To display this profile visually, you simply take the numbers from the table and plot them in the graph. Unfortunately, when analyzing options, it is only that simple if you are entering an option position on the day the option(s) expire, when determining your potential profit or loss is just a matter of comparing the strike price of the option(s) to the stock price. On a two-dimensional graph displaying an option position, there are normally several different lines, each representing the performance of your position at different projected dates. When assessing the risk of an option trade, many traders, particularly those who are just beginning to trade options, tend to focus almost exclusively on the price of the underlying stock and the time left in an option. The easiest way is simply to input a single number for what you expect volatility to be in the future, and then look at what would happen to the position if that change in implied volatility does occur. Adding Volatility, Holding Time Constant The other drawback to estimating and inputting a value is that volatility is still held at a constant level.
So far we have used simple strategies to illustrate risk graphs, but now let's look at the more complicated long straddle, which involves buying a call and a put both in the same stock, and both with the same strike and expiration month.
This software is for punters willing to bet on events selected according to its advice based on mathematical computation of a high probability of making money.
Users of this software should return to this page often, to check the latest test results and tips.
Exchange betting software for punters who want to win with minimum time, effort, thought and complexity.
Tells you exactly the odds to request and stake to place to maximize your winnings and minimize risk.
Alternatively, let our mathematician do the work for you by using the Abacus Tennis Betting Tips Service. If you want better odds than are available at any given moment, you can request your desired odds and state the amount of money you want to bet at those odds. Assuming that your aim is to make money from exchange betting and not to bet just for fun, this site uses tennis in most of the examples. Example 1: Tennis match between Timea Bacsinszky of Switzerland and Yanina Wickmayer of Belgium on 14th October 2009 in Linz, Austria. The match started two hours behind schedule, during which time the odds for the non-favourite came right back to 3.6. Example 2: Tennis match between Alize Cornet of France and Agnieszka Radwanska of Poland on 15th October 2009 in Linz, Austria.
Three and a half hours before the scheduled start time our bet on the non-favourite was matched. Example 3: Tennis match between Aleksandra Wozniak of Canada and Caroline Wozniacki of Denmark on 16th October 2009 in Osaka, Japan. Since the time our bet of 4.9 was matched the odds for the non-favourite shortened considerably. In these three examples the favourite stayed ahead after our balancing bet was matched and eventually won.
Next is an example of a bet requested by Abacus that was not matched for the non-favourite player, so avoiding the loss of our stake. Example 4 (avoiding a loss): Tennis match between Frederik Nielsen of Denmark and Thomaz Bellucci of Brazil on 20th October 2009 in Moscow, Russia. The next example demonstrates the Exchange Betting Calculator's accuracy in telling you exactly how to bet on an event where one player is the hot favourite and the other player is the hopeless underdog, in order to win a large amount of money for only a small stake. Example 6 (winning a lot of money for a small stake on a hot favourite at short odds): Tennis match between Andy Murray of Great Britain and Rafael Nadal of Spain on 16th April 2011 in Monte Carlo, Monaco. The Exchange Betting Calculator tells you instantly the optimum bet to request for the non-favourite before the event, in order to maximize your chances of it being matched when the odds reach their peak, whether within an hour of the event start or earlier. If you try to guess the amount to request, it may be matched too early because it is too low, and the odds may continue to move against you. If you guess too high, the bet will never be matched and you'll lose an opportunity to participate in the event. You need to make a certain amount of profit for every win on the non-favourite or the favourite, in order to minimize the effect of the inevitable losses. In-play betting is fun (especially if you win), and, if you're good at it, you can win more than you lose. The ideal scenario would be to place winning bets before the event and just leave them there. This formula shows that you do not need to use 'Lay' betting at all, if you find it hard to understand or fear making a mistake.
Thanks to brilliant computer software, 'in-play' betting is possible on exchange betting web sites.
This means that, if you bet a certain amount on the non-favourite before the event, and, during the event, the non-favourite gains even a slight advantage, the odds on the non-favourite will shorten and the odds on the favourite will lengthen. This is a complex calculation, and, after some research, we at Abacus Data Systems could not find any software tool that did it. Used for pre-event betting, the Exchange Betting Calculator advises you on which bets to place, which to avoid and the odds to request for both adversaries. You enter the odds offered for both opposing sides before an event and the amount you want to bet on the non-favourite. The most profitable sport for pre-event betting is tennis, and for in-play betting (see next item) the most profitable are tennis, American football, snooker, darts. By this means the requested odds are easy to match, and you build up the winnings on each adversary gradually, using the winnings on the one to bet on the other. Full step-by-step instructions are are included in software 'Tips' section of the Exchange Betting Calculator software program. The Exchange Betting Calculator software algorithms are a trade secret, of course; otherwise other mathematicians and software engineers could copy them. Suffice it to reveal that several discrete calculations are built into the Exchange Betting Calculator, all of them complementing each other to form a complex algorithm. Because the odds offered for the non-favourite and the favourite are determined by a large number of other bettors, not by a bookie, they can be considered as being representative of the betting community's average opinion of the relative strength and weakness of each adversary. The Exchange Betting Calculator also performs well with snooker for a similar reason, though not as well as with tennis. Although the information provided by the Exchange Betting Calculator can also be applied to other suitable sports and games, such as American football and darts (very long matches only, otherwise the odds swings are too large and too rare), testing shows that pre-event bets tend to break even.
