Option Payoff Excel Tutorial

longandshort said:
@Quanto you don’t seem to understand what @FSU is saying lol. While these options calculators in excel are “helpful” for new options traders, they shouldn’t be relied on for actual analysis as their assumptions can lead to significant divergence from reality.
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This is basic maths, everybody can check & verify it.
But he does different than what these formulas are for: he closes the position early, instead of letting it expire (and handle everything automatically by the OCC or the broker).
Such payoff formulas are always just (only) for the expiration, not for closing early.

Of course I can understand when he needs to close the position early by himself when he lacks neccessary funds in his acct. But this of course is his own problem, not a problem of the said payoff formula...

Here's a good text that explains the last day of the option in detail:
https://www.powercycletrading.com/what-time-do-options-expire/
Look what the above text says:
Most exchange-traded options contracts follow a predetermined expiration system. Equity stock option contracts listed on the US exchange will always expire on the Saturday that follows the third Friday of the month.
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Ie. the Monthly options expire on Saturday! :)
Closing them on Friday means early-closing!...

OCC: Option Clearing Corporation --> see the first link above.



 
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Quanto said:
This is basic maths, everybody can check & verify it.
But he does different than what these formulas are for: he closes the position early, instead of letting it expire (and handle everything automatically by the OCC or the broker).
Such payoff formulas are always just (only) for the expiration, not for closing early.

Of course I can understand when he needs to close the position early by himself when he lacks neccessary funds in his acct. But this of course is his own problem, not a problem of the said payoff formula...

OCC: Option Clearing Corporation --> see the first link above.
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You still don't seem to understand. You can't let these options exercise automatically and have the OCC handle everything. These are not cash settled. You won't know if you will be assigned or not. After hours movement will affect whether long holders exercise or not.
If you did this, you would be at tremendous risk, you may or may not be assigned on your shorts and could come in with a huge position the next day.
 
FSU said:
You still don't seem to understand. You can't let these options exercise automatically and have the OCC handle everything. These are not cash settled. You won't know if you will be assigned or not. After hours movement will affect whether long holders exercise or not.
If you did this, you would be at tremendous risk, you may or may not be assigned on your shorts and could come in with a huge position the next day.
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You seem not to understand, b/c such "minor" problems are not the fault of the payoff formula, which BTW is the discussion topic here... :)

FYI: I let all my short options just expire automatically w/o doing anything by me. It works flawlessly, and getting assigned is no problem for me, b/c that situation too is part of my trading plan.

And: not w/o a reason do I prefer low priced stocks... :)
I'm not crazy to trade a stock whose share price is $800 or so, like in the above case.
I trade stocks < $10 :-) and their options. In that case such problems as listed by you cannot happen.
 
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FSU said:
The problem with this and all other options payoff calculations is they assume when the stock closes at the exact price where a short option is centered, it yields max profit. This is just not the case unless you are dealing with a cash settled index.

Since you can exercise an option until 530 pm on expiration, even out of the money options retain value. These models assume they are worthless.

If you have a long butterfly in a volatile stock such as SMCI and it closes exactly at your short strike, these models will assume a max payoff. In fact, your short option may still have substantial premium here on the close. So, you really aren't able to achieve the max value predicted in these calculations.
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I was short a call option last Friday that was 5percent in the money. At 5pm the stock fell 15percent and the option was not exercised.

ps: you are playing chess with a pigeon.
 
I'm really surprised that there are some traders who even question the usefulness of the standard well-known payoff function.... Unbelievable, IMO! I'm really shocked!

Some days ago another such trader said one rather should take AI ("machine learning" he said) instead of such payoff formulas to determine the outcome at expiry... :)
This one had no clue what the payoff function does, and I think he was/is even a "veteran trader"...
 
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I am mercifully blocked by the OP,but why on earth would anyone need an EXCEL spreadsheet to calculate payoff??

A mind is a terrible thing to waste
 
I have to say Quanto, you're a tough one to figure out. You post a great deal here and you seem to get upset when people comment. I tried to point out the problem with your calculations, as they don't work with exactness in equity options due to after hours assignment risk at expiration.

Your responses have been that I am too poor to have options exercise. That based on my past posts I don't know what I am talking about and that my calculations are wrong. Each time I have not insulted you back, I just try and explain each of my statements, trying to show my point.

Not sure what you are really looking for in this forum.
 
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