Analysis Software for Stock Options
Stock options are complex financial contracts that trade on the open markets. They give you the right to buy or sell shares in an actual stock at a pre-determined price any time before the contract expires. An option's pricing behavior is difficult to predict due to the complicated nature of its terms. Approaching expiration dates also dramatically affect how the passing of time affects options' values. Analysis software helps options traders choose contracts and predict performance.
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Availability
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Some stock option analysis software is available for free online. But most of the robust solutions for analyzing options are part of proprietary trading platforms supplied by a broker. In many cases, you must open an account with an options broker to have access to their software. However, you do not actually have to use the account to trade. Some brokers provide a free demo account so you can try their software before you choose to open an account. It is not uncommon for serious options traders to maintain accounts at several brokers for access to all the analytic programs currently in the industry.
Profit and Loss Graphs
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The one feature that nearly all stock option analysis programs share is the ability to predict the full range of potential profits or losses that could incur with any particular options trade. Options strategies can be quite complex. Conservative strategies have both limited profit or loss, while aggressive strategies provide extraordinary profit potential at high risk for significant losses. All stock option prices depend on the value of an underlying stock, so these graphs visualize how the trade reacts to simple changes in a real stock's performance. Typically, the horizontal axis represents the price of the underlying stock, while the vertical axis depicts the profit or loss amount.
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Probability Calculators
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After knowing the potential extremes in profit or losses of a strategy, a trader next needs to consider how likely his profit target is to occur. Stock options change in value based on an "implied volatility" of the underlying stock. Some brokers provide probability calculators that use this volatility information to predict if a stock is likely to move as expected. The programs then combine these results with the specific strategy to determine its overall likelihood of profit.
Historical Prices
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Unlike stocks, whose prices do not expire unless the stock is actually de-listed, all stock options cease to exist eventually. This makes the study of past price charts difficult since historical price databases are not as readily available. Some analysis software includes tools to view historical option prices. This makes it possible to test your strategies against past market behavior to see if your ideas would have been profitable.
Warning
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Stock options are among the riskiest investments in the financial markets. Their extraordinary volatility opens up great opportunity for major losses. Additionally, they are complicated products that are difficult to understand and predict. Never trade stock options with money you cannot afford to lose, as many stock option contracts do expire worthless, resulting in a total loss of the investment.
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