'Trading' It is the favourite topic of everyone who wants to earn money in minimum time, both profit and loss are associated with this term, and when it comes to 'option trading', then, it becomes even more profitable or lossy.
Many people made huge profits because of option trading, while many lost their everything. With the help of option trading, you can earn 1000% or more profit on your investment in minutes, while your balance can also be 0 in a few seconds.
If there is really a risk somewhere in the trading world, then it is here, the more you risk more you earn, And in order to keep your risk at the lowest and profit maximum, most of the time, you must need good knowledge, better strategies and some tools like risk calculators, with the help of
which you can earn profit in a smarter way than others. And if you are worried that from where did you get all these things, then relax, that's why we are
here to short out your this problem, In this post, we have mentioned the 'best books for options trading'.' option strategy calculator',
and 'option strategy builder on excel'.
Option calculator is a type of tool or technically speaking a type of arithmetic calculation algorithm which is used to calculate the theoretical value of an option premium, it is based on the *Black-Scholes model and is also used to predict and analyze options.
So before understanding how it works let's know about the Black Scholes model...
It is a pricing model also known as the BSM(Black-Scholes-Merton) model which is used to
determine the theoretical value based on the put and call option, its principal is based on the six
variables which are- Time, the strike price of an option, volatility, type of option, risk-free rate,
underlying stock price and the time to expiration.
Formula - |
You can also use the option calculator to know the fair price of an option premium,
Many times it happens in the market that the price of any premium is more or less than its fair
price, and traders do not know at what price it would be right for them to take the premium, in
such a situation you can use the option calculator. By doing this you can know the proper
premium price.
For example: let's say that the price of an option premium is running at 100rs and when we
use the option calculator, we know that its fair price should be 120rs, so we will take that
premium immediately and earn profit from it when it reaches its fair price and so on, You can
calculate the fair price of any undervalue or overvalue option premium.
Steps to use option calculator-
Step1- First of all, you open the option calculator tool by visiting a website or in any application, there are so many such applications and sites that provide you with the facility to use a free option trading calculator, for this you need to simply open your web browser in phone or PC, and have to search by typing 'free option calculator', after that you will open any free site.
Now, you will get to see such an interface.
Step2: After you see the above interface you have to choose which option would you like to take, for example, if you want to buy any call option then you have to fill up its price, the strike rate of the option, expiry date, days remaining in expiration, volatility, interest rate, amount and it's frequency after that you get the call value and so on put value.
Step3: But you should need to have Knowledge of option Greeks (Delta, Gamma, Theta, Vega, Rho)to understand the options calculator.
Now, the question arises that what is option Greeks, and how could they help to understand option calculator.
Option Greeks are the terms used to understand the various factors that might affect the option
price, they refer to a set of calculations which is used to determine the risk in option premium
calculation with the help of them you can make a more clear decision about which option
premium is good for you to trade and when to buy that option.
Theta - It is the most important option Greek, with help of it you can find out how much the value of an option reduces each day as it approaches the day of expiration.
Delta- The delta option Greek is very helpful for traders, it can help you to assess the probability that an option will expire. In the money '(ITM), meaning its strike price will be above (for puts) or below (for calls) the underlying market price.
Gamma- It is used to find out how much the strike price affects the delta, which means if the strike price change delta also change and gamma is used to find out their price difference.
Vega- It can help you to understand how sensitive an option can be if large price swings in the underlying stock.
Rho- This can help you simulate the effect of a change in the interest rate on an option.
This is a brief view about option Greek we will cover its detailed explanation in another post.
Conclusion:
In this post, we have learnt about the option calculator that it is the toll or a kind of program which works on an arithmetic algorithm to detect the probability of increase and decrease in the price of option premium, and we also mentioned some famous books with the help of which anyone can learn about option trading and generate good money by enhancing their skills,we
also mentioned how you can use an option calculator, And have given brief information about the option Greek, and also described where and why they are used?
we hope this post of ours will be helpful for you.
Thanks :)