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Duration: 5:11


Contributor: Interactive Brokers

Level: Intermediate

This lesson will show you how to use the Custom Scenario within IB Risk Navigator to estimate the forward price for option contracts.

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Study Notes:

IB’s Risk Navigator allows users to monitor risk in their live portfolios, but it also allows users to examine the expected impact on a “what-if” portfolio under changing prices and volatility conditions. That could be a really useful tool when it comes to estimating the price of an option over time as the price of an underlying security moves, and for investors wanting to consider changes to expected movements ahead.

Access the Risk Navigator and create a New Portfolio. In this example we will use a basic bull call spread using options in ticker IBKR to demonstrate.

Add the underlying security and the respective call options and select your desired expiration date. In this example, we can display the Implied Volatility reading for the two options by adding this field from the Metrics menu at the top of the page and selecting from the Contract Risk field. This displays the individual implied volatility readings for both options.

Use the Report Viewer to drive the content of the plot below by selecting the ticker from the dropdown menu. The default view shows Equity Portfolio Value Change and depicts how the value of the account is expected to change on the y-axis as the value of the underlying changes on the x-axis.

At the current price for the underlying security, there is no expected change in the value of this call spread and so the profile cuts the x/y axis at precisely zero. What we want to know is how the account is impacted dollar-wise in the event we change the price of the security, implied volatility or the number of days to expiration. Step 1, Step 2 and Step 3 Under the Market Scenario, the live prices of the underlying and both options are displayed. In this case we can determine the net premium paid for this vertical call spread by subtracting one premium from the other.

In order to look ahead or to make changes to price and volatility, create a Custom Scenario from the View dropdown menu. This creates a mirror-image view of everything displayed under the Market Scenario. We also have an input area to edit certain values. Select the underlying ticker and enter a new price.

You may either enter a new explicit value, a dollar change or a percentage change. Select the desired Type from the dropdown menu. In this example I will increase the price of IBKR to an explicit value of $45.00. You can see that the values change from black to red indicating an edit has been made. To put this change into action – hit the Apply button at the top of the Editing field.

The change will be reflected in the Custom Scenario and will allow you to see the premium for both options at the new price. You may compare those prices to the Market Scenario.

Given the increase in the price of ticker IBKR we can show the individual legs of the spread and so calculate the new price for the spread.

Next, we can examine the impact on option premiums in the event we change implied volatility readings. Enter a new value for implied volatility and hit apply. Compare the calculated option premiums displayed under the Custom Scenario with the original Market Scenario to see the impact of how expected movement