The OptionCalculator provides insight in the profit or loss of a options trading strategy. An option here refers to a stock option or an index stock option.

An option is the right to buy or sell an underlying asset on, or before, a certain time in the future at a fixed price now. An option to buy is called a call option, an option to sell is called a put option. The strike price is the price at which the underlying can be bought or sold in case the option holder chooses to exercise the right to buy or to sell. The date after which the option may no longer be exercised is called the expiration date.

An American style option allows the holder to exercise the option at any time up to the expiration date. An European style option can only be exercised at the expiration date. More information can be found on Wikipedia.

In order to get an opinion about an options trading strategy one can use a theoretical pricing model. The OptionCalculator uses a binominal approach to model the so-called Black-Scholes equation, adjusted for American options. The used approach takes the following variables into account:

• The current price of the underlying
• The volatility of the underlying contract
• The strike price
• Amount of time remaining to the expiration date
• The risk-free interest rate over the life of the option
• Any dividend of the underlying

The used modelling approach has drawbacks and is based on a number of assumptions, including the assumption that the volatility is constant over the life of the option. This is not the case in practice. The accuracy of the outcome also depends on the accuracy of the inputs. All this means is that the values shown for the options trading strategy may deviate from the values seen on a stock exchange.

The OptionCalculator assumes 365 trading days per year.