The Risk Graph tool in Create An Option Trade is the focal point of the web site. The Risk Graph tool can create or modify an option combination and display a graphic of the characteristic Profit & Loss curves of the option combo. A simple press of the "Save Report and Exit" button at the bottom of the Create An Option Trade/Risk Graph web page will save the trade permanently. The saved trade will be accessible on the Options Analysis web site whenever the user logs in again. Saved trades appear at the top of the Welcome page. The saved trades allow the user to "watch" a trade over the course of several days and monitor the trade's profit and loss.

Here is one way to create and save an option trade.

There are many ways to get to the Risk Graph Analyzer. If you enter from the Create An Option Trade button on the Welcome Page, there is no trade to analyze and the stock chart is shown using the stock you entered in the text box in the Welcome Page.

You can get to the Risk Graph Analyzer from Create A Search by clicking on an option combo in the Create A Search Output. Doing so causes the Create A Search trade to be analyzed and charted in the Risk Graph Analyzer.

This field allows you to change the underlying stock. The list is from trades you have saved and stocks you listed in My Stock List.

The risk graphics show a price Chart and a volatility chart.

The top price chart fixes the volatility constant and shows Stock price versus option value for different days to expiration. A black line is drawn horizontally thru the stock close and intersects the red line at the option's current value.

The bottom volatility chart fixes the stock price at todays value and shows volatility versus option value for different days to expiration. Similiarly a black line is drawn thru the latest 7-150 day IV and intersects the red line at the latest option value.

Usually four stock option graph lines are present showing how the trade will evolve in time from current conditions.

Red is usually today, blue is next in time, green is further in time and black is expiration. The possible profit and losses that depend on how the underlying moves become evident from the graph.

The red line can be used to determine what the trade's profit/loss is for "today's" data. ( The better way to do this is "multiple day analysis" discussed in Chapter 5 > Edit Trade) To use the price risk graph for today's data, the red line shows the profit/loss of the trade for all possible stock, y-axis positions. At the top of the risk graph you see something like C=90. The "90" is the stock's closing price. Find this closing price on the left y axis.

If you use candlesticks, this will be the bottom of a red candle or the top of a white candle at the end of the stock data plotted. If you use open- high-low-close, it's the close mark. Move horizontally at this close price on the graph, following the x-axis, until you hit the red line. Then look down at the money value on the x-axis. The intersection of the close price with the red line is the option position's profit/loss for that close price.

The Upper and Lower chart graphics axis values are displayed and can be changed by the user. Backspace out the value shown and type in the desired values. Click on "Update the chart" to have the new chart axis limits take effect.

The chart defaults to 3 months of data. The Start date on the chart can be changed using the Start Date selector. An example Start selector is shown above.

This option allows you to control the dependent variable being charted on the horizontal x-axis.

COMBO PROFIT in dollars

COMBO PRICE

COMBO DELTA in eff. LONG contracts

COMBO GAMMA in DELTAS gained/pt RISE of underlying

COMBO THETA in dollars gained/day

COMBO VEGA in dollars gained/point rise in IV

When you make any changes that affect the charts, you can use this conveniently located button to update the chart with the requested change.

Quoted profit	Model profit	Quoted Price	Model price	Delta (Shares)	Gamma	Vega	Theta
$ 0.00	$ -42.15	13 15/16	13 1/2	33.7	-0.4527	$ -8.42	$ 1.41

This shows the combo profit and price values using the actual quote data. Also shown are the combo profit and price predicted by the option model data. The option model data is obtained by computing the IV values of all the options that day, fitting a curve to the data and then computing the price based on the fitted IV data. If the quote is bad, it will not have a good match to the model data. Far out of the money quotes also do not fit the model data very well. The other parameters are the "Greeks" of the trade that day. (See online Help manual > Chapter 2 for definition of Greeks).

The probability calculations use both the implied volatility and the statistical volatility (obtained from the past data of the underlying). The statistical volatility value used is shown here.

