1. State your Forecast
– important to be specific about price of stock and time frame
e.g. XXX stock will rise from $10 to $15 in 20 days. Today is 40 days to expiration.
2. Calculate the Implied Volatility
– volatility percentage in the option pricing formula
– Stock price
– Strike price
– Dividends
– Interest Rates
– Days to expiration
– Volatility
OIC Option Pricing Calculator
3. Estimate the option price assuming forecast is correct
4. Estimate the option price assuming forecast is wrong
5. Measure results alternative on a percentage basis and analyze the risk/reward of each option
6. Using the option chosen from your analysis, determine the number of options to purchase*Credits: CBOE Options Institute Online Learning Center – Trading Strategies