Calculating an Options Time Value

Special Thanks to Chris Berte

And the DC MOB/IUG

To View Video Presentation by Chris Berte

1. Click Here, then

2. Signon to Xdrive, & then

3. Click on green button "Lauch Xdrive" on top right side

4. Click on IUG Meetings, then

5. Click on "Options_Calculator_by_Chris_Berte.wmv" and follow with his Calculator.xls

Need to have 5 Windows Open – Click on each line to open add’l windows

1. Click here to Open window to Option_Time_Value_Calculator.xls
2. Click here to Open window to INVESTools Interactive Chart www.INVESTools.com
3. Click here to Open window to www.EarningsWhispers.com
4. Click here to Open window to www.IVolatility.com
5. Click here to Open window to OptionsXpress - Options “Pricer” www.OptionsXpress.com

11 Option Action Steps

1. Choose a Stock
2. Calculate projected Move
3. Calculate Time to make the Move
4. Pick Expiration Month and Establish Strike Price
5. Pick Stop Loss 3% below support and . . .
1. “Seat Belt” Stop – 30-50% of Ask Price (a worst case scenario)
2. “Brakes” Stop – Unused when stock closes above/below the support/resistance level. This should be your most frequently used Stop.
3. “Time” Stop – Critical – Half the time until option expiration. On Call Options, if stock price is above support but at or below strike purchase price, GET OUT!
6. Check Earnings Release date / Go to www.EarningsWhispers.com
7. Check Volatility / Go to www.IVolatility.com
8. Choose Delta Based on Time Stop
9. Input Strike Price, Premium, and Theoretical Value
10. Calculate theoretical price “Pre-Move”
11. Calculate theoretical price “Post-Move”

Implied Volatility [Vega – 70%]

TIME VALUE = + Time Decay [Theta – 20%]

+ Interest Rates [Rho – 10%]

PULLING IT ALL TOGETHER

1. Get the Edge on Forecasting
2. What’s the Move & Time Frame
3. Know the Technicals
4. Look for the 10 Bagger – Use the Calculator!

Option Tidbits

When Buying an Option, You Pay for the Spread, Implied Volatility, & Time Value

1. Spread - Price is THE most important Thing!

It is the difference between the Bid and the Ask Price

The smaller the expected move, the higher the Delta should be. Keep

risk/reward in check

2. Implied Volatility

Low Volatility - Pay low Premium & High Volatility - Pay high Premium

With Increasing Implied Volatility, you can go close to “at the money” ATM

If you are unsure, choose a strike price “Deep in the money” DIM

Decreasing Implied Volatility – Sell

3. Time Value - Use Time Stops!

Decays fastest in last 6 weeks & you loose 70% of value at ½ way point

Buy farther out and/or “Deep in the money” DIM to negate time decay

4. The BIG PAY OFF = Price on the Stock

Exiting the Trade

1. When hitting the calculated price
2. Reaching targeted price of underlying stock
3. Reaching Time Stop

4 Pitfalls

1. Over Commitment of Capital

2. Lack of Diversification

3. Placing trades that have a risk/reward of 1:1 or less

4. Gambling when losing &/or becoming risk averse when winning

DISCLAIMER
* NapaINVESToolsMarketSamurai & INVESToolsUG is run for and by students of the INVESTools Method.
* We are neither stockbrokers nor investment advisers.
* Members may use web sites which belong to any of the INVESTools Brands: Business Week or Success Magazine.
* The information provided by members is obtained from various sources that have been deemed reliable, however, the information is not guaranteed to be accurate or complete.
* Members do not make recommendations on stocks or strategies.
* You are responsible for making your own decisions regarding any trade.
* Stocks or options may be discussed for educational purposes only.
* Members are expected to refrain from discussing products or software that conflict with or are in competition with the INVESTools Method.
* We expect that you will be honest in your education level. If we find out otherwise we reserve the right to remove you from the group.