As we continued to test and win with the third algorithm, we tweaked it here and there to improve it, so that it returned enough profit to be considered worth the effort of placing the bets, while still keeping the risk factor low. Based on this experience, an investment of ?1,000 over time would bring a profit of ?187.00. Algorithm 3A was tested for 50 bets and returned an average 16.22% net profit (after exchange betting web site's commission).
Algorithm 3B was then tested for 20 bets and returned an average 17.87% net profit (after exchange betting web site's commission). Now that 250 bets have been placed, we feel that we have tweaked the algorithm to its limit for a maximum profit from tennis betting, and feel confident that future results should remain fairly steady, although we shall continue to test and publish our results ad infinitum.
Our first 257 bets, using only the mathematical advice provided by the Exchange Betting Calculator and a fixed stake, returned just under 10% profit (commission paid). A new video is coming soon that will demonstrate exactly how we use use the Exchange Betting Calculator to make these profits regularly at the Betfair betting exchange.
Instead of purchasing the Exchange Betting Calculator software, you can buy the details of the Abacus test bets in advance for each of the major tennis championships: Australian Open, French Open, Wimbledon, US Open. For the best results, purchase the service at least 24 hours before the start of the tournament (the main tournament, not the qualifying rounds). According to the past statistics shown below, you will make a net profit, after commission and the cost of the tips. Answer: We make only small test bets because our business is making money from software, not from gambling.
We did not bet during the last 6 days of Wimbledon, because the person who tests the Abacus software went on holiday on the second Monday of the championship, hence the total staked was lower than usual.
On 08 July 2009 our web site was checked and approved by Betfair, who are offering to credit new accounts with free stake money, so that you can try out what you've read about here. For example, a computer and the right software can take care of the fairly complex mathematics required to calculate the fair value of an option.
Risk graphs allow you to see on a single picture your maximum profit potential as well as the areas of greatest risk.
In this case, the point lines up with $500 on the vertical axis to the left, displaying that at a stock price of $55 you would have a profit of $500. But at any other time between the date of entering the position and expiration day, there are factors other than the price of the stock that can have a big effect on the value of an option. In the stock example above, it makes no difference whether the stock goes up to $55 tomorrow or a year from now - regardless of time, your profit would be $500. Here is the risk graph for a simple option position, a long call, to show how it differs from the risk graph we drew for the stock. The call option allows you to control the same 100 shares for substantially less than it cost to purchase the stock outright. For any other day between now and expiration, we can only project a probable, or theoretical, price for an option. But anyone trading options should also always be aware of the current volatility situation before entering any trade. While this may be a reasonable assumption for some stocks, ignoring the possibility that volatility levels may change can cause you to seriously underestimate the risk involved in a potential trade. There are ways to create more complex graphs with three or more axes, but two-dimensional graphs have many advantages, not least of which is that they are easy to remember and visualize later. This solution gives you more flexibility, but the resulting graph would only be as accurate as your guess for future volatility.
This option strategy has the advantage, at least for our purpose here, of being very sensitive to changes in volatility. This is a picture of what the trade will look like exactly 30 days from now, halfway between today and the February expiration date. This means that, if you make a 'Back' bet on an event at certain odds and a 'Lay' bet on the same event at different odds that enable you to make a net profit from the result, you'll pay a commission on only the net profit, not on the amount you actually won. If player A shows no sign of threat to player B at all, your 'Lay' bet will not be matched, and you'll lose 10 when player B wins. This is another reason why soccer is harder to win on than tennis, for example; a soccer match can end in a draw, whereas in tennis there can be only a winner and a loser. This is because there is not sufficient liquidity at this stage and the market is therefore not properly formed.
You do NOT want your bet to be matched too early and then see a further increase in the odds. These odds were reached several times during the event, and would have given us yet another win-win situation. Both bets, the one on the non-favourite AND the "balancing" bet on the favourite, were matched BEFORE the event actually started!
