Stock Definition Dialog
The Stock Definition Dialog
includes controls for entering a stock symbol, the stock’s volatility, its
current market price, a brief description, and a number of controls supporting
quarterly dividends.
Stock Symbol
Refer to the Symbol / Identifier discussion in the Instrument Definitions section above.
Volatility
If you never intend to analyze options on a particular stock, then volatility can be ignored because it’s only used to price and analyze options derived from the stock. However, if you are interested in analyzing options on a stock, you should know a couple of things. First, many sources of volatility report the volatility as a percentage, e.g. if the volatility is 0.391, they may report 39.1%. NillaHedge expects volatility to be the un-scaled floating point value, not the percentage. An excellent source for volatility values (reported as percentages) is Robert's Historical Stock Volatilities.[1]
Dividends
The stock price obviously affects
the capital value of your portfolio, and dividends are a motive force behind
income reporting (elsewhere in NillaHedge).
If you’ve done any amount of income investing, you will have discovered
that there can be several weeks between the ex-dividend date and the issue date
for the dividend check, but NillaHedge only has only one set of dates and uses
the ex-dividend date for both purposes.
There are several justifications for this simplification. First, option valuation is driven by the ex-dividend date not the payment date. Second, capturing eight dates associated with dividends would substantially complicate the Stock Definition Dialog and pose a greater data entry burden on the user. Finally, given the limited storage capabilities of the typical PocketPC, storing just four dates instead of eight, saves storage space. The side effect is that the current yield may be affected. It will usually be inconsequential.
You’ll note that the date picker controls in the Stock Definition Dialog can specify years as well as months and the day of the month. NillaHedge assumes that dividends recur annually on the given calendar date, ignoring the year specified. Each of the four dividend date pickers is restricted to the months in the associated calendar quarter. If a stock pays dividends just once per year, in May, the only place you can successfully specify the date is in the date picker immediately to the right of the Q2 checkbox. You’ll also find that the dividend date picker and dividend amount for the Q2 dividend are disabled while the associated quarterly checkbox is not checked. Once you check the checkbox, the date picker and dividend amount controls are enabled. If you later desire to experiment with the effects of discontinuing the dividend, you need only disable the checkbox for the associated dividend and save the modified stock definition back to the database. The ex-dividend date and the dividend amount are retained in the database, but that dividend is excluded from all subsequent income calculations. At the end of the experiment, you can simply re-check the Q2 checkbox and re-save the stock definition.
Current Yield
When a stock price and one or more quarterly dividends are defined, the dialog will report the current yield of the dividends as a percentage of the stock price.
Definition dependencies
Since vanilla put and call options refer to an underlying stock, you may wonder if you must create a stock definition before creating an option definition which refers to it. The answer is no. If a stock definition does not exist at the time that an option definition referring to it is saved, a placeholder stock definition will be created for you. It will be up to you to enter appropriate values for the market price, volatility, dividends, and description, if any. The Stock Definition Dialog is the only place where you can enter a description, dividend dates and amounts for a stock, but the Option Analyzer also allows you to modify the stock price and volatility for an option’s underlying stock. Additionally, the Option Chain Retriever will automatically update the stock price whenever it successfully retrieves an option chain for a particular stock.