The Institute for Options Research Free Optons Tools! Option Trading Tools! Books, videos and software for trading options! Your complete resource for options trading
Return Home About Us Free Tools Trading Tools Online Store Contact Us
July 25, 2017 
Main Menu

Home
About Us
Contact Us
Online Store
Sites of Interest
Subscriber Login *
Today's News

Free Tools

Spread Betting
Market Update

Option Quotes
Option Calculator
Options Glossary
Option Reports
Option Tools Downloads
Power Charts
Stock Quotes

Trading Tools
Option Master
Push Button Trader
Push Button Writer
Put & Call Tactician
Specials
Option Scanner
Power Analyzer
Power Stock
Other Tools

Online Manuals
Sports Analysis
NEW-Trading With Ken Trester   

P.O. Box 6586
Lake Tahoe,
NV 89449
Phone: (800)407-2422
Fax: (775)588-8481

Email Us

Option Master Chapter 2
Download the Option Master Manual - PDF 187k

 

Software for Pricing Options
by Kenneth R. Trester
and Robert P. Swanson


Chapter 2 - Getting Started



OPTION MASTER® for Windows/TM

Software Requirements

OPTION MASTER® for Windows/TM requires Windows 3.0 or higher.

Installation for Version 1.3

OPTION MASTER® is supplied to you on a 3.5" disk. You MUST install the program to your hard drive. The INSTALL program will automatically load the program onto the C: drive in directory \OPMASTER.

To install the program, insert the OPTION MASTER® disk in Drive A. Move to drive A by typing "A:" and pressing "Enter." Type INSTALL and press "Enter." The program will now be installed to C:\OPMASTER.

Installation for Version 1.41

This version requires Windows 3.1 or higher. To install, insert disk in Drive A. From the Program Manager, choose File, Run, and then type A:\SETUP. To run the OPTION MASTER® program, click on the OPTION MASTER® icon. Getting Started To run OPTION MASTER®, log to your hard drive to the OPMASTER Directory. This would be C:cd OPMASTER. Then type WIN OM and press "Enter."

If Windows is already running, double click the File Manager (the File Cabinet Icon), click the proper drive and directory, and double click on the program OM.EXE.

To start the program using an icon, follow your Windows User's Guide instructions to establish an icon. These instructions include moving to "Windows Setup," then "Options," and then "Setup Applications."

Once you start running the program, there will be three menu items in the main menu bar. They include FILE, CALCULATE and EXTRAS.

FILE Within this menu item, you can create a data file, open a previously saved file, or print the current window.
CALCULATE Gives you a menu of the different screens and tasks that can be completed with OPTION MASTER® for Windows/TM.
EXTRAS Here you are able to reconfigure your output screen, specify the startup screen and change the Multiple Strike Price increment value. In addition, you can delete files, and the "Help" section is under this menu item.

Moving Around the Screen

The key to using OPTION MASTER® for Windows/TM is the TAB key. Use the Tab Key to move from one entry box to another.

If you do not have a mouse, use the ALT key and the underline letter of the menu item you are selecting.

Calculate

By selecting Calculate on your menu bar, you will see a menu of the different screens and different tasks that can be completed with OPTION MASTER® for Windows/TM. This category has four major menu items: PRICES, PROBABILITIES, RATIOS and VOLATILITY.

Prices

This section of OPTION MASTER® for Windows/TM calculates the theoretical prices for stock, index and commodity options.

Single Option Price
The menu item Single Option Price calculates the theoretical price of a stock or index option. Just enter the expiration month, stock or index price, strike price, volatility and the interest rate (3-month T Bill rate) in the appropriate entry boxes. Then click either Put or Call and you will see in the Message Center the theoretical put or call price, plus your probability of profit if you bought the option at the theoretical price, and the Delta. To change the date or year, click the "Arrow" or use the up and down arrow keys on your keyboard.

Multiple Option Prices
This menu screen calculates a whole range of theoretical option prices for a specific stock or index. Again, move from one entry box to another using the Tab key. When you reach the Beginning Strike Price, enter the lowest strike price that you wish to use. Then select the Ending Strike Price. Select the highest strike price for which you want to calculate option prices by clicking on the "arrow."

