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DOCUMENTATION FOR the SHAREWARE VERSION of T H E O P T I O N E V A L U A T O R by Raymond J. Kaider (c) 1987 DISCLAIMER: The OPTION EVALUATOR is provided to the user as SHAREWARE. Distribution of this program without charge is encouraged. This program is provided without warranty. The author accepts no liability in the use or misuse of this program. It is assumed by the author that the user of this program is versed in the trading of futures options and OEX options and of the risk involved in speculation. Subjective judgement based on experience is essential in utilizing information derived from this pro- gram to achieve profits. Trading futures or options on futures can be a high risk affair. The author accepts no liability or responsibility for losses suffered in the futures or options market by the user. The OPTION EVALUATOR does not portend to be a trading system nor does it imply that it is a crystal ball seeing into the future. The program is based on the Black-Scholes model of option pricing. Copies of this SHAREWARE version are available for $5.00. The REGISTERED version (with documentation) is available for $60.00. Ordering informa- tion is included at the end of this documentation. The following is a brief discussion of how to use the SHAREWARE version of the OPTION EVALUATOR, including examples. The program may be run from hard disk or floppy. Simply type in the word OPTION and the program will load. The first screen will give information regarding questions about program operation, obtaining a REGISTERED copy of the program, and how you might go about contacting me if you are interested in opening either a managed or non-discretionary account. SHAREWARE USER QUESTIONS: My mailing address, as well as my Compuserve ID are listed on the opening page. I will try to answer any user ques- tions about problems incurred in running the program, but NOT about op- tion trading or terminology. I cannot make any guarantees as to when the answers will be forthcoming, either. It is assumed the user is knowledgeable about options and option trading and terminology. REGISTERED COPY INFORMATION: See end of this document. ACCOUNT INFORMATION: I am a registered commodity futures broker and a registered Commodity Trading Advisor (CTA). If any user would care to discuss their current option positions, receiving option newsletter or data transmissions, or opening a managed or non-discretionary account, you are invited to call me during market hours, Monday-Friday, roughly from 8 AM to 4PM, Central Daylight Savings Time at 1-312-794-1777. If I am not available, please leave your name and number. Your call will be returned. PRESS ANY KEY TO GO TO MAIN MENU. DESCRIPTION OF MAIN MENU SELECTIONS CHANGING INTERNAL DATE: It is very important that the system date be set to the date for which you are making any computations. The reason for this is that the days until expiration are determined by subtracting the internal system date from the option expiration date. If you are calcu- lating option values on Friday night, July 31, for use on the following Monday, August 3, make sure the system date is set to 08-03-87. Other- wise, 3 additional days til expiration will be included in your calcula- tion, throwing off your given output by that amount. To change the date simply press D at the Main Menu. A window will appear informing you of the current system date. Enter the new date in the for- mat MM/DD/YY. Do not include the slashes. Simply type in the numbers of the date. EVALUATING A CALL: This choice will create a window which will prompt you for several different inputs. (MAKE SURE YOUR READ THE SECTION ON PROPER FORMAT FOR DATA INPUT LATER IN THIS DOCUMENT!) In entering the THE OPTIONS EVALUATOR SHAREWARE DOCUMENTATION 2 expiration date of option follow the same rules as for changing the sys- tem date (see above). After making your entries you will be asked to confirm their accuracy. If there is an incorrect entry you will be re- turned to the Main Menu. Simply choose C again and reenter your input. The output will be the Fair Market Value (FMV) of the Call, along with the DELTA, THETA, and VEGA of the Call. EVALUATING A PUT: This choice is identical to Evaluating a Call, except, of course, it's for a Put. Enter input correctly and your output will be the same as above for Evaluating a Call. CALCULATING IMPLIED VOLATILITY: This choice is similar to the above two Main Menu choices. The difference