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Long Directions

1) Introduction:

          OptionPosition is a financial analysis App that estimates the value of a set of shares and put and call options for a particular stock.   It allows the investor to explore various option hedging positions and create a portfolio that is sensitive to price and volatility fluctuations or that provides protection for various concerns.  OptionPosition graphically illustrates the value of put protection, covered calls, call spreads, time spreads, delta neutral skew trades, iron condors, etc..  

          The OptionPosition App goes out to the web to retrieve information on available put and call strike dates and strike prices and all stock and option prices.  It uses the Black-Scholes equation to determine an implied volatility associated with each put or call option.  Using that implied volatility, it estimates the value of the option as the price of the stock changes, as time progresses or as volatility increases or decreases.  OptionPortfolio then graphs the value or Greek function (i.e. derivatives with respect to price, time or volatility) versus the price of the stock.  It also plots the value and Greek functions at any time between now and the first  strike date and under the assumption of increased or decreased volatility.   Graph scales can be easily moved, expanded or contracted with one or two finger touch moves.

          OptionPosition has the capacity to remember 8 different portfolios at any one time.  Each portfolio relates to a particular stock trading on the NYSE or NASDAQ.  Without a subscription, OptionPortfolio is limited to the following 6 stocks:  AAPL, BAC, GE, GLD, SPY, and USO.  With an auto-renewable monthly subscription, OptionPosition can access all NYSE and NASDAQ stocks.  Each portfolio can have 6 different asset lines selected from a quantity of long or short shares, and a quantity of long or short puts or calls with various strike dates and strike prices.   

          These Directions contain the following sections:

1) Introduction (this section)

2) Portfolios 

3) Graphs

4) Subscriptions

5) Special additional iPad features (modify aspects indicated by (**) )

6) Technical details (Calculation related, Dividend related, Expiration timing, Risk free interest rate, Stock quote delay, and Subscriptions).


2) Portfolios:

          To enter a portfolio, touch the ‘Portfolio’ tab bar then select one of the 8 numbered portfolios on the segmented control at the top of the screen.  If you wish, enter a Name by touching the ‘Name’ space and typing in a name.  Touch the ‘Ticker’ space and enter a ticker symbol for one of the allowed stocks (if you do not have a subscription) or enter the ticker for any NYSE or NASDAQ stock (if you do have a subscription).  Touch ‘Done’ and OptionPortfolio will go to the web to download option information.   Touch ‘Assets’ and then one of the 6 ‘Item’ spaces.  Select whether this Item will be Shares, Calls or Puts and, if Calls or Puts, select a strike date.   When done, touch ‘Save’ (**).  If the item is a call or a put, touch the corresponding ‘Strike Price’ for the item, select a strike price and touch ‘Save’(**).   Then touch the corresponding ‘Position’ for the item, select Long or Short and the quantity and touch ‘Save’(**).  Repeat this procedure for up to 6 different items for each portfolio.  To enter items for a portfolio for a different stock, or to enter a portfolio with a different set of options for the same stock, touch a different number on the segmented control at the top of the screen and repeat the above.

          If any value is displayed in a red color it indicates something is not completely correct.  For example, if web access is unavailable, OptionPosition will use the last stored interest rate or option values and indicate that by displaying the interest rate or the date in red.  If a selected Strike Price is not available on the selected date, or if the implied volatility is unphysical (i.e. less than 0% or more than 1000%) the price will be displayed in red. 

          Touch (**) ‘Diagnostics’ to review the assets, their current prices, implied volatilities, value, and Greek derivative functions.  You can use the Diagnostics table to select a set of assets that have a specific total hedged position such as a total Delta value close to zero.   

3) Graphs:

            Once one or more portfolios have been populated with items, touch the ‘Graph’ tab bar.   (If a graph does not appear touch ‘Rescale’ – graph scaling is discussed below.)   The black line indicates the gain/loss value of the portfolio of assets as a function of the stock price as of today.  As time moves on and we approach the strike date, the value will change.  To see the value at some point in the future, touch the ‘Date’ segment on the ‘Red Line’ and move the slider to the right.  To see the value were the volatility to increase or decrease, touch ‘Vol.’ on the ‘Green Line’ and move the slider to the right or the left.  

