ThinkorSwim Tutorial - The Options' Theoretical Price and the Expected Price Calculator

This tutorial explains the Theoretical Price of an Option and how to use the “Expected Price Calculator” in the Think or Swim Trading Platform. This tutorial follows the trading guide: Think or Swim Tutorial - The “Black-Scholes Model” - How to determine the price of Options. Before reading I recommend visiting the Link above.

How to place the most rewarding options strategies from scratch? Visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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Let’s understand how Think or Swim uses the Options' Theoretical Price calculation to help you make better decisions.

The Expected Price Calculator is an invaluable tool that tells you how realistic your order is to get filled under the current conditions. It is found in the “Trade” Tab on the bottom of the page whenever you place any buy and sell order. It is drawn as a straight line in which the price goes form a minimum (NAT price) to a maximum (MID price). It shows the theoretical stop price required to fill your Option order at a particular limit.

Let’s assume you want to place an Option order on XYZ. On the “Trade” Tab you tape in the Symbol box the Ticker you are looking for. For the selected stock you will have a list of all available options at different expiration date (e.g. AUG 10 (17), SEP 10 (45), OCT 10 (73), etc – Month, Year, Days to Expiration) . If you select any of the date showed you will have a new list with all Put and Call Options at different strikes. Choose a strike close to the Stock price (ATM), click on the asking price and you will see your order below on the “Order Entry Tools” Menu. Right below your order you will see the “Expected XYZ Price” .

Think or Swim is defaulted to a limited price that is exactly the current asking price. You can decide to change this price by clicking on it and taping in with your keyboard. If you do that you will see that as soon as you change the price (it depends on how much you want to pay for that Option) the “Expected XYZ price” below will change automatically telling you the changing in the price you need to get your order filled at the price conditions you have chosen. For any reasons you can decide to buy below the market or above the market and the system will tell you the expected price of the Stock you have to wait for in order to have your request accomplished.

What is important to understand is that either if you buy below or above the market this tool doesn’t guarantee that you will get filled. This is just a theoretical price model in which the Think or Swim system tells you what Stock price makes the Option worth the price you are willing to pay.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

The price of an one-year $50 Call Option will be equal to the price the Market Maker has to pay to be guaranteed to receive $5,000 in one year.

Let’s assume the Risk-Free Interest Rate is 5%. If that is true then the Conversion package must be worth $4,762 today. We know that because mathematically $4,762 is the amount of money required today in order to have exactly $5,000 in one year if the Interest Rate is 5% ($4,762 * 1,05 = $5,000). In financial terms we would say that the future value of that package $5,000 is worth only $4,762 today.

So far the Market Maker has paid $5,000 to buy 100 shares and $200 to buy a Long Put for a total expenditure of $5,200 on a package theoretically worth $4,762 today. The Market Maker has overpaid a difference of $438 ($5,200 - $4,762) for that package and this is the amount of money it will require to sell you the one-year $50 Call Option in order to make its trade free-risk.

The Call is therefore worth $4,38 per contract (remember that each contract is made up of 100 shares, so the total price will be exactly $438).

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Do not forget to visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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You can directly check how to calculate the theoretical price of an Option by going to the Chicago Board Options Exchange website (CBOE) at www.cboe.com clicking on the “Tools” menu and then on the “Options Calculator” section. Here you have just to enter these data: $50 Stock price, $50 strike or exercise price, 360 days expiration, let’s assume 15,67% Volatility (it’s the only value that makes the Put value worth exactly $2 that is the assumption we have made before), 5% Interest Rate and 0 dividends paid through the life of the option. Click on Calculate and check how much the Call Option is worth.

If you find this tutorial interesting read also: Think or Swim Tutorial - The “Black-Scholes Model” - How to determine the price of Options.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

In the next GroWithYou Trading Tutorial:

• Call and Put Options Explained
• Call Options as the binding agreement to purchase your Home

• Put Options as the agreement to purchase an insurance policy

Keep learning about ThinkorSwim and Stock Options by going to: ThinkorSwim Tutorial - Understanding how Stock Options work and their Risk Profile.

Here you can find a mini “free video tutorial” prepared by the professional traders of the "Options A to Z" company that can help you in understanding all the concepts discussed in this article. For further information visit the website at www.optionsAtoZ.com.

Watch the following "Free Video Tutorial”

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