When selecting Expiration Cycle, if you select Every Month, OPTION MASTER® for Windows/TM calculates the theoretical option prices for the next three months for the range of strike prices you have given. If you select the Jan, Apr, Jul, Oct cycle, OPTION MASTER® for Windows/TM will calculate option prices for the three most recent upcoming months listed.

For example, in March, option prices would be calculated with expirations in April, July and October.

Commodity Option Prices
Calculating theoretical values for futures and commodity options is similar to stock or index options. The major difference is that you must enter the exact expiration date for the option contract.

Probabilities

Probability of Profit
This section of OPTION MASTER® for Windows/TM calculates your probability of profit if you buy or sell (write) an option or enter an option strategy.

The Probability of Profit modules are similar to the option pricing modules, except that you must give the specific option price or break-even price (or stop-loss price) for a strategy. Again, move from one entry box to another using the Tab key.

Ratios

This section of OPTION MASTER® for Windows/TM calculates the Delta, Gamma, Theta and Vega for a stock, index or futures option price.

All of these ratios can be calculated and automatically displayed when you calculate the theoretical price for an option by using the Configure menu item.

DELTA -- is the percent of a point that the theoretical value of an option will change for a one-point change in the underlying stock, index or futures. For example, if a call stock option has a Delta of .50, the stock option will move up 1/2 of a point for every point that the stock moves up one point.
GAMMA -- is the amount the Delta will change if the underlying stock index or futures changes one point. For example, if the Delta is .50 and the Gamma is .10, if the stock price increases by one point, the Delta will increase to .60 (.50 + .10 = .60).
THETA -- is the time decay factor and is the rate at which an option will lose value as each day passes. For example, a Theta of .33 indicates that an option price will decrease in value .33 of a point as each day passes.
VEGA -- is the point change in the theoretical value of an option for a one percentage point change in volatility. For example, if an option has a Vega of .50 to each percentage point increase in volatility, the option will gain 1/2 of a point.

Volatility

This section calculates both historical volatility and implied volatility. Historical volatility is the price volatility of a stock, index or futures based on past prices of the underlying instrument. Historical volatility is the most important component of the pricing model.

Implied volatility is the volatility as measured by the present price of the option in the options market. This volatility is what the market thinks the volatility should be.

Historical Volatility
When using the Historical Volatility menu screen, first select the Observation Period. We suggest "weekly observations."

Once you have entered the Observation Period, you can begin entering stock, index or futures prices for the past days, weeks or months. For example, if you have selected "Week," you could enter a stock's closing price for the past 10 or 20 weeks. Hit the Return or Tab key to enter each entry. You can calculate volatility any time by clicking the Calculate Volatility box.

Of course, you can edit the prices you have entered by clicking the Add, Insert and Delete boxes. If you wish to remove a price from the list, you mark the price by clicking on it with your mouse and then click the Delete box. To insert a price, do the same by marking the point at which you wish to insert a price, but now click the Insert box after you have entered a stock index or futures price at Stock or Futures Price entry location.

Once you have entered a series of prices, you can save those prices in a file by selecting File in the menu bar. So, you can add or update your specific stock or index files periodically and hence their volatilities.

Implied Volatility
When calculating Implied Volatility, you must provide the present market price for the option in question. Implied volatility is necessary for "what if" analysis. For example, if you want to find out what an option will be priced at if the stock moves accordingly, you will need the future date and the implied volatility. Then the Prices section of OPTION MASTER® for Windows/TM will tell you the likely price of the option in the market.


OPTION MASTER® for DOS

Installation

OPTION MASTER® for DOS is supplied to you on a 3.5" disk. You can run OPTION MASTER® directly from Drive A or Drive B by typing MASTER and pressing ENTER. To install OPTION MASTER® to your hard drive, type INSTALL from the A or B drive, and provide a sub-directory where you wish to install OPTION MASTER®. For example, at the A drive-A>, type INSTALL C:\OPMASTER and press the ENTER key. Then the program will automatically set up OPTION MASTER® on the C-Drive in sub-directory OPMASTER.