being entering the FMV of the option and receiving the implied volatility as output. Should an input error occur or should the implied volatility be extremely high (as was the case in the March-May '87 Comex Silver market) you may receive a message "RESULTS BEYOND PROGRAM RANGE." Double-check your input first and reen- ter. If same message occurs, be aware that the option volatility has probably approached 100%. Take appropriate action. CALCULATING HISTORICAL VOLATILITY: By following menu prompts, you will be returned the Historical Volatility for any Type 1-4 underlying instru- ment. You may enter data on a Daily, Weekly, or Monthly basis. This is the only input required and you are given the opportunity to correct er- rors. F1 = HELP ANYTIME: By pressing F1 at anytime during the program the user will call-up a HELP screen which is a digest of this documentation. It may be helpful while still in the learning phase of using this program. FEATURES NOT AVAILABLE ON THE SHAREWARE VERSION ONE-TIME TABLE: Pressing O will give you a sample output of this feature available on the registered version only. It will allow the user to choose any three strike prices (at given increments) and any range of fu- tures (OEX) prices (at given increments) and calculate the FMV of both Puts and Calls at all futures (OEX) incremental prices for all three strike prices. Also returned will be the DELTA of all options at all un- derlying prices for all three strikes, as well as the THETA and VEGA. These sheets are invaluable for creating option strategies, and similar sheets are used by option professionals world-wide. CONTINUOUS TABLES: These tables are similar to the ONE-TIME TABLES, but are user defined. That is, if a speculator is tracking 3 different un- derlying instruments on a daily basis, the speculator would set up vari- ous parameters in this section, and then, for each trading day, would en- ter required input. There is less required input in this section than that of the ONE-TIME TABLES because some of the input is pre-defined by the user. Another feature is the saving of implied volatility figures on THE OPTIONS EVALUATOR SHAREWARE DOCUMENTATION 3 a daily basis, as well as 5, 10, and 30 average implied volatility fig- ures and all features described above in the ONE-TIME TABLE section. ANALYZE A STRATEGY: This feature is currently not available in either the SHAREWARE or REGISTERED version. I hope to complete it by September, 1987. It will allow the user to project into the future the value (and feasibility) of multiple-leg strategies. Registered users will be noti- fied upon completion of this project. Dependent on how this program is received, a long-term project will be the inclusion of GRAPHIC capabilities for most of the major functions. Again, registered users will be informed upon project completion. DESCRIPTION OF PROPER INPUT FORMAT Most futures trade in decimal figures as do their options. But several groups aren't as considerate of programmers. T-Bonds trade in 32nd's of a point and their options are traded in 64th's. Soybeans and grains trade in 1/4 cent increments (but are traditionally listed in 1/8th cent increments, e.g., 5416 means $5.41 6/8 or $5.41 3/4 per bushel) and their options are traded and listed in 1/8 cent increments. The OEX (not a fu- tures contract) trades in decimal, but has options which trade in non- decimal fractions of a point. These fractions may be listed in 1/2, 1/4, 1/8, or 1/16 point increments. As a result, a standard for data entry had to be established. One of two choices had to be made. Either have the user convert all fractions to decimals, do the calculation, and then convert back to proper fraction, OR have the program take care of the conversion and hope the user will follow certain input standards. The latter option was cho- sen. ITEM I. The ONLY time the user will enter a decimal point will be when asked for IMPLIED VOLATILITY or INTEREST RATES, if the decimal point is required. If the determined implied volatility is 11.34%, enter 11.34, not .1134. If it is 23.6%, then enter 23.6, not .236. If interest rates are 5.97%, then enter 5.97, not .0597. If they are 6.1%, then enter 6.1, not .061. ITEM II. The T-Bond family of options have been designated as TYPE 1 contracts. These are any contracts which trade in 32nd's of a point and have options which trade in 64th's of a point. If a T-Bond is trading at 96-04 (96 4/32) then enter 9604 with no decimals or any other punctua- tion. 92-10 is entered