Days From Today	Prob of Profit	Expected Profit	Odds of Success
45	52.9%	$ 12.92	1.1 to 1
90	55.3%	$ 60.87	1.2 to 1
Expiration	58.1%	$108.25	1.2 to 1

The probability that you will make a profit is displayed for different days into the future up to the expiration dates. The prediction is obtained by propagating the trade in time using the SV to expiration. The result is a probability distribution of the trade. The area under the probability distribution where the trade makes money is summed and displayed as Probability of Profit.

The expected value of your profit is shown. This is obtained by subtracted the predicted money you might make from the money you might loose. If the expected value is negative you are currently likely to loose money. The odds are obtained by dividing the money you might make by the money you might loose. Odds greater than 1.0 are in your favor. 1 to 1 is basically an even money trade.

 Green is current market conditions  
 Click Market price to get database closing prices, especially if you change the trade.
 Click Purchase Price and input the price in the text box if you purchased the trade.

Your trade appears next. The multiplier, next to the "X", shows how many options the trade is using. The trade continues with your position, long or short, then how many long or short positions in each you hold, then the option expiration month and the symbol name of the stock.

The trade continues with the strike price, the type of option, call or put, and finishes with the prices available for your option.

The option price has three choices:

Market Price

Purchase price

Model Price

If the Market data and Model data disagree widely, this is an indication of bad data. If the probability is 100% you will make money, this is always an indication of bad Market data. You sometimes have to visit today's skew chart of option prices to determine if the Market data is bad and that the Model data looks good. The Model data will be taken from the fitted line in the skew chart.

You can change the parameters in the trade. Always understand the source of the option price data when you make the changes. If you put the selection option on "Market Price", the web site will grab the Market data for the trade you enter, when you hit the "Update Option Trade". button. Otherwise the option price stays at the Purchase price value.

The green lines show current market data for your trade. This includes IV (implied volatility), DELTA (where +100 means your trade value and the underlying price move together in equal amounts in time), Est_IV (implied volatility estimated from the site's curve fit), Volume (the number of trades made that day for that option), OI (open interest in the trade), Bid Ask (the last bid and ask quotes for the trade). trade).

IBM Put Call Ratio Numbers for 06-01-99

You can add to your trading position and create whatever Combo you want. This includes adding a stock position to your option position. Your trade must have at least 1 option trade in the combo. The "add" becomes active if you replace the 0 after the long/short option with a positive integer. The trade options are the same as the trade previously discussed.

You can update your trade or make a new trade using the trading table. "Replace Current Combo With " will use the trading table radio button option you select.

"Append to Current Combo" will also use the trading table radio button option you select and add the trade position to your current position.

"Use" allows you to change the expiration month and year of the option combo to be analyzed. "Use" defaults to the near month and you must change it to get the options for months in the future. The combos and probabilities in the table below "Use" correspond to the month and year in the "Use" text box.

The Trading Table shows the more common types of Option Trading Combos. Each Combo is linked to a help file that explains and shows an example of the trading combo. Each strategy has a radio button next to it. Clicking on the radio button will select that combo. The number in parenthesis is the Probability of Profit at expiration based on past statistical volatility and the particular strike prices the table decided to use. The Probability calculation does use deterministic stock price predictions and will not usually match any trade you are analyzing. It's merely informative information.

To use the table you first have to decide whether you are bullish or bearish. Let's say we are bullish.

This puts us in the first column of the table. Now we have to decide if the implied volatility is HIGH or LOW. What we are really guessing is whether IV will be coming down in the future or going up in the future. The prevailing wisdom is that if the IV is high, it will "revert to the mean" and come back down lower. If this is what we believe will happen, than we should select the bottom row of the table labeled "HIGH" for implied volatility.

Even though the IV is high, it's not guaranteed that it will come down. If we think that the IV is going to go higher still, then we should select the top row of the table labeled "LOW". This row will have strategies that will benefit from IV going higher. The last row, labeled "HIGH" will give strategies that will benefit from IV going lower.

The middle column is for when you think the market will not be changing. This area has many delta neutral trades such as the straddles, strangles and ratio spreads.

The right column is for when you are bearish and you want to profit from high and low IV conditions. .

"Update Option Trade" will refresh the Risk Graph Analyzer page with your changes. "Save Option Trade" will save the temporary trading file to the users permanent file. The trade will be there the next time you return to the web site.

"Exit Without Saving", allows the user to exit without updating his permanent file.