Options Profit Calculator Mayhem

[Flechette]

Hello,

I am new here because Reddit never lets me post a question. Here is my general question: Why do different Options Profit Calculators yield such different results? The differences are so large I cannot trust them. I used to just use Power Etrade, but recently I started comparing the results to other options calculators with huge differences.

 

 

I am trying to do a relatively simple PMCC on WMT and the Etrade options calculator, Power Etrade Calculator, OptionsProfitCalculator.c om and OptionsStrat all give different predictions. What is going on?

Input:

Long call: 16 Jan 26: $37.30

Short call: 24 May 24: $0.56

 

Results:

Max profit Etrade: $31.95

MaxProfit Power Etrade: $105.3

OptionsProfitCalculator: $136

Options Strat: $136.70

 

What is going on?  Thanks for any help.

 

 

 

[TrustyJules]

4 hours ago, Flechette said:

Hello,

I am new here because Reddit never lets me post a question. Here is my general question: Why do different Options Profit Calculators yield such different results? The differences are so large I cannot trust them. I used to just use Power Etrade, but recently I started comparing the results to other options calculators with huge differences.

 

 

I am trying to do a relatively simple PMCC on WMT and the Etrade options calculator, Power Etrade Calculator, OptionsProfitCalculator.c om and OptionsStrat all give different predictions. What is going on?

Input:

Long call: 16 Jan 26: $37.30

Short call: 24 May 24: $0.56

 

Results:

Max profit Etrade: $31.95

MaxProfit Power Etrade: $105.3

OptionsProfitCalculator: $136

Options Strat: $136.70

 

What is going on?  Thanks for any help.

 

 

 

I havent worked with any of the calculators you mention but can guess what happens perhaps. As a side note, you did not give the strike prices for your PMCC on WMT - from context I presumed that it is:

 

BTO 1 C WMT 26.67$ 16 Jan 26 - at close yesterday 32.55-34.90-37.30 (bid mid ask)

STO 1 C WMT 63$ 24 May 24 - at close yesterday 0.56-0.58-0.59 (bid mid ask)

If you plot the return chart in One you will get this but One opens the position at the mid price (unless you specify otherwise):

 

So first point is that the other option calculators could be taking bid and ask openings rather than mid which makes a huge difference due to the spread on the 2026 LEAP in the position. The second point is that the way they take IV changes into account or not, makes a difference. The plot chart above gives a theoretical max profit of 278$ if you were to close on Friday next week with the short expiring worthless. That is not a scenario that is realistic because IV of the short option will rise and - for the purpose of this discussion - we presume the IV of the LEAP and general market remains stable. If we plot the chart for Thursday next week and input a 9pt rise of IV differential between the short and the long you get this:

On Friday it would be worse to the point that if the short is near or on its strike the IV of the short will even more seriously impact the return figure. I trade a lot of long positions that are similar to a PMCC but have longs nearer ATM and are ~6-9 months from expiry. The shorts are 1-2 weeks away - sometimes near expiry of the short its value can destroy the rise in value of my longs. This is a function of the IV differential and delta of course.

 

As OptionCalculator is free I replicated the above there with opening the position at mid-prices:

I am not sure how they take into account IV which I dropped by 10% - in One they change the differential between the options which is ok here but ideally you need to be able to change the IV on the individual positions per strike and date in the future to be more accurate in the predictions. In any case I get a different result than you because of these parameters - the outcome of option positions is not at all linear and therefore the different outcomes are probably due to different settings or presumptions that the software makes when offering you these outcomes.

[Bullfighter]

There are several reasons why you get different values:

• One is that there are several options models. As in any field, they are not reality, or 100% accurate. These calculators may be using different models.
• Another is that you are using different expirations. When doing that, the expiration like is not fixed: it can move up or down depending on the relative values of the front and back expiration legs. The calculators may be using different assumptions on the relative changes of implied volatility for the legs. One of those assumptions is no IV change on any leg. The truth is, nobody knows what the market reaction is going to be. All you can do is make an assumption.
   

[Flechette]

@TrustyJules Thank you so much for your explanation! First off, I am sorry that I forgot to post the strike prices ! 😳  Yes, you assumed them correctly.

I did take the midpoints as you suggested when I posted the results earlier. I note that OptionsProfitCalculator and Options Strat are virtually identical, so I am assuming that they use very similar algorithms. 

Your explanation in the first paragraph makes sense even though at first I got nowhere near the $278 max that your model did. It defaults to buying at market prices but you can input whatever you want to be more accurate for your trade, which I did. I chose the midpoints. It got very close to your number: $270.95. So I think these two tools are probably pretty accurate (as can be) given the right inputs (the actual price paid for the two legs and not market, as well as the correct IV assumption...which is essentially an educated guess).

While playing around with Options Strat there is a IV bar you can slide. I see how much IV affects the results. A lot.

ETrade is another story. They have two tools (the basic one and the "Power ETrade" one) that give wildly different results. This is alarming.

Power ETrade and it has a slider for submitting different positions at a certain price. It takes the cumulative of the position so you do not get to specify one of the legs exactly. It could be that one of the legs was higher than the midpoint and the other lower...but it results in the same value. I buy at the midpoint most often.

The basic ETrade tool allows you to choose "debit", "even" or "credit". I am assuming that this means "bid mid ask". I suspect if I play with the IV and make sure that the buy/sell prices are accurate then these tools will be more accurate too. Maybe.

But one thing I learned is that there are a LOT of assumptions in these tools and things like IV can be guessed at but not definitively known in the future. By the way, how do they calculate IV? Is it a six month in arrear running average or something? Right now I just have to accept the numbers given. I can't really ascertain what a recent large drop or large gain has done to it.

Thank you so much for your very detailed explanation!

 

 

 

[Flechette]

@Bullfighter Thank you for your reply. I think you are right; a lot of these tools make assumptions and those assumptions can wildly affect the results. I had not given as much thought to how IV affects outputs and assumed that they didn't have as wide as an effect as they evidently do. I will try to factor that in to my investments, although I do not know quite how since the actual IV in the future changes. Complicated!

[Bullfighter]

The best you can do is backtest your trade plan across different market regimes, to see how it behaved and get a feel for it, manage your expectations, and build confidence. OptionNet Explorer is great for this. The values of the greeks may be different, but the P&L is not.