Live on Gatsby Cloud: calloption.trade
Use this web simulator to generate realistic option contract scenarios before entering the market with real money.
View day by day changes in option premium with dynamic D3 charting.
Charts are generated based on normal distribution and options priced with the Black-Scholes-Merton model.
Created by Carter Lawson at SUPERMAPLE.systems
Main Technologies:
Javascript
React/GatsbyJS/Gatsby Cloud
D3
NPM Packages Used:
React-bootstrap
React-bootstrap-icons
React-bootstrap-range-slider
Other:
JS Normal Distribution function via T. Ferguson UCLA Math
D3.js Graph Gallery Connected Scatterplot Starter via Y. Holtz
This resource is for learning purposes only and is not intended to represent actual future price movement or financial advice. Though it mimics the movement of option prices for basic education, actual market prices will vary, transaction fees will apply, and option prices will be further affected by changes in implied volatility (this model uses consistent IV throughout projections).
A call option contract gives a purchaser the right to buy a set amount of shares at a predetermined price. A standard stock option contract covers 100 shares. It is important to note that exercising the contract is a right, but not an obligation for the call holder.
All call contracts have two main features, a strike price and an expiration date.
The strike price is the fixed price at which a contract can be surpass the strike price in order for the contract to be worthy of exercising. Otherwise, exercising the contract would mean purchasing shares for more than you can buy them for on the open market. For example, a contract could allow the purchaser to buy 100 shares at a strike price of $105. If the stock price moves to $106, exercising the contract to buy at the lower strike price would lead to a $1 profit on every share purchased.
The expiration date dictates the amount of time the contract is valid. The value of the option is dependent on the amount of days to expiry. Day by day, the value of the option changes as the contract approaches the expiry date. As longer dated options have more time to reach their potential, more days to expiry increases the price (premium) of the option.
American-style options can be exercised at any time prior to the expiration. European-style options can only be exercised on the expiration date.
Note: This simulator uses the Black-Scholes-Merton model for pricing European options, but the fundamentals observed are still relevant to those purchasing American derivatives.
The incentive for the option seller is the premium. The premium is the total cost of the option. This includes both the current value of exercising the option, if the strike price is below the current stock price, and an estimate of future movement potential. In the seller's ideal outcome, the stock price ends up below the strike price, and they pocket the premium as the contract expires worthless.
When a call option is “out of the money”, the current stock price is below the strike price. The contract cannot yet be exercised, and in this case the value of the option (the premium) is only the potential for it to move above the strike price.
When a call option is “in the money”, the current stock price is above the strike price. The contract is eligible to be exercised (immediately or on expiration date depending on American/European). The premium in this case factors in the amount the stock has surpassed the strike price, and the potential for it to move further.
Where the stock price lies in relation to the strike price effects the options value and rates of change.
For example: $10 stock moves to $10.50 (Days to expiry: 30)
Strike 1: $11 -> Option premium moves from $5 to $7.50
Strike 2: $15 -> Option premium moves from $0.20 to $0.30
In the first option, the strike price is closer to the current stock price. Because the probability and potential of the first option being “in the money” is higher than Option 2, it is priced higher from the start.
The amount the option premium changes with a $0.50 increase in the stock price is also larger ($2.50). The same movement in Option 2 only moves the option’s value $0.10, because it still has a long way to go before it is “in the money”. What you are noticing is a difference in delta, one of the five option greeks that are used to measure risk. More about the option greeks can be learned here.
The risk-free interest rate is a hypothetical rate of return representing what an investor could expect to receive on an investment with absolutely zero risk. Though no investments are 100% risk free in reality, safe securities such as U.S. treasury bills or the LIBOR (London Inter-bank Offered Rate) can be used as reliable benchmarks. As call options free up capital investment opportunities for the call purchaser, higher interest rates will create higher priced options.
Implied Volatility is a metric estimating the range of future share price movement. IV is determined by measuring historical price movement and factoring in current market sentiment.
The volatility percentage represents an estimate of one standard deviation of the stock price over a period of one year. Standard deviation is a statistics concept that measures the likelihood of outcomes. In a normal distribution bell curve, 68% of outcomes are estimated to fall within one standard deviation, 27% of outcomes within two deviations, 4.5% within three deviations, and 0.2%.
This is best explained with a couple examples:
A $100 stock with a 50% IV is expected to have a 68% chance to stay within $50 of the current stock price, meaning a potential range of $50 - $150 over the year. There is a 27% chance estimated that it surpasses $150 or falls below $50, and approximately 4.5% chance it surpasses $200.
A high growth stock with a lot of market buzz could have an IV percentage of 150%. If it was currently sitting at $100, this indicates that the market sees potential for the company to more than double in growth. A single deviation of this stock would be $150, therefore there is an estimated 68% chance it stays within the $0 - $250 range. Probability would further dictate a ceiling of $400 for the second deviation (27%), and $550 for the third (0.2%).
The simulation (tools/simGraph.js) generates a normal distribution of price movement relative to the volatility input. Daily SD (standard deviation) is calculated, then an RNG roll is conducted for a percentage of the daily SD. A multiplier is applied to the daily SD based on another RNG roll for a normal distribution of "types" of movement days (enabling days where movement surpasses the first deviation).
Changes to the "Luck" parameter affects price movements that fall within the 1st deviation to be all positive or all negative (68%). As this does not affect 2nd+ deviation movement days, a simulation with "good" luck still has a slim chance of trending downward. Repeated simulation with selected luck influence should generate desired result.