as 9210, not 921. If the Bonds are at an even strike price, such as 94-00, you must enter 9400, not 94. Bond strike prices are listed the same way. The 96, 98, and 100 strike prices must be input as 9600, 9800, and 10000, respectively. The Bond family options trade in 64th's of a point, and must be input as such. For example, if a Bond option is at 2-05 (2 5/64th's) then enter it as 205, not 2.05, 25, or the like. If it is at 1-00, then enter 100, not 1, THE OPTIONS EVALUATOR SHAREWARE DOCUMENTATION 4 or 1.00. If at 3.20, then enter 320, not 3.2 or 32. Output produced by the program will be in the same format as you entered. Bond output will be in 32nd's (9212 means 92-12) and options in 64th's (23 is 23/64th's, 106 is 1 6/64th's). ITEM III. The Soybean/Grain family comprise this group. All input will be in 1/8th cents, signified by the final digit. If the futures are trading at 305 1/4 cents, then enter 3052 (indicating 305 2/8 or 305 1/4). If Beans are at $6.00 even, then enter 6000 to allow for the zero fractional cents. The options are the same. If a $2 December Corn Call is trading at 7 5/8 cents, then enter 75 as the price, not 7.5, .75, or .07625. Strike prices must allow for the fraction cents. A $3.00, $5.75, and $6.50 strike would be entered as 3000, 5750, and 6500, respectively. As with the Bonds, Type 2 output is the same as input. All output is listed with the final digit indicating 1/8th cents. For example, 5432 is $5.43 1/4 and 310 is equivalent to 31 cents even. ITEM IV. Type 3 contracts comprise the majority of futures and options: those that trade in decimal. Convention must be followed here, as well, though. A June Japanese Yen might be reported with a price of .006642, .6642, 66.42, or 6642, depending on your source. Again, with use in this program, enter 6642, NO DECIMAL POINT! A September S&P 500 contract that settles at 301.45 is input as 30145. Strike prices must allow for all digits also. A 55 strike in the D-Mark is input as 5500, a 305 strike in the S&P's is 30500. The options follow the same rule. If a Swiss Franc call is trading for 1.30 points, then enter 130, not 1.3 or 13. All output from this section is in the same format as input. ITEM V. Type 4 contracts include the OEX, though not a futures contract, the most popular option traded in the world. These options are treated as a compromise between Type 2 and Type 3 contracts. Enter the underlying index as you would a Type 3 contract, in decimal. That is, if the OEX is at 293.67 enter 29367. The same applies to strike prices. A 295 OEX strike is entered as 29500, not 295. The options are entered as Type 2 options, i.e., with the final digit in- dicating 8th's of a point. (The user may have to do some simple mental conversion to accomplish this.) If an OEX option is at 15 1/2 points, then enter 154 (meaning 15 4/8, or 15 1/2). If at 5 3/4, then enter 56 (5 6/8, or 5 3/4). When dealing in 16th's of a point the user may have to use some discretion. If an option is at 1 1/16 then the user must de- cide whether to enter 10 (for 1 0/8) or 11 (for 1 1/8). If an option is at an even point amount (12, for example) you have to allow for the 0/8th's of a point. Enter it as 120, not 12. The OPTION EVALUATOR does not compute premiums for STOCK OPTIONS. (Allowances must be made for dividend payment.) Again, dependent upon response, this may be an inclusion of future versions. THE OPTIONS EVALUATOR SHAREWARE DOCUMENTATION 5 ORDERING INFORMATION To order additional copies of this SHAREWARE version of the OPTION EVALU- ATOR, send a check or money order (checks must clear!) for $5.00 per copy to the below address. To order REGISTERED versions of the OPTION EVALUATOR send a check or money order for $60.00 to the below address. REGISTERED user will re- ceive a diskette containing the full-version of the OPTION EVALUATOR as described above, as well as complete documentation, and notice of any en- hancements made in future versions of the program. REGISTERED users may feel free to contact me by mail with any questions they might have regarding questions about the program. Assuming the let- ter is received, response will be shortly forthcoming. If you have enjoyed using the SHAREWARE version of the OPTION EVALUATOR and would like to make a contribution to be used for further program de- velopment, it would be appreciated. Please send it to the address below. GOOD LUCK! Raymond J. Kaider P.O. BOX 4417 Chicago, IL 60680-4417 THE OPTIONS EVALUATOR SHAREWARE DOCUMENTATION 6