PocketNumerix - NillaHedge

NillaHedge

NillaHedge is a portfolio manager for stocks & options that incorporates an extensive suite of analytical tools for assessing and hedging against interest rate risk and issue specific market risk. Portfolios consisting of stocks and vanilla stock options are automatically organized into a hierarchy of virtual folders ultimately containing positions which may be open (active) or closed. A high level overview of the key tools in NillaHedge follows below.

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Option Analytics ...

The OptionAnalyzer provides detailed insight into an option's sensitivity to the underlying stock's price, volatility, and dividend yield; to the risk-free rate of interest; and to the passage of time. The OptionAnalyzer also computes the probability that an option will close In-The-Money, its implied volatility, and its elasticity (percent change in option value given a percent change in value of the underlying stock).

The OptionAnalyzer facilitates experimentation and automatically updates your database at the conclusion of your analysis. It takes a rigorous approach to option valuation consistent with the computing resources of a handheld device. In particular, the OptionAnalyzer values the currently selected option using a variation of Black-Scholes theory that (for a call) discounts stock prices by the present value of its unpaid, but still assignable dividends.

In contrast, web-based option analyzers that consider dividends at all, typically use continuous yield models that inaccurately model market dynamics. Web-based tools that compute rho often fail to indicate whether their rho is independent of the dividend yield or discounted by it. In conttrast, the OptionAnalyzer reports rho(r), the sensitivity of option value to the risk free rate (r) and rho(D), the sensitivity of option value to the underlying stock's dividends (D). Similarly, web-based tools that report theta, the sensitivity of option value to the passage of time, and vega, the sensitivity of option value to the underlying stock's volatility, frequently report inaccurate values. Those very shortcomings inspired the development of NillaHedge.

Refer to Option Analyzer documentation for additional details.

Hedge/Spread Evaluation

The HedgeExplorer provides rapid graphical feedback on the profitability of alternative option spreads and hedging strategies. You can limit downside risk or maximize profit potential by constructing ratio-calendar spreads consisting of long and short positions in as many as three options and their underlying stock.

When you select a stock symbol of interest, the symbols for options on that stock in your database are loaded into the three option list boxes (O1 .. O3). After that, up and down scroll buttons select the next symbol in the list box that currently has focus, so you can review the profit profile (the black curve) of each alternative option spread as fast as you can scroll through the list. Naturally, you can also select symbols via the drop down box or type them and have autocompletion find them for you.

The X-axis depicts the underlying stock price. The Y-axis shows the resulting Black-Scholes value and profit profile. The underlying stock (if enabled by having a non-zero quantity) would be plotted in purple. Modifications to the underlying stock price and volatility (sigma) can be saved or rejected. The risk free rate value is always saved.

Refer to Hedge Explorer documentation for additional details.

Sensitivity Analysis ...

NillaHedge includes three graphical tools that show how options and your portfolio of option positions will respond to changes in interest rates, the passage of time, and the underlying stock volatility. All edit box contents are stored and retrieved from the previous use.

The TimeDecayExplorer shows how option values behave with the passage of time. When the portfolio box is checked, you can see how your options portfolio behaves as options expire and underlying stocks go ex-dividend. The X-axis is scaled in months, the Y-axis is a percentage of current value. Pure-BS allows you to ignore current market value and base the projections solely on Black-Scholes value. In Pure-BS mode, all curves will originate at 0%.

Refer to Time Decay Explorer documentation for additional details.

The RateSensitivityExplorer depicts the sensitivity of option values to changes in interest rates. When the Portfolio box is checked, it also plots a cost weighted average of the rate sensitivity for all positions in your portfolio. If you find that the value of your Options portfolio increases sharply with interest rates, but you expect a decline in rates while most of your positions are still active, you may want to hedge against that effect by buying bonds or puts (both of which increase in value when interest rates fall). The X-axis shows prospective values of the risk free rate; and the Y-axis shows the percentage change in value.

Refer to Rate Sensitivity Explorer documentation for additional details.

The VolatilityValueExplorer depicts the sensitivity of option values to their underlying stock's volatility. The X-axis is a factor applied to the current stock's volatiity. The Y-axis is a multiple of the current option or portfolio value. Pure-BS allows you to ignore current market value and base the projections on Black-Scholes value. In Pure-BS mode, all curves pass through (1,1). Analysts familiar with vega, may be just as happy using the OptionAnalyzer, but even well versed investors may find it valuable to visualize option value sensitivity in a comparative setting.

Refer to Volatility Value Explorer documentation for additional details.

Options Market Data Retrieval ...

The OptionChainRetriever enables you to download the current stock price and related option prices from a server on the World Wide Web. Stock and Option prices for issues you have already committed to your database are automatically updated. The options available at the earliest possible expiration date will populate the list view, which you can sort by strike price, expiration date, etc.

Nearest term options are loaded first because these issues produce implied volatiliies that are closest to the underlying stock's 'true' volatility. All available expiration dates will populate the Expiry list box. The Fetch button will be enabled whenever you select an expiration date that hasn't already been fetched. If you select an Expiry date that has already been fetched, those options will be scrolled into view.

Selected issues can be saved to the database for further evaluation in the HedgeExplorer, OptionAnalyzer, RateSensitivityExplorer, TimeDecayExplorer, and VolatilityValueExplorer.

A current option chain subscription is required to retrieve market data from the server.

Refer to Option Chain Retriever documentation for additional details.

State of the Portfolio ...

The PortfolioNavigator offers an interactive portfolio browsing experience. The Navigator might be described as a 'folding spreadsheet' allowing you to quickly assess how your active stock and option positions are performing as a group as well as allowing you to quickly locate an issue and drill down into its constituent positions.

Manilla (folder) rows accumulate totals for the issues within. Issue rows (with symbol names in the first column) are initially visible, but may be hidden by selecting the boxed minus button next to the folder row immediately beneath them. Powder blue (position) rows are initially hidden, but can be made visible by clicking the boxed plus button next to the issue's symbol, immediately beneath them.

Columns for capital gain, income, net gain, annualized yield, etc. are also computed. Columns that are seldom of interest can be permanently hidden via preferences and temporarily reordered by dragging the column header to the desired position.

Refer to Portfolio Navigator documentation for additional details.

The PositionsTranscripts dialog generates a transcript of positions closed in a given year, thhereby documenting realized gains and losses for tax purposes. It will also generate a transcript of open (active) positions, thus summarizing current paper gains and losses. In both cases it reports annualized yields for each position and the cost weighted average return for the portfolio. When there's only one position in the portfolio, the portfolio summary is suppressed. For simplicity, the portfolio shown here contains only one option position and one stock position.

Refer to Positions Transcripts documentation for additional details.