- Short Call
- Long Put
- Short Put
These basic strategies can be combined to form more complex strategies such as the ones below.
- Long Straddle: Buying both an at-the-money (ATM) call and an ATM put with identical expiration dates.
- Short Straddle: Selling both an ATM call and an ATM put with identical expiration dates.
- Long Strangle: Buying both an out-of-the-money (OTM) call and an OTM put with identical expiration dates.
- Short Strangle: Selling both an OTM call and an OTM put with identical expiration dates.
- Covered Call: Selling call options and owning the corresponding amount of underlying stock.
- Vertical Spreads: Strategies in which one option is bought and one option is sold, where the options have the same expiration date and different strike prices. For example, a Bull Call Spread involves the purchase of a lower strike call and the sale of a higher strike call.
- Ratio Spreads: Strategies involving disproportionate numbers of puts and calls with the same expiration date. For example, a Ratio Call Spread involves buying a certain number of higher strike calls and selling a greater number of lower strike calls.
- Long Butterfly Spread: Two identical options are sold along with the purchase of an option with a lower strike price and the purchase of an option with a higher strike price.