          There are three different ways to adjust the scale of the axes.  a) To move the graph, touch anywhere within the graph area and move the graph with one finger.  b) To increase or decrease the scale along the X or Y direction, touch anywhere within the graph area with two fingers and spread or pinch the two fingers along the X or Y direction or both.   c) Another way to expand or contract the X axis is by tapping a high (or a low value) just below the X axis to lock it and then touching to the left (or right) of that value with one finger just below the X axis and moving that finger to the left or right (or right or left).  d) The same procedure will expand or contract the Y axis.  When done, you can touch Rescale to return the scales to their preselected values.  (Aside – We know that this sounds somewhat complicated, but once you get the hang of it you will find it is the fastest way to zoom to exactly where you want.)

          To view any of the Greek functions, touch the segmented control at the bottom.  Delta is the derivative of the gain/loss value with respect to stock price, normalized to a $1 change in stock price.  A share of stock has a Delta of 1.  Delta is expressed in terms of shares.  An at-the-money option has a delta of 0.50. Vega is the derivative of the gain/loss value with respect to volatility, normalized to a change in volatility of 1% (i.e. 9% goes to 10%).  Vega is expressed in terms of portfolio $’s per 1% change.  Theta is the derivative of the gain/loss value with respect to time, normalized to one day.  Theta is expressed in terms of $’s per day.  Gamma is the second derivative of the gain/loss value with respect to stock price, normalized to a $1 change in stock price.  It is the change in delta with respect to price. Gamma is expressed in terms of shares per $.   For further information, refer to our website referenced above and the section ‘Technical details’ below.  

          To eliminate some of the screen clutter, touch the ‘Hide’ button(**).  To restore those functions, touch the ‘Show’ button(**).  Alternatively, tilt(**) the iPhone to the landscape orientation for a clean graph that retains only the scaling functions described above.   

4) Subscriptions:

          We are pleased to provide this App to you for a small onetime payment.   With that onetime payment comes access to 6 example stocks that allow you to explore option strategies including one large, dividend paying company (GE), one  large non-dividend payer (BAC), a fabulous high-tech company that we all love (AAPL) and three classic index stocks (SPY, GLD and USO).  For those who wish to use OptionPosition to explore option positions for stocks that they might actively trade, we offer a subscription that provides access to option data for all stocks on the NYSE and NASDAQ.  (The subscription fee justifies the effort that we put into this App.   We thank you in advance for your understanding of the limits of the non-subscribing version and the request for a monthly stipend to keep us excited about OptionPosition.)

          A one month auto-renewable subscription is available at the App Store through an In App Purchase.  To purchase the subscription, touch the ‘Directions’ tab bar then touch the white button labeled ‘Touch here for an explanation of subscriptions or to subscribe’.   Then touch ‘Read subscription info’ and you will be taken to the App Store.  Once there, touch ‘Confirm’ and enter your App Store password.  Each month, unless you go to the App Store and cancel the subscription, your subscription will be renewed automatically.  

          If you have more than one device (iPhones or iPads) you can extend your subscription to all of your devices.  Instead of touching ‘Read subscription info’ as indicated above, touch ‘Verify subscription status’ on the other device.  You will be taken to the App Store to enter your password and your subscription status will be extended to that device.   At the end of the month, if your device did not receive the renewal notice (we believe only one device will), you will be told that ‘Your subscription needs to be updated.’  Touch the white button that will be labeled ‘Touch here to update subscription information’.  You will be sent to the App Store to enter your password and get your subscription updated on that device.  Again, only one subscription is needed to cover all of your personal devices.

          Subscribers who terminate their subscriptions will retain their portfolio positions and the data that is stored in their device (i.e. option prices that were downloaded while their subscription was active).  However, with the exception of the 6 example stocks listed above, those option prices will not be updated (read about red colored dates above).

5) Special additional iPad features:

On the iPad ‘Portfolio’ page, both the Assets and the Diagnostics are displayed at the same time.  There is no need to touch ‘Save’ to save an entry; your entry will automatically be saved when you touch the next item you wish to alter.  As you change an entry, the effects of that change will be displayed in the Diagnostics table.  This makes adjusting a hedged position very simple (e.g. changing the number of shares to achieve a Delta neutral skewing).  If you wish to cancel an entry, touch ‘Cancel’.  (Please note that an entry that has not been saved by either advancing to the next item or by touching ‘Save’, while it will affect the Diagnostics table, will not affect the graphic nor will it be saved when OptionPosition is terminated.)

