Important legal notice: Mantic Software Corporation has no business relationship with the Chicago Board Options Exchange, nor any control over the data provided by the CBOE web site. More information and disclaimers about downloaded data are presented by the Options Laboratory™ program the first time you try to download option price data. You can also review the disclaimers by selecting Help | Disclaimers from the program's Help menu (not the Help speed button).
An "option chain" is the list of all the available options on a stock or index. This window fetches option price chains from the Chicago Board Options Exchange web site. The data is delayed 20 minutes or more.
You should never assume that data in the Chain window is completely accurate. Option prices often change rapidly. Always verify prices and option ticker symbols with your brokerage service before placing a trade!
This does not imply that you need "real time" prices to be a successful option trader. Take enough time to understand the limits of your intended strategy - at what prices must you trade for it to work? Then always place limit orders, priced so you'll be satisfied if the trades go through. It is almost never wise to place "market orders" for option trades.
Unlike previous versions of Options Laboratory, this is now done in the Browse window. Please read the discussion of that window.
You may not want to see all the existing options. Nearby options are those expiring within three months, and within two strikes of the current stock price. Alternatively, selecting All options shows all active options including LEAPS®. Options Laboratory always retrieves the entire option chain; the Nearby button only controls which options are displayed to you.
The retrieved option chain includes information about what time of day the prices were captured, and the stock price. In addition, Options Laboratory estimates the market implied volatility by averaging the implied volatility of those nearby options which have traded today, as indicated by a non-zero volume entry. These items are displayed in blue text in the Environnment panel (illustration below).
If no option chain data is available, or you want to play with hypothetical values, Options Laboratory can generate "fair value" chains. These chains are hypothetical options with appropriate strike prices and expiration dates, priced according to the volatility and other information you specify in the Environment panel.
To use this feature, you must set the current date, price of the stock or index, volatility estimate, interest rate and dividend. Then choose the Offline menu and pick Fair value chain from current settings. This generates a chain with a range of strikes and expirations up to a year in the future.
Please be sure to press the [Enter] key on your keyboard after typing the date and price. Due to a peculiarity of Microsoft Windows, changes to the price or date input box may not be "noticed" if you go directly to a menu item such as Offline without pressing [Enter].
The Offline menu has a second choice, Chain for textbook examples. This feature is a convenience designed for use with our textbook. It always provides the same date, price and volatility settings to match examples and illustrations in the book.
An option symbol consists of a "root" followed by two letters indicating the expiration month and strike price. For example IBMIM has root IBM and suffix IM indicating a September 65 call. (The call/put designator is also determined by in the expiration month letter).
You may observe that an option symbol appears more than once, perhaps with different prices. Each option symbol is listed followed by a separate letter indicating which exchange gave the price. "E" is the CBOE, for example.
Clicking on the Calls or Puts column heading will cause the options to be listed in alphabetical order.
The option's month and year of expiration. Clicking on the Month column heading will sort the options in order of expiration, and by strike price within the same expiration month.
The option's strike price. Clicking this column heading will sort the options by strike price, and within a strike price by expiration month.
Indicates the amount by which the option is currently in-the-money or out-of-the-money. For example, a $40 call is $1.50 in-the-money when the stock price is $41.50.
These data columns are displayed in blue text to indicate that they are values calculated by Options Laboratory. These numbers are not provided in the downloaded data; they are computed by Options Laboratory from that data.
Delta is an estimate of how much the option price will change for a small change in stock price. For example if delta is 0.50, the option price will rise 5 cents if the stock price changes 10 cents. A call option's delta is typically very close to 0.50 when the stock price is right at the option strike price. (The corresponding put's delta will be -0.50 since the put declines in value as the stock rises.)
Implied volatility is the volatility that the stock should have if we assume that the quoted price is "fair". In other words, given the current stock price; option strike price; interest rate and dividend yield; and time until the option expires, what volatility must be imputed to the stock if we assume the quoted price is really the option's fair value? Stated differently, the option's market price reveals what "the market" assumes about the future volatility of the stock price.
Sometimes Options Laboratory can't calculate implied volatility and implied delta. This happens when an option hasn't traded, or the quoted price is not economically rational compared to the known stock price. You should also understand that there is no simple formula that gives the implied volatility in terms of the other parameters. Implied volatility is calculated by a method of numerical approximation, and under certain circumstances the approximation method fails to give a meaningful answer, especially when the stock price is very far from the option strike price.
After computing all the implied volatilities, the program estimates the future "market volatility" of this stock by averaging the implied volatilities of all its nearby options. (Nearby options are the ones with strike price close to the stock price, which expire in 3 months or less.) This estimate is put into the volatility input box of the Environment panel at the top of the screen.
You may want to adjust this estimate. It's good practice to compare the estimated value to the overall volatility structure of the whole chain. You can do this quickly and effectively by examining the volatility scatter plot.
These items are reported as they appeared in the retrieved option chain.
When performing option calculations, Options Laboratory uses the "best" Bid or Ask price from the chain. If no Bid or Ask is available, the Last price is used. The program will not use prices where the Volume entry is zero, meaning that option hasn't traded today.
The Chains window offers a handy shortcut to help you set up a position quickly. In either the Call or Put grid, double-click any row to select an option after downloading an option chain. A pop-up window opens where you can buy, sell, or write covered calls on that option.
This is the quickest way to add a specific option trade to your position. When you click Buy or Sell in this window, the cost at quoted Ask or Bid is used to figure a transaction cost to display in the Number of contracts box.
You can also specify trades with more control (for example a price other than the quoted price, or an option not present in the chain) by entering them in the Trades window. You can also generate combinations and enter their trades automagically from the Strategies window.