Options Laboratory™ presents its analyses and projections as easy-to-interpret graphs. The graphs are "live", meaning that they change instantly as you adjust any parameter setting. For example, you can drag the projection date scroller from "today" toward expiration and watch the shape of the graph evolving as simulated time passes.
Each graph plots a range of possible future stock prices on the x-axis (horizontal) and a dollar value on the y-axis. The x-axis price range reflects the underlying stock's volatility and the number of days between "today" (the date in the Environment panel) and the projected future date of the graph. The price range is wider for longer time spans, and wider for more volatile stocks.
The range is spans a ±3.0 standard deviation price range from today's price, assuming the stock price movements follow a Gaussian (actually log-normal) random walk. This assumption is at the heart of all option price theory.
The purple vertical lines in the illustration above show the current stock price (dotted line) and lines at the ±1.0, 2.0 and 3.0 standard deviation prices. You can see that the program predicts a 3-standard deviation price range from about $50 to $102. Statistical theory tells us that under the random-walk assumption, there is a
This information can be very useful when deciding how wide to set the strike price range in option spreads, and also when deciding whether to hold on to a position or close it out.
If you carefully place the mouse over any point on a graph line and left-click, the exact coordinates of that point will be displayed in the lower right corner of graph (right end of graph title area). When you move the mouse, the program draws hairlines to visually identify the selected point.
If your position includes more than one asset (for example, stock and call options, or several different options), Options Laboratory can decompose the combined position into individual lines for each component. Select the lines you want by clicking the check boxes in the Lines to graph panel. The Net line always represents the performance of the entire combination, regardless of which other boxes are checked. It is the arithmetical sum of the lines for each component of the combination.
There are check boxes for the underlying stock or index, and up to four individual options. The program does not impose any limit on the number of different options that may be in a position - you could make a combination of 5 or more options if you want - but it can only draw separate lines for the first four options. This limitation is imposed because it becomes hard to visually distinguish the colors of lines that are too similar. In any case, it is unrealistic to have real-world option positions with more than 4 open options at the same time.
The graphs presented by Options Laboratory are mathematical predictions about your option position under various possible future conditions. All graphs are drawn to project your position's performance on some date between "tomorrow" and the date when the first option in your position expires. The projection date is controlled by dragging the Projected to slider control with your mouse. The graph changes interactively as you drag this control back and forth.
The program present the following graphs:
Probability weighting is a particularly important idea, read about it here.