          The larger screen on the iPad provides a much larger graphical display and therefore the ‘Hide’ and ‘Show’ buttons are not provided.   OptionPosition on the iPad supports the landscape orientation.  Therefore the tilt screen graphic is not enabled on the iPad.

6) Technical details

          Calculation related:  OptionPortfolio uses the Black-Scholes equation to calculate an implied volatility for each option.  The assumption that the price of an option is determined by the Black-Scholes equation is, therefore, inherent in all valuations within OptionPosition.  Under this assumption, if the implied volatility (annualized standard deviation) is calculated to be less than 0% or more than 1000% the item is excluded from calculations and listed as having 0% or 1000% volatility.  Derivatives are calculated by finite differences rather than closed forms.  For Delta, a $0.10 difference is normalized to $1.00.  For Vega, a 1% difference is used.  For Theta a one day difference is used for all days except the last day where Theta is calculated to the end of trading.  For Gamma, a $0.01 difference is normalized to $1.00.  

          Dividend related:   When a stock declares a dividend payment to shareholders of record on a specific ex-dividend date, OptionPosition assumes that, ceteris paribus, the stock price will fall by the amount of that dividend on the date that the stock will go ex-dividend.   Most importantly, OptionPosition assumes that dividends will continue to be declared in the future as they have been declared in the past – both in terms of dividend amounts and scheduled ex-dividend dates.  As dividend increases are announced or ex-dividend dates altered, these facts are reflected in the calculations when such information has been correctly transcribed by our proprietary data sources.  (We make no guarantees of accuracy with respect to dividend information or any other data.)  The portfolio value of a stock assumes that dividends will be reinvested risk free rather than used to purchase additional shares.  Because the value of the dividend is retained in the portfolio, the value of a portfolio that includes shares does not change when the stock goes ex-dividend.  However, because the break-even price of the stock is assumed to decrease when the stock goes ex-dividend, the price axis scale must be shifted by the dividend amount for all graphs that are shown for a future date.  This new scale is displayed in the color of the future-date slider (i.e. red or green).  Because OptionPosition is assuming a scheduled payment of fixed dividends and not a ‘dividend rate’, dividends do not change as the underling price of the stock changes.  Therefore, OptionPosition calculates a Delta value that differs from the closed form and other Black-Sholes formulas that assume that dividend rates are fixed and therefore that dividends change with stock price (i.e. [d/dP] of [S*exp(-rate*T)] differs from [d/dP] of [S – sum(Di)]).  We believe our approach is more correct.  Please send us your comments on this matter.  

          Expiration timing:  OptionPosition assumes that option volatility extends until 5pm or 6pm US East Coast Time on the day that options are settled (i.e. Friday afternoon for weeklies and Saturday afternoon for monthlies).  There is some error in this assumption as trading on monthlies is very weak on Saturday and in any event 6pm is too late.  However there are significant problems with ending the time before close of trading so we erred on the longer side.  Note that the quantity (volatility*time*time) is used throughout the Black-Scholes equation so the effect of this error in time shows as a small error in implied volatility and Vega and, we believe, nowhere else.  The change is significant only on the last one or two days of trading when inefficient trading costs dominate assumptions underlying Black-Scholes and the calculations would be unreliable even with correct timing.

          Risk free interest rate:  OptionPosition uses the annualized Euro-dollar 3 month rate as determined by Bloomberg and CTRB ICAP Fixed Income & Money Market products.  

          Stock quote delay:  All quotes are delayed by approximately 20 minutes although we reserve the right to increase or decrease that delay without notice.  

          Subscriptions:  When the App Store tells OptionPosition that a subscription has been transacted under the user’s iTunes account, OptionPosition gives the user full access to web data until midnight local time on the day that is exactly 31*24 hours from the time of the transaction.  At that point, OptionPosition requires a subscription update to continue the full web access.  The App Store renews auto-renewable subscriptions ‘every month’.  Therefore, at midnight after 31*24 hours, the subscription will have been renewed and the update will extend the subscription by an additional 31*24 hours from the time of renewal, not from the time of the update.  That is, the subscriptions are monthly, not 31*24 hours.  When a device interacts with the App Store, the App Store sends certain transaction information to the device.  This information is summarized at the bottom of the ‘About’ text screen but only during a session when the App Store has sent such information.  For example, if you go through with a ‘Verify subscription status’ request, the About text screen will show all monthly subscriptions that the App Store has recorded for your iTunes account.