We'd win 45% of our stake if the favourite won, and 51.5% of our stake if the non-favourite won. The Exchange Betting Calculator calculates this precisely to two decimal places, with a bias towards either adversary, based on the probability of the requested odds for the favourite being matched and also on historical statistics, to return the maximum amount of profit in the long term. With traditional betting, you're betting against a clever bookmaker who fixes the odds according to a strict mathematical formula calculated to make him a profit, depending only on the amount of money bet on each opponent. Although the odds are still against you before the event -- obviously, otherwise nobody would 'lay', and there'd be no betting at all! If and when the "swing" reaches a certain point, and you bet a certain amount on the favourite, you will make a profit regardless of the outcome of the event! To be able to win over a period of time, it's therefore ESSENTIAL to know not only the amount of money and the odds at which to bet on each side, but ALSO the probability of that swing occurring. The amount you need to bet on the favourite and the odds to request, in order to make a profit, regardless of whether the favourite or the non-favourite wins.
Full step-by-step instructions are are included in the Exchange Betting Calculator software 'Tips' section. The offered odds swing back and forth frequently, and often quite far, as one or other player makes a largish break, even before the frame is won. With in-play betting, the Exchange Betting Calculator is useful for tennis, snooker, American football, darts, volleyball, basketball, etc., fairly equally.
As is typical of software engineers, we immediately wondered whether there was a possibility of gaining an advantage through the power of mathematics.
The algorithm we used during the second round of matches was less ambitious, and we lost about one-third of the amount that we lost during the first round.
Since we started to use our judgment (based on the experience gained from tennis betting) in addition to this mathematical advice, and to vary the stake accordingly, the results have been radically different. If you purchase the service after the tournament has started, you will be sent the tips for the next tournament. Just plug the numbers into the Exchange Betting Calculator, and it'll spit out the information you need. To trade options successfully, investors must have a thorough understanding of the potential profit and risk for any trade they are considering.
The ability to read and understand risk graphs is a critical skill for anyone who wants to trade options.Creating a Two-Dimensional Risk Graph Let's begin by showing how to create a simple risk graph of a long position in the underlying - say 100 shares of stock priced at $50 a share. The vertical axis (the y-axis) represents the possible profit (and loss) figures for this position.
The picture also demonstrates immediately that as the stock price moves down, your losses get larger and larger until the stock price hits zero, where would you lose all your money. When you first purchase the option, you start out even (at the zero line with neither a profit nor a loss).
This projection is based on the combined factors of not only stock price and time to expiration, but also volatility. To gauge whether an option is currently cheap or expensive, look at its current implied volatility relative to both historical readings and your expectations for future implied volatility. So it makes sense to stick with the traditional two-dimensional graph, and there are two ways to do so while handling the problem of adding a fourth dimension.
If implied volatility turns out to be quite different than your initial guess, the projected profit or loss for the position would also be off substantially. That is, we need a graphical representation of a position's sensitivity to changes in volatility, similar to the graph displaying the effect of time on an option's value.
If you feel the need to bet on many events just for the sake of betting or for fun, against its advice, this software is likely to reduce your losses, but you'll probably still lose. It often happens, though, that the odds increase an hour or so before the event, as more punters bet on the favourite, and then decrease during the few minutes before the start, as punters bet on the relatively high odds of the non-favourite. Ideally, you want your bet to be matched when the odds hit their peak and then drop back again.
We entered these two figures into the Exchange Betting Calculator, and it advised us to request a bet on Bacsinszky at odds of 4.1. Now we'd win 45% of our stake if the favourite won, and 51.5% of our stake if the non-favourite won. We entered these two figures into the Exchange Betting Calculator, and it advised us to request a bet on Cornet at odds of 4.9. We entered these two figures into the Exchange Betting Calculator, and it advised us to request a bet on Wozniak at odds of 4.9.
Now we'd win 57.5% of our stake if the favourite won, and 6% of our stake if the non-favourite won.
This proves how important Key Factor #1 is to exchange betting strategy and how Exchange Betting Calculator can help you to win money by getting the predicted figures exactly right.
Furthermore, in-play betting is very time-consuming, because you must follow the ups and downs minute by minute. Unless you know this information, you could be requesting odds that have very little chance of being matched, and you'll lose money.
Briefly, it involves preparing several bets in advance with multiple calculator forms, so that you don't lose precious time figuring out what you need to do when the time comes to do it. The stake on the favourite breaks even if the non-favourite wins, and the requested odds for the favourite return about half the original stake on the non-favourite.
Volleyball lends itself well to in-play betting, because the action is fast and the scores tend to swing from one team to the other very frequently. After months of testing it has been found that the Exchange Betting Calculator returns a net profit (after commission) of approximately 10% of the amount staked on tennis matches prior to the start of the events (considerably better than the bank deposit account interest rate). The algorithm we used from the third round to the quarter-finals was conservative, and we won the same amount of money that we'd lost with the second algorithm for the same number of bets. It's better than any bank interest rate on a deposit account, and betting this way brings an element of excitement into our otherwise dull lives whenever we check our results. These results are therefore presented in a separate chart below, and the chart containing the first 300 bets (above) is discontinued. The odds can swing dramatically within seconds during in-play betting, and will probably be different from those before the start.
