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How Do I Use the Option Portfolio Analytics?

This module goes beyond a simple option calculator.  It is designed to teach you how to manage a position that contains both options and the underlying asset.  From personal experience, you can learn how to manage the three primary drivers of the position's value:  underlying asset price, volatility, and time.  Managing these drivers requires large amounts of current market data, knowledge and access to the analytics provided from modern option pricing theory.  

Option portfolio analytics is a unique module that is designed to make this task easy.  At the click of a mouse it lets you combine current market data on the web, option pricing analytics, interactive learning techniques and visual software tools to learn how to take control of a position.  In fact, many large trading houses today do not have the ease of accessing information that this module provides.

A general description of this module is provided below.  If you have previously read this you can jump to screen details by clicking on this hypertext now.

Student Note:  For learning purposes there is a default data set that you can use to check out the features before venturing onto the web.  To do this, you would click beside Default Data on the opening screen.  If you need to acquire more background information on Options you can also click on Option Lessons.

Overview of Module Specifics

Two major steps must be performed.  The first step is to gain access to current market data.  The second step is to apply this data to the various dimensions of the problem of managing an options' position.

Accessing and Cleaning Data

The opening screen of the module is designed to let you gather the data.  Three main functions are automated for you.  At the click of a button you are able to: 

i.  gather current option price data

ii.  gather current interest rate data

iii.  gather current dividend yield data

Unfortunately, with option data a trader faces many practical obstacles.  The data may not be clean.

The first problem that may arise is that the data is old relative to the underlying asset price data;  many options do not trade as frequently as the underlying asset price.  This is especially the case with options that have become deep in-the-money or deep out-of-the-money.  Secondly, the bid/ask spread in the options market is typically larger than other derivative markets such as futures;  this can lead to problems when one is trying to infer information or ask what-if type questions.  Additional housekeeping also needs to be performed such as indicating option exercise style (American versus European), and interpolating interest rates and dividend adjustments to the option data.  

Thus, after data is retrieved the module automates data cleaning by requiring the user to specify what type of cleaning activities are to be performed.  Once completed, you are ready for the second important step, which is working with the data.

At any time you can override automated adjustments with your own estimates, if desired, by entering the data directly into the options data grid.

Working with the Data

The major set of functions that can performed on your position are:

i.  Computation of implied volatilities and implied volatility smiles;

ii.  Computation of option payoff and profit diagrams and related information such as break even analysis.  In addition, automated support is provided for many of the common strategies; 

iii.  You can then go beyond payoff/profit diagrams to examine dynamic aspects of option trading strategies.  That is, instead of being focussed upon the time of the option's maturity you can examine the behaviour of your option trading strategy over time;

iv.  A major Financial Engineering function is provided.  This provides automated support for designing option positions that mimic ones desired exposure (i.e., risk) profile.  A unique aspect of this module is that you can draw your desired profile and then let option analytics find the solution for you subject to user specified constraints;

v.  Option sensitivities.  This extends the powerful Sensitivities module provided by the Option Calculator to conducting the same analysis on an option position.  That is, it extends the problem from a single security setting to a portfolio setting;

vi.  Hedging.  The module automates designing neutral positions such as gamma neutral, delta/gamma neutral etc. 

All of the above can be performed on the latest available option prices.  This means that the module provides current answers to a large number of important what-if questions.  In this way you learn how to take control of an option's position.      

To learn about what each screen in the Options Portfolio Analytics module can do for you, click on screen details now.      


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