Getting Started

To run OPTION MASTER®, log to your hard drive to the OPMASTER directory, if you use this directory. This would be C:cd OPMASTER. Then type MASTER and press ENTER.

Once you start running the program, there will be three menu items in the main menu bar. They include FILE, CALCULATE and EXTRAS.

FILE Within this menu item, you can create a data file, open a previously saved file, or print the current window.
CALCULATE Gives you a menu of the different screens and tasks that can be completed with OPTION MASTER® for DOS.
EXTRAS Here you are able to reconfigure your output screen, specify the startup screen and change the Multiple Strike Price increment value. In addition, you can delete files, and the "Help" section is under this menu item.

Moving Around the Screen

The key to using OPTION MASTER® for DOS is the TAB key. Use the Tab Key to move from one entry box to another.

If you do not have a mouse, use the ALT key and the underline letter of the menu item you are selecting. Press the ALT key to identify the proper letter to press.

ALT Commands

Main Menu

  • ALT + F = File
  • ALT + A = Calculate

Calculate Menu

  • ALT + P = Put Prices
  • ALT + C = Call Prices

Extras Menu

  • ALT + D = Delete Data Files
  • ALT + C = Custom

Configure Menu

  • ALT + D = Default
  • ALT + C = Custom
  • ALT + A = Always
  • ALT + W = When Called from Menu
  • ALT + P = Puts
  • ALT + C = Calls
  • ALT + I = Ignore

Calculate

By selecting Calculate on your menu bar, you will see a menu of the different screens and different tasks that can be completed with OPTION MASTER® for DOS. This category has four major menu items: PRICES, PROBABILITIES, RATIOS and VOLATILITY.

Prices

This section of OPTION MASTER® for DOS calculates the theoretical prices for stock, index and commodity options.

Single Option Price
The menu item Single Option Price calculates the theoretical price of a stock or index option. Just enter the Expiration Month, Stock or Index Price, Strike Price, Volatility and the Interest Rate (3-month T Bill rate) in the appropriate entry boxes. Then click either Put or Call and you will see in the Message Center the theoretical put or call price, plus your probability of profit if you bought the option at the theoretical price, and the Delta. To change the date or year, click the "Arrow" or use the up and down arrow keys on your keyboard.

Multiple Option Prices
This menu screen calculates a whole range of theoretical option prices for a specific stock or index. Again, move from one entry box to another using the Tab key. When you reach the Low Strike Price, enter the lowest strike price that you wish to use.

When selecting Expiration Cycle, if you select Every Month, OPTION MASTER® for DOS calculates the theoretical option prices for the next three months for the range of strike prices you have given. If you select the Jan, Apr, Jul, Oct cycle, OPTION MASTER® for DOS will calculate option prices for the three most recent upcoming months listed.

For example, in March, option prices would be calculated with expirations in April, July and October.

Commodity Option Prices
Calculating theoretical values for futures and commodity options is similar to stock or index options, with a few differences that are discussed in the next chapter.

Probabilities

Probability of Profit
This section of OPTION MASTER® for DOS calculates your probability of profit if you buy or sell (write) an option or enter an option strategy.

The Probability of Profit modules are similar to the option pricing modules, except that you must give the specific option price or break-even price (or stop-loss price) for a strategy. Again, move from one entry box to another using the Tab key.

Ratios

This section of OPTION MASTER® for DOS calculates the Delta, Gamma, Theta and Vega for a stock, index or futures option price.

All of these ratios can be calculated and automatically displayed when you calculate the theoretical price for an option by using the Configure menu item.