Otherwise, prepare likely bets in advance with multiple Exchange Betting Calculator forms, and have them ready. With this position you would make $100 of profit for every one-dollar increase in the price of the stock over and above your cost basis. On the upside, as the stock price goes up your profit continues to increase with a theoretically unlimited profit potential. And the difference between the cost basis on the option and that theoretical price is the possible profit or loss. You can do this as many times as you like, both BEFORE and DURING the event, right up until the instant when the final result is known. Despite this irrefutable logic, horse-racing and soccer are the most popular sports events for exchange betting.
If it's low, your bets will not be matched, regardless of the swings during the event, and there's no point in betting at all. This figure was never reached during the entire tennis match, and we would therefore have lost any stake on Nielsen. The return on investment for these 20 bets alone was actually higher than the 12.26% indicated in the chart, because the data for these 20 bets are included in the cumulative total for the entire 100 bets. For example, it is probably unwise to participate in an event where one opponent is highly ranked in the sport and the other is unknown, yet the odds offered on each are within the limits advised by the calculator. If you buy shares of stock, you make one dollar for every dollar it rises and lose one dollar for every dollar it falls. That means the element of time makes the risk graph for any option position much more complex. As you get closer to expiration, this effect begins to accelerate (but at a different rate for each price). On expiration day, if the stock is still at $50, the option is worthless and you lose the entire $230.
Keep firmly in mind that the profit or loss displayed in the risk graph of an option position is based on theoretical prices and thus on the inputs being used.
The trick is to request a bet in advance, to be at the front of the queue (explained later), for the non-favourite. The increase in our cash returns was phenomenal, as you can see in the chart and the table. The Exchange Betting Calculator thus saved us a loss on this event by advising us not to bet on it at the displayed odds. We didn't bother with a sliding scale between weak and strong, but, if you want to make the most money with the Exchange Betting Calculator, you should do so. You simply need to calculate the profit or loss at each price, place the appropriate point in the graph, and then draw a line to connect the dots. If you buy the $50 call, you will make one dollar at expiration for every dollar the stock rises above $50, but you will not lose one dollar for every stock price below $50.
Unfortunately, few investors or traders take the time to understand them and they end up missing out on a wonderful tool that will make their lives easier and also add insightful dimensions to their understanding of options.
Profit and loss diagrams can also keep you out of a lot of trouble since they can alert you to potential risks of a particular strategy that you may have never considered.
Please understand that the work we are putting into these exercises is not necessary when trading options in the real world. Computer programs will draw the pictures for you and you will not need to actually create the tables and charts.
So let’s start with a simple example and create a profit and loss diagram for one of the most basic of all positions, a long stock position. OCC staff says some 12%-15% are exercised, and 55% are offset by closing sale (this includes the 20% to 33% offset at a loss).
Next, we calculate what the profit and loss would be for our position in question if the stock were at each of those prices. To construct the profit and loss table, we’d start with a column of stock prices starting with the $50 purchase price and then extend the range somewhat above and below this center price.
If you look further down the list, you can see that if the stock price is $53, you’ll have a $3 profit.
Since 2 of 3 options expire worthless or at a loss, Option Wizard reinforces the perspective to be a patient seller or nimble buyer. 2. To read the chart, you just select any stock price along the horizontal axis and then trace a line up to the profit and loss line. From there you follow it directly to the left axis and that tells you what your profit or loss would be for that particular stock price. Delta -- the higher the delta, the more your option mirrors the move in your underlying. 6. Likewise, if the stock is trading at $46, we’d have a $4 loss, which is shown by the solid arrows.
This tells us that at a stock price of $50 we have no profit or loss; we are just breaking even. Any time a profit and loss line intersects the horizontal axis that shows a breakeven point.
In other words, if we own stock, we gain dollar-for-dollar as the stock price rises and lose dollar-for-dollar as the stock price falls.
Now, if you are familiar with graphing, you probably figured out that the information in Table 3-1 would plot as a straight line. However, as we move to the asymmetrical payoffs of options and add more complex strategies, the table will be nearly impossible to follow. A picture becomes a much easier way of understanding how your profit or losses will be affected with changes in the underlying stock, which is why we want to understand how to read profit and loss diagrams. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.
Copies of this document are available from your broker or the Chicago Board Options Exchange, 400 S. LaSalle Street, 24th Floor, Chicago, IL 60605 or the Chicago Board Options Exchange, 400 S.
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