I have a question for you. Please try to answer it as honestly as you can:
How Well Do You Understand Options Pricing And Options Strategies?
To help you answer this question, I have prepared three statements. Make sure to read them and then consider to what extent you agree with them:
- I know more than 8 different options strategies and their basic payoff behavior. (Agree/Disagree)
- I know what the Greeks are and how to use all of them in my trading. (Agree/Disagree)
- I completely understand the relationship between implied volatility, time and price of a wide variety of multi-leg options strategies. (Agree/Disagree)
If you fully agree with all of the just-mentioned statements, you clearly have a very good understanding of options pricing and options strategies.
But don’t worry if you didn’t fully agree with all of these statements. I have created a tool that will help you develop a much better understanding of options pricing, options strategies and much more. I call it The Strategy Lab.
Everything in the Strategy Lab is based on the Black Scholes Model – a mathematical model that won a Nobel Prize in Economics. The model was developed by Fischer Black, Robert Merton, and Myron Scholes and is still one of the most commonly used derivative pricing models.
What Is The Strategy Lab
The best way to learn options is not by reading articles on them. The best way is to try out as much as possible without risking your hard-earned money. That’s exactly what The Strategy Lab allows you to do.
The Strategy Lab allows you to visually learn all the intricacies of the rather complicated Black Scholes options pricing model. Furthermore, it allows you to directly see how changes in market conditions can and will impact your trades. Summed up, The Strategy Lab is the research tool for option strategists.
In my opinion, the best way to present The Strategy Lab is with a short video presentation:
Here is a list of features of The Strategy Lab:
- Interactive Payoff Diagram Creator
- Interactive Charts of All The Greeks For Every Strategy
- Over 2 Dozen Preset Strategies
- Fully Customizable Strategy Creator (Supports Up To 6 Legs of Options and/or Stocks)
- 3-Dimensional Interactive Graph That Visualizes The Relationship Between, Implied Volatility, Time and Price For Every Strategy
- Fully Customisable
- Works On All Devices
- Very Easy To Use
- Ability To Save All Charts
- Lifetime Access + Access To All Future Updates
- Excellent Customer Support
- Access To The Strategy Lab From Anywhere, Anytime
- In-Depth Guide To The Strategy Lab
- And More…
The following image will give you an overview of how The Strategy Lab looks like:
How much does The Strategy Lab cost?
The final price of The Strategy Lab will be a one-time payment of $50. However, if you are reading this, you still have the chance to gain lifetime access to The Strategy Lab (including future updates) for a one-time payment of $29.
That’s over 40% less than the final price!
How To Use The Strategy Lab
Let me present you an example of how The Strategy Lab could be used to analyze the commonly used option strategy: short iron condor.
The exact iron condor that I used was set up in the following way (default short iron condor):
The following animation shows how changes in time affect a neutral short iron condor. With the help of The Strategy Lab, this can be done by sliding a slider to the left. You can see the days until expiration of this iron condor on the right-hand side of the animation. (The dotted line represents the underlying’s price at entry.)
For the sake of this example I chose to display four plots:
- At Expiration (blue): This shows the payoff of this iron condor at its expiration date.
- X Days Out (orange): This plot shows the payoff of this iron condor X days before expiration.
- Delta * 10 (green): This plot shows the Delta of this short iron condor multiplied by 10.
- Theta * 10 (red): This plot shows the Theta of this iron condor multiplied by 10.
Theoretically, it would also be possible to display the plots of all the other Greeks at once. However, then it would be hard to recognize what is going on.
The blue ‘At Expiration’ plot looks just like you would imagine the payoff diagram of a short iron condor. It achieves max profit if the price of the underlying stays between the two short strikes (95 and 105). The max profit of this iron condor is $351.4.
Max loss, on the other hand, will occur when the underlying’s price is either below the 90 long
When changing the time until expiration, the blue ‘At Expiration’ plot is not affected because there always are 0 days left for this plot.
Next up, let’s discuss the orange ‘X Days Out’ plot. As seen with this plot, time clearly has an impact on the payoff behavior of the iron condor! The impact that the passing of time has depends on where the underlying asset’s price is. If the underlying asset’s price is in between or near the two short strikes, the impact of passing time is positive. Otherwise, the opposite is the case.
This means, as long as there still is sufficient time left until expiration, an iron condor can still be profitable even if the underlying’s price moves slightly above the upper or below the lower short strike price.
Now let me present, what the Delta plot shows you. Delta is the option Greek that measures the effect that a $1 increase in the underlying’s price has on the option’s price.
With less and less time until expiration, the Delta of this iron condor right around the long strikes becomes more and more extreme. This means with less and less time, this iron condor becomes more sensitive to changes in the underlying’s price. So a small move in the price of the underlying can have a much larger impact on this iron condor when it has little time left than if it would have many days until expiration.
That is one of the multiple reasons why it is a good idea to take profits early on iron condor trades. The longer you wait, the more volatile the profit and loss of the iron condor becomes.
Last but not least, let us talk about the Theta of this iron condor. Theta is the option Greek that measures changes in an option’s price for changes in time. In other words, Theta is the amount that an option’s price will change for the passing of one day.
As you can see on the animation, the Theta of this iron condor seems to be pretty flat while there still is a lot of time left until expiration. However, as time passes, Theta seems to awaken. This means that for every day that goes by, this iron condor will change more in price than it did the day before. The increasing sensitivity to changes in time is not linear. The closer the iron condor gets to its expiration date, the more its payoff will be impacted by changes in time.
Furthermore, it is evident that the Theta is positive while the stock price is in between the two short strikes. This indicates that time will have a positive effect on this iron condor’s payoff while the stock price is between the two short strikes and negative if is elsewhere. The closer the iron condor gets to its expiration date, the narrower the range in which time has a positive effect becomes.
Now we covered all the plots shown on the animation above. Hopefully, my relatively basic analysis of this iron condor could give you some insights into how to potentially use The Strategy Lab. Obviously, this only just scratched the surface of The Strategy Lab’s analysis capabilities.
I only analyzed the effect of time on four plots on one chart of one variation of one option strategy. In addition to this, you could also analyze all the other Greeks, the effect of changes in implied volatility, the effect of changes in the
The Strategy Lab allows every trader, regardless of skill level, to significantly improve their understanding of options strategies, options pricing and the dynamics of options in the markets. These are things you need to know to become a successful (options) trader!
I hope that you can see how The Strategy Lab can further develop your understanding of options and thereby improve your profitability as a trader. You can gain lifetime access to The Strategy Lab with less than the profits of a single good trade:
Remember: Right now you can still save over 40%
If you have any questions, comments, feature requests or anything, make sure to let me know in the comment section below. I will do my best to help you out as soon as possible.