Last week, we released Options Builder Tool that is used in devising and placing options strategies such as Straddles, Strangles, Butterflies etc.
In this article, we will show how to use this tool to devise your own options strategies and what their pay-off will be like on the chosen date.
Instead of describing each and every field in the tool, their utility is shown by placing some options strategies which will give the contextual basis.
Options Builder - Basic Description
The Options Builder tool is divided into 4 sections as shown in the Figure1
- Stock/Index drop-down is used to select the Futures and Options (FNO) stock or the Index of interest. Once selected, contextual information such as the lot size, spot price & current IV of the stock/index appears. This information will be helpful in devising the option strategy. The pay-off date is by default is the expiry date of the current month expiry contract. The pay-off date can be changed to the desired date as per the strategy requirements.
- Legs (1-4) represent the individual positions of the options in relation to the larger option strategy. Once the information for the particular leg is selected via the drop-downs, the current IV and last traded price of that particular option strike appears. Futures section is mainly helpful in placing covered call strategies or management of option strategies by delta balancing.
- "Get IV Percentile" button, once clicked, fetches the current IV percentile of the stock over last 6 months.
- The bottom portion of the tool is reserved to display pay-off graph, option strategy information and the total margin required for the strategy.
Single Leg Option Strategies
Here we show how to place a plain vanilla long call, long put & short call option strategy.
Multi-leg Option Strategies
Here we put on multi-leg option strategies like Straddles, Strangles, Butterflies etc. These strategies involve buying or selling of multiple legs of various options.
Calendar Option Strategies
We place calendar option strategies such as Neutral Calendar Spread, Double Diagonal Calendar Spread etc, which rely of time decay of option premiums. These strategies involve selling front month options & buying back month options.
Option Strategies with varied Pay-off Date
Let's say you have placed an option strategy with a result or a news of the stock in offing and you want to know what will be the the pay-off and profit-loss scenario of the strategy on the specific date. You can accomplish this by placing the strategy and selecting the pay-off date different from expiry date from the calendar. Here, we show the pay-off graph of a short straddle option strategy 2 days later and at expiry.
Pay-off of strategies with custom prices
What if you entered an option strategy with entry prices executed differently than it is shown on the options builder tool. Your pay-off graph will be different from the standard one. Now, you can have your own pay-off graph with your own executed entry prices. Simply enter the prices of your strategy in the price boxes across the proper Leg to get the correct pay-off graph. Here, we show how to place the strategy with custom prices
Earnings Results Oriented Strategies
Earnings results oriented option strategies are held for smaller periods and relies on drop in implied volatility (IV) to make profits. Using the options builder tool we can see the pay-off of the strategy after 'X' number of days. We can also see the pay-off with a 'what-if' scenario where we can ask the question such as, what-if the IV drops by 20% post-results or what-if IV drops by 30%, how will the pay-off graph will change. Here we show how to do this.
We have tried to use the tool in different scenarios to understand the usefulness of the tool & how it can be used. In case, if you want another strategy to be covered which you feel is difficult to place using the tool, then please leave a comment below, we will add the video to the user guide.
Suggestions and feedback are always welcome. It will help in improving the tool.