DELTA -- is the percent of a point that the theoretical value of an option will change for a one-point change in the underlying stock, index or futures. For example, if a call stock option has a Delta of .50, the stock option will move up 1/2 of a point for every point that the stock moves up one point.
GAMMA -- is the amount the Delta will change if the underlying stock index or futures changes one point. For example, if the Delta is .50 and the Gamma is .10, if the stock price increases by one point, the Delta will increase to .60 (.50 + .10 = .60).
THETA -- is the time decay factor and is the rate at which an option will lose value as each day passes. For example, a Theta of .33 indicates that an option price will decrease in value .33 of a point as each day passes.
VEGA -- is the point change in the theoretical value of an option for a one percentage point change in volatility. For example, if an option has a Vega of .50 to each percentage point increase in volatility, the option will gain 1/2 of a point.

Volatility

This section calculates both historical volatility and implied volatility. Historical volatility is the price volatility of a stock, index or futures based on past prices of the underlying instrument. Historical volatility is the most important component of the pricing model.

Implied volatility is the volatility as measured by the present price of the option in the options market. This volatility is what the market thinks the volatility should be.

Historical Volatility
When using the Historical Volatility menu screen, first select the Observation Period. We suggest "weekly observations."

Once you have entered the Observation Period, you can begin entering stock, index or futures prices for the past days, weeks or months. For example, if you have selected Week, you could enter a stock's closing price for the past 10 or 20 weeks. Hit the Return or Tab key to enter each entry. You can calculate volatility any time by clicking the Calculate Volatility box.

Of course, you can edit the prices you have entered by clicking the Add, Insert, and Delete boxes. If you wish to remove a price from the list, you mark the price by clicking on it with your mouse and then click the Delete box. To insert a price, do the same by marking the point at which you wish to insert a price, but now click the Insert box after you have entered a stock index or futures price at Stock or Futures Price entry location.

Once you have entered a series of prices, you can save those prices in a file by selecting File in the menu bar. So, you can add or update your specific stock or index files periodically and hence their volatilities.

Implied Volatility
When calculating Implied Volatility, you must provide the present market price for the option in question. Implied volatility is necessary for "what if" analysis. For example, if you want to find out what an option will be priced at if the stock moves accordingly, you will need the future date and the implied volatility. Then the Prices section of OPTION MASTER® for DOS will tell you the likely price of the option in the market.


OPTION MASTER® on the Macintosh®

Installation

OPTION MASTER® can be run from the disk supplied to you by clicking on the OPTION MASTER® icon, or you can install OPTION MASTER® by dragging the OPTION MASTER® icon to your hard drive.

The Menu

The key to using the Macintosh version of OPTION MASTER® is the TAB key. Use the Tab Key to move from one menu item to another.

By selecting Calculate Price on your menu bar, you will see a menu of the different screens and different tasks that can be completed with OPTION MASTER®.

Single Option Price

The menu item Single Option Price calculates the theoretical price of a stock or index option. Just enter the Expiration Month, Stock or Index Price, Strike Price and the Volatility in the appropriate entry boxes. Then click either Put or Call and you will see in the Message Center the theoretical put or call price, plus your probability of profit if you bought the option at the theoretical price.

Multiple Option Prices

This menu screen calculates a whole range of theoretical option prices for a specific stock or index. Again, move from one menu item to another using the Tab key. When you reach the Beginning Strike Price, enter the lowest strike price that you wish to use. Then select from the range of prices available for Ending Strike Price. Select the highest strike price for which you want to calculate option prices.

When selecting Expiration Cycle, if you select Every Month, OPTION MASTER® will calculate the theoretical option prices for the next three months for the range of strike prices you have given. If you select the Jan, Apr, Jul, Oct cycle, OPTION MASTER® will calculate option prices for the three most recent upcoming months listed.

For example, in March, option prices would be calculated with expirations in April, July and October.

Calculate Volatility

When using the Calculate Volatility menu screen, first select the Observation Period. We suggest "weekly observations."

Once you have entered the Observation Period, you can begin entering stock, index or futures prices for the past days, weeks or months. For example, if you have selected Week, you could enter a stock's closing price for the past 10 or 20 weeks. Hit the Return or Tab key to enter each entry. You can calculate volatility any time by clicking the Calculate Volatility box.

Of course, you can edit the prices you have entered by clicking the Add, Insert and Delete boxes. If you wish to remove a price from the list, you mark the price by clicking on it with your mouse and then click the Delete box. To insert a price, do the same by marking the point at which you wish to insert a price, but now click the Insert box after you have entered a stock index or futures price at Stock or Futures Price entry location.

Once you have entered a series of prices, you can save those prices in a file by selecting "File" in the menu bar. So, you can add or update your specific stock, index or commodity files periodically and hence their volatilities.

Commodity Option Prices

Calculating theoretical values for futures and commodity options is similar to stock or index options, with a few differences that are discussed in the next chapter.

Probability of Profit

The Probability of Profit modules are similar to the option pricing modules, except that you must give the specific option price or break-even price (or stop loss price) for a strategy. Again, move from one menu item to another using the Tab key. The use of the Probability of Profit module is discussed in the next chapter.


OPTION MASTER® for Newton/TM

Requirements

If you purchased a storage card with OPTION MASTER® in place, you only need a Newton/TM computer device. Without this storage card, you will need a Macintosh computer running System 7, or you will need an IBM PC-compatible computer running Windows 3.1 or higher and the Newton Connection Kit.

Installation

If OPTION MASTER® is already on your storage card, just insert the storage card in your Newton/TM and you are ready to get started. If you are using a Macintosh, connect your Newton-compatible device to your computer with a serial cable, or the Newton Connection Kit cable. Insert the appropriate disk (when using the Newton Connection Kit). Launch the Newton Package Installer, or if you are using the Newton Connection Kit, select Install Package from the Newton menu. Then select OPTION MASTER®. (With an IBM PC using the Newton Connection Kit, follow the same procedure.)

Then immediately choose Connection from the Extras drawer on your Newton-compatible device, then select Macintosh Serial or DOS or Windows PC and press the Connect button. After a few minutes, OPTION MASTER® will be installed on your Newton-compatible device.

Getting Started

After installing OPTION MASTER®, the program will appear in the Extras drawer. Tap on its picture to start the program. Once you start, the Stock/Index Option Price screen will appear. This screen will calculate stock and index option prices. TAPPING and WRITING
The OPTION MASTER® for Newton/TM program is designed to minimize the amount of writing on the Newton screen and maximize the amount of tapping to activate menu items or enter data. For example, Beginning Date can be changed by tapping on the black diamond to the left of Beg. Date.

Now you are given a choice of the 12 months. Just Tap the month you desire. To change the day of the month, just Tap the "up" or "down" arrow to the right of the date. The same procedure applies to change the year.

The only writing that is usually needed is to change the stock, index or futures price. You do this by scrubbing out the previous price and writing in the new stock price. To enter the fraction for a stock price, just Tap on the stock price. You will be given the range of fractions to choose from. Tap on your choice.

To enter the Strike Price, just Tap on the words Strike Price, and you will be given the range of strike prices to choose from. Tap on your selection. If the strike price you desire is not available, you can write in the desired Strike Price. To enter Volatility, the same procedure is followed. However, when you Tap on Volatility, you will first be given a range of volatilities to select from (i.e., 1-10 or 11-20). If the volatility you desire is 16%, Tap on "11-20" and then Tap on 16. If the volatility you desire is not on the list, you can write it in. Whenever an item in the program has a diamond before it, you can Tap on it and get a range of choices from the menu.

Calculate

By tapping on Calculate at the top of the Newton screen, you will see a menu of the different screens and different tasks that can be completed with OPTION MASTER® for Newton/TM. This category has four major menu items: Prices, Probabilities, Ratios and Volatility.

Prices

This section of OPTION MASTER® for Newton/TM calculates the theoretical prices for stock, index and commodity options.

Stock/Index Option Price
The menu item, Stock/Index Option Price, calculates the theoretical price of a stock or index option. Just enter the Expiration Month, Stock or Index Price, Strike Price, Volatility and the Interest Rate (3-month T-Bill rate) as indicated. Then Tap either Put or Call and you will see in the Message Center the theoretical put or call price, plus your probability of profit if you bought the option at the theoretical price, and the Delta. The End Date usually refers to the Expiration Date.

Multiple Option Prices
This menu screen calculates an entire range of theoretical options for a specific stock or index. By tapping the Low Strike Price, you are specifying the option with the lowest strike price that you wish to calculate.

Commodity Option Prices
Here you tap either Grains, Bonds or Other Commodities for other commodities and other futures contracts. Calculating theoretical values for futures and commodity options is similar to stock or index options, with a few differences that are discussed in the next chapter.

Multiple Futures Prices
This menu screen calculates a whole range of theoretical option prices for a specific futures contract.

Probabilities

Probability of Profit
This section of OPTION MASTER® for Newton/TM calculates your probability of profit if you buy or sell (write) an option or enter an option strategy.

The Probability of Profit modules are similar to the option pricing modules, except that you must give the specific option price or break-even price (or stop-loss price) for a strategy.

Ratios

This section of OPTION MASTER® for Newton/TM calculates the Delta, Gamma, Theta and Vega for a stock, index or futures option price.

DELTA -- is the percent of a point that the theoretical value of an option will change for a one-point change in the underlying stock, index or futures. For example, if a call stock option has a Delta of .50, the stock option will move up 1/2 of a point for every point that the stock moves up one point.
GAMMA -- is the amount the Delta will change if the underlying stock index or futures changes one point. For example, if the Delta is .50 and the Gamma is .10, if the stock price increases by one point, the Delta will increase to .60 (.50 + .10 = .60).
THETA -- is the time decay factor and is the rate at which an option will lose value as each day passes. For example, a Theta of .33 indicates that an option price will decrease in value .33 of a point as each day passes.
VEGA -- is the point change in the theoretical value of an option for a one percentage point change in volatility. For example, if an option has a Vega of .50 to each percentage point increase in volatility, the option will gain 1/2 of a point.

Volatility

This section calculates both historical volatility and implied volatility. Historical volatility is the price volatility of a stock, index or futures based on past prices of the underlying instrument. Historical volatility is the most important component of the pricing model.

Implied volatility is the volatility as measured by the present price of the option in the options market. This volatility is what the market thinks the volatility should be.

Historical Volatility
When using the Historical Volatility menu screen, first select the Observation Period. We suggest "weekly observations."

Once you have entered the Observation Period, you can begin entering stock, index or futures prices for the past days, weeks or months. For example, if you have selected Weekly, you could enter a stock's closing price for the past 10 or 20 weeks. To enter prices, write the first stock, index or futures price in next to the diamond under Price. Then Tap the Add box. The price will be placed in the screen below. Try to avoid entering prices with fractions or decimals to speed up the entry process. You will usually not lose much by rounding off your prices unless you are working with Bonds or T-Bills or similar instruments where fractions are important.

After you have entered the first price and added it to the list, you only need to tap on the diamond next to the price and you will be given a menu of prices to choose from by tapping on the numbers. This will enable you to avoid writing in additional numbers. To delete a number from the list, just scrub it out. To insert a number in the list, enter the number you wish to insert, then tap on the insert box and tap on the price in the list below the position you wish to insert the new price. Once you have entered past prices for several weeks or months, just tap on the Calculate box to calculate volatility.

Implied Volatility
When calculating Implied Volatility, you must provide the present market price for the option in question. Implied volatility is necessary for "what if" analysis. For example, if you want to find out what an option will be priced at if the stock moves accordingly, you will need the future date and the implied volatility. Then the Prices section of OPTION MASTER® for Newton/TM will tell you the likely price of the option in the market.

Entry Tips

When entering commodity and futures prices, avoid decimals if possible (i.e., instead of 60.5, use 605); and due to the wide variety of strike prices for futures, you may need to write in your own strike prices because the strike price you desire will not be available on the strike price menu.

If the Newton/TM has trouble recognizing the number you write, just scrub it out and Tap twice. The Newton/TM will give a calculator on the screen. Now you can quickly Tap in the number with ease.


Go to Chapter 3 | Return to Table of Contents


 
 
Copyright 2012 © by The Institute For Options Research, Inc. | Home | Contact | Terms | Affiliate |