In my articles, I often show BrokersXpress or think-or-swim profit/loss or risk-analysis charts such as the one that appeared in last week's Options 101 article.
Profit/Loss Graph for an XEO Iron Butterfly with Extra Long Call as a Hedge:
In addition to BrokersXpress, several brokerages such as think-or-swim provide such profit/loss or risk-analysis charts, some clunkier or spiffier than others. BrokersXpress' version is relatively easy to use, accessed by clicking on "Position Analyzer" under the "Tools" tab. If the position being studied is an anticipated one and not a live one, a "Trade Calculator" tab will do the job. It's fairly easy to read and interpret this chart, and traders can input differing volatilities and dates to determine where profits and risks might lie. As can be seen on this chart, losses would have mounted quickly on this already-closed trade if the XEO had begun dropping below about 408 on 6/19/2008.
Such charts can be used to tailor insurance, hedges or adjustments. Think-or-swim's version is spiffier, allowing for more inputs, and it's as easy to pull up with the click of a tab as BrokersXpress' version. Once it's pulled up, it's a snap to add simulated adjustment trades and see how they would work out. The graph can be forwarded to a different date or adjusted to show changes in volatility. Altogether, it's superior to the BrokersXpress version if versatility and readability are considered.
However, neither of these sources provides all the information found in OptionVue's software, software that also imports historical options prices so that traders can back test specific strategies, watching profit-loss charts to see how the trade developed. But OptionVue is prohibitively expensive for many traders. If cost is not a concern for you, look into OptionVue's capabilities.
However, I and my trading partners are always on the watch for something that might provide at least some of the capabilities of OptionVue with as little of the cost as possible. I've tried the Op-Eval software that's packaged with James Bittman's latest book, Trading Options as a Professional. That software offers traders whose brokerage platforms don't give them any analysis charts of the type discussed in this article an alternative, but this software requires traders to input all parameters for the options they'll be using for a specific strategy. That, in my opinion, renders the software clunky when a trader is trying to study how a certain strategy might play out. The software offers many other benefits, but my search continues.
In a recent search, I located among a list of free options tools for options traders the name OptionOracle. In "Top 5 Options Tools (Free)," blogger Andrew Hart included OptionsOracle, software that he called the "most comprehensive (free) options trading tool out there," one that "can help traders screen for and visualize options strategies."
After downloading the software, a two-minute tutorial guided me through the initial setup. Importing options prices was as easy as first typing in the symbol for the underlying and then clicking "Update." Delayed quotes are imported into the underlying's box and into that devoted to the options.
Building a hypothetical covered-write position was accomplished with a few clicks of the appropriate tabs, in only a few seconds. The long-stock position required adding a row and clicking the sought-after "long stock position," but adding the short call was as easy as paging down to the desired call position, dragging that call down to the "Strategy Positions" section and then clicking on the default "long call" to change the position to a short call.
The "Strategy Summary" showed inputs such as "Total Investment," "Total Debit," "Maximum Profit Potential," "Maximum Loss Risk," and others. Strategy positions can be saved and pulled up the next time you want to study them. They can also be imported into the "Portfolio Management" section where further studies are available.
However, after loading each strategy separately, a click on "Graph" tab then returned the "Strategy Graph" that I sought. Voila. There it was, with either a dark or light background, with toggle switches to look at the graph at expiration or the current day, with a bar to input any specific date if something other than the current day or expiration was wanted.
I was thrilled to discover a tab at the bottom of that risk analysis graph titled "Show StdDev." Although that information is also available on think-or-swim, the capability to show a standard-deviation move is not available on my Brokersxpress charts, and income traders often want to know the expected price movement within a certain time period. In fact, all traders want to know that, or should. If a trader is day or swing trading, for example, knowing that price has a 68.2 per cent or some other percent of staying within a certain range over that period of time can help one set appropriate stops. Knowing the expected standard deviation move is helpful in determine whether a strategy is workable or doesn't have much chance of being successful and is essentially a lottery play.
On the graph below, the standard deviation lines are shown as green dotted lines, with the profit/loss graph for the position--100 shares of MSFT and one sold AUG 25 call--shown as of Jul 14, 2009. The red circle can be placed anywhere along the profit/loss curve with the resultant values for the position at that price shown along the bottom of the graph. Because of width requirements for publication for our articles, the chart is cropped on the right-hand side.
OptionsOracle Profit/Loss Graph:
Recreating the XEO position shown in the first chart took less than a minute. No punching in of OPRA symbols was necessary. Simply scrolling through a list of options, I was able to drag down the ones I wanted and produce the graph that follows.
XEO Position as Shown on OptionsOracle:
Width requirements meant that the profit/loss at the red dot was not shown, but the software calculated that if the XEO had been 500.11 on 6/19, the position would have suffered a 524.37 loss. Zoom features would have allowed me to zoom in on the area between the 2-standard-deviation moves, if I'd wanted.
I could run a "Start Date" backwards and call up options prices for the front-month and six back-month options. Unfortunately, however, I could not succeed in finding a way to study FEB 09 options series' prices, so that kind of back testing probably isn't available.
I haven't even begun to touch on all the interesting tabs that are provided, such as the volatility cone and smile, and a truly intriguing one titled "Option Pain" that appears to calculate the max pain levels for option expiration. This test of this free software was a cursory one, and I'm certain I've missed some capabilities and some potential problems, too. However, as a person who tends to stumble around with new software, I consider myself a good tester for ease of use, at least, and this software proved easy to use. I didn't see any advertisements on the site, another plus for those of us who tend to accidentally click on those advertisements on sidebars every now and then. I can't guarantee that it is, as claimed, spam proof or virus proof. It is free, although a banner at the bottom of a sidebar does implore that users "Support OptionsOracle. Make a Donation." Samoa Sky's "About Us" section notes that a group of software programmers and investors in stock, forex and options developed the software for their own use, but then decided to open it up for all to use. In the forum section, they solicit new ideas for the software. I'm going to suggest alerts.
Be reminded that the prices are delayed. However, when I'm studying my options positions at the end of the day, thinking ahead to what will happen if prices run to a certain level or volatilities move to a certain level the next day, that doesn't matter so much. This software allows me to do both.
To see an overview of what's offered, you can go to this link and first get a preview of the features and then, if desired, read a 45-page "Getting Started" guide that I'm only now digesting. You can download OptionsOracle from that site, too.
Since first roughing out this article, I've been test-driving the software for about ten days and like it well enough that I'll probably be including some screenshots in my articles as I discuss various topics about options. I've also written my brokerage and asked them if they'll consider working with Samoa Sky to provide live data feed. Clients of InteractiveBrokers and TD Ameritrade already have that real-time data feed that interfaces with OptionsOracle.
As always, this isn't an advertisement. I have no connection with this company. If I've mistaken or misrepresented something on the OptionsOracle site, that was an oversight. My only goal is to provide information, education and tools that might help all us options traders and to share with our subscribers any methodologies or software that might be helpful.
Profit/loss or risk-analysis charts are more than helpful. Just as I would no longer trade without my preferred nested Keltner charts, I consider profit-loss charts to be invaluable when studying either an anticipated position or a current one. Next week or sometime in the near future, I'll probably discuss a bit more about how I use such graphs, with a debt of gratitude to Dan Sheridan, Steven Lentz and all the others who first introduced me to their capabilities on free webinars for the CBOE.