Options Profit Graph For Price Changes Before Expiration

The options price change and profit graph worksheet on our trading spreadsheet is used to show us how option price and profit changes in 3 different ways:  (1) on the expiration date (2) on the date of the trade (3) on any other date before expiration.

It’s not enough to simply do option price modeling at expiration, especially for a long option.  This is the case, because very few long trades are actually held to expiration – at least without taking partial profits and/or turning the option into a spread.

And if the trade doesn’t work out, I would typically take a loss like I would on an underlying trade [there are other factors that would be involved that considered how the option fit in a stock options combination position], instead of letting it expire worthless and increasing the loss.

Options Trading And Price Change Scenario

There is a spreadsheet update to download – latest spreadsheet 12/9/2013

Options Trading Spreadsheet

Consider the following options trading scenario:

  • On 11/12 your underlying is at 75.80
  • You buy a 75.50 put for the 11/22 expiration
  • The put costs 2.00
  • Support is at 71.70

Price Before Expiration Options Profit Graph

Now let’s look at the options price graph that shows the change in the options price in 3 different ways:

(1) Options price at expiration

  • You can see that the breakeven for the put is 73.50
    • 75.50 strike – 2.00 cost = 73.50
    • If the underlying is at 75.00 on expiration you will lose 1.50
      • 75.50 strike – 75.00 = .50 – 2.00 cost = -1.50
      • If the underlying is at 72.00 on expiration you will gain 1.50
        • 75.50 strike – 72.00 = 3.50 – 2.00 cost = 1.50

(2) Options price change the day of the option trade

  • Look at the 2nd column labeled date1 – this is the date you made the options trade
    • If the underlying goes to 75.00 on the day of the trade you will make .39
    • This is the theoretical value for the option – the option cost
      • This calculation kept the volatility the same as when the option was purchased
      • You can change the volatility using an input in the worksheet

(3) Options price change at a different day before expiration

  • Look at the 3rd column labeled date2 – this is a day before expiration that you want to model the options price change and profit for
  • The date used is 11/15 – 3 days after the trade date
    • Now if the underlying goes to 75.00 on 11/15 – your profit will be .11
    • Again remember that the profit graph is taking the theoretical value of the option – the actual cost of the option
      • This calculation has also been done increasing the volatility from 42% to 43%
      • You can see how theta for the 3 days has decreased the amount of profit, even with an increase in volatility
      • If the underlying has gone down to 72.00 – your profit will be 2.07
        • Look at column 2 and you again see how getting the move 3 days after the trade date gives a smaller profit – even with the volatility increase
        • But you can see how these profits are greater than your profit at expiration for the same underlying

The difference in the options profits is the expiration price is intrinsic value only – while prices before expiration will include time value:

  • This is what makes having an options trading spreadsheet that compares the profit at expiration to a date before expiration important
  • Because remember – we are looking at a move to a 72.00 underlying price when we had determined that support was at 71.70
    • And there are still 7 days to expiration
    • Sure price could go down further and increase profit – but we could also retrace if not reverse from this test of support
      • Now look at date2 – I just lowered volatility back to 42% and changed the date to 11/18 – let’s look at the 73.50 underlying price
      • That 2.07 profit on the test of support has just gone down to .61
      • And we know that if this becomes the expiration price – we will break even on the trade

So, consider options trading management:

  • This would have certainly indicated taking a partial profit on the move to support
  • And this may also be good timing to turn the long put into a put debit spread
    • This would lower the cost of the spread but still give it additional profit potential
  • Or you could turn the long put into a put ratio short spread
    • Selling put options for the following week
    • Especially if you had done a stock and options combination trade that made you short the underlying
      • Now using the options greeks worksheet – you could get the theoretical value for a 70 put on the 11/29 expiration with a 43% volatility
      • And do the options math for a ratio put short for any remaining long puts after taking the partial profit

Price Before Expiration Options Spreadsheet Inputs

I am now going to go over the inputs for the price before expiration worksheet – when you look at the tabs in your options spreadsheet, this worksheet is labeled Price1

  • Price2 is essentially the same worksheet, but it is for 2 options at 2 different dates, instead of 1 option – I will do a separate video going over those inputs.

Worksheet Inputs

  • You can see the spreadsheet area for the inputs
  • The outside column are the inputs for the option and the 2 dates
    • The blue cells are for inputs and the white cells have formulas
  • The middle column uses the inputs from the left column – but we will input the option price to get implied volatility, which will be used as the volatility input
    • Date 11/12 – expiration 11/22 – exp mult 10.5 – rate .25
    • Underlying 75.80 – opt type p – strike 75.5 – qty 1
  • You should have seen all of those inputs fill in for the MIV column
    • Now enter 2.00 for the option price
    • And then enter that amount as the volatility input in column1
    • You can see that implied volatility is the 42% we used
  • Once entering volatility you can see at the bottom of the column that the opt price and opt thv are the same – and there is no profit
  • Now fill in the inputs for date2 in the right column
    • Date 11/15 – 11/22 exp already filled in – exp mult 7.5
    • Volatility went up to 43% – underlying went down to 72.00
    • At the bottom of the column you see that the opt thv went to 4.07 – making the profit 2.07
    • If you entering these inputs on your own price1 worksheet as I discuss them – you can see that your profit graph has completed and you have the graph we just discussed in the video
      • Look at the 72 strike for date2 you see the 2.07 profit – which is the same profit you see on the spreadsheet
      • I added that to the column to show where the opt thv goes to and as a simple double check with the profit graph for the profit amount

You could now make the other input changes we discussed and see the results in the profit section of the spreadsheet, as well as on the profit graph

  • We changed the date2 11/18 – underlying to 73.50 – and the volatility back to 42%
  • That showed as a .61 profit on the profit graph
  • Change those inputs in the spreadsheet
    • They will changed the profit section of the spreadsheet but do nothing to the profit graph
    • You can see that the opt thv went to 2.608 [2.61] and the profit is now .608 [.61]

So, that covers the Price1 worksheet for calculating the changes in an options price for a date before expiration, along with comparing it to an underlying move on the date of your trade – and to a price to expiration calculation.