What is an options calculator and how to use it?

Listen to our Podcast: Grow your wealth and keep it secure.

0:00 / 0:00

Introduction

Options are financial derivatives that can be bought and sold by traders in the market. Options provide the individual with the right to purchase/sell shares at a certain fixed price on a future date. This helps traders predict the market movement and take advantage of their ability to analyze the market accurately. Call options allow traders to buy shares at a strike price, and put options allow them to sell shares at a strike price.

Although options provide traders with the right to carry out this contractual transaction, the trader has no obligation to execute this right. They can let the option expire. The value of the option would be a loss though. 

Additional Read: How to Calculate Brokerage in Share Market

What is an Option Calculator?

An option price calculator is a helpful tool that traders use to get an estimated value of options contracts. The calculator takes into account several aspects including the current price, the strike price, the date of expiry, the volatility of the market, and prevailing interest rates. It helps in determining the approximate value of the option which is influenced by the aforementioned factors. It's sort of a predictive tool for investors and helps them get an idea of potential profit or loss scenarios.

People who are into options trading in Nifty frequently use these calculators. They enter the current price, the strike price, and other relevant metrics for the calculator to process. The calculator analyzes the data provided and with the help of the formula coded into it, the estimated approximate value of the option is returned as output. 

An options trading calculator gives an individual some semblance of a glimpse into the future. Different scenarios can be envisioned, and changes can be foreseen this way. The insights one gets using an options calculator can aid them in making more informed decisions. Irrespective of whether the individual is a beginner or a seasoned trader, an options calculator can be a potent weapon. It increases the confidence with which one trades in options. The confidence, in turn, can result in better returns. 

Components of an Option Calculator

An option price calculator works like this: it takes inputs from the user, fills up the values of all its components, and then ascertains the option’s worth using this information. Let’s list out the components that form part of this calculator.

The current market price of the asset is a major component. It could be a stock, a commodity, an index, or even a cryptocurrency. The options trading calculator must know the asset type and its market price to work on the calculations. Followed by the current price, the strike price is also an important component of the tool. Strike price or exercise price, is the price at which the asset can be bought or sold. 

The expiry date of the option is also necessary for this calculation. The time of expiry until when the option can be executed helps the calculator ascertain the value of the option. For the unversed, an option can be exercised on or before its expiry date. 

A measure of the market volatility also plays a role in this calculation. The highs and lows of the market can affect the valuation of the option significantly. This volatility is taken into account while determining the estimated worth of the option. 

Whether the trader is going for a call option or a put option is also a component of this calculation. A call option gives the individual the right to buy at the strike price, and a put option gives them the right to sell at the strike price.  The value of the option is influenced by which option it is that we are dealing with. 

The interest rate prevailing in the market too needs to be factored into this calculation. Interest rates can be deceivingly significant in influencing the option price. This is especially true in cases of bonds and currencies where the interest rates play a vital role. In addition to interest rates, dividends are also important to this discussion. However, dividends are not paid out for all assets, so this is only applicable to cases where a dividend payout exists. 

How to use an Option Calculator?

Calculation of options value is done through a complex mathematical model named the Black Scholes Model. This is used to calculate Option Greeks, which are a set of values that are named after the Greek alphabetic characters. Although the model is complex, the calculator would require the user to add in the inputs. 

The following inputs are required for the calculator to determine the options' price. 

Spot price: The current market price of the underlying asset is one of the mandatory inputs to be made into the calculator.

Interest rate: By interest rate, we refer to the prevailing interest rate in the market. If unsure, one can refer to the RBI website to know what value to fill in this space.

Dividend: In cases where dividends are paid out for the underlying asset, one needs to enter the expected value of the dividend per share. 

Time until expiry: Time left until the expiry of the option is a crucial metric for determining the value of the option. 

Implied volatility: The implied volatility of the market needs to be entered as well. This value can be taken from the Volatility Index, which can be taken as a trustworthy measure of this metric. 

Benefits of Using Option Calculator

Using an option price calculator comes with several advantages and here are a few of them. 

Precision: Option calculators provide precise values and they hold a strong place in the finance world. The variables involved in ascertaining the value of options are several and an efficient calculator is required to do the math for the traders. Even minor errors can distort the picture and hence these are inevitable in the business. They use different models and one can choose the one that fits their strategy better. Overall the technicality is quite high and an option value calculator is quite important for traders. This is especially true in the case of option intraday trading.

Time Efficiency: Dealing with the stress of decision-making is already hard enough for traders, and handling complex analysis without help can be a blunder. Using options calculators can reduce the pressure and reduce the time taken to interpret the numbers. These few seconds or minutes can save potential losses, in dire situations. This is especially true in the case of options intraday trading. 

Versatility: Option calculators are designed with several features and tools to make sure the diverse needs of the traders are met promptly. They offer the choice of different pricing models which include, Black-Scholes, Binomial, and Monte Carlo Simulations. The models cater to varied trading scenarios and the diversity comes in handy for decision-makers. Options calculators help traders evaluate the risk associated with the options using a range of metrics collectively known as the “Greeks” and represented by characters from the Greek alphabet.

Types of Calculators

There are different types of options calculators, catering to different requirements. Let’s explore some come types.

1. Option Pricing Calculators: These tools determine the value of options using different pricing models, such as Black-Scholes, Binomial, or Monte Carlo simulations. 

2. Volatility Calculators: These calculators help traders in estimating the expected volatility of an underlying asset over time. 

3. Greek Calculators: ‘The Greeks’ are metrics that indicate the sensitivity of an option's price to changes in several factors. Greek calculators can provide values for Delta, Gamma, Theta, Vega, and Rho, allowing traders to interpret how various factors can influence their options.

4. Probability Calculators: These calculators assist traders in estimating the probabilities of various outcomes from their options positions. 

5. Position Analysis Calculators: These calculators determine the risk and reward of option positions and strategies.

6. Historical Data Analysis Tools: Some options value calculators help traders in analyzing historical price data for underlying assets. This includes price movements, trends of volatility, and option pricing behavior. 

Conclusion

It is easy to underestimate the importance of options calculators but they play a pivotal role in the analysis and decision-making process for the traders. In the right hands, these tools can offer revolutionary insights that can exponentially increase the odds of a successful trade.  Using these different types of options calculators can help traders gain expertise in options pricing, risk management, and trading strategies, which in turn would ultimately increase their chances of emerging successful in the options market.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

Share this article: 

Read More Blogs

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

7.5 Lacs+ Users

icon-with-text

4.3+ App Rating

icon-with-text

4 Languages

icon-with-text

₹4300 Cr MTF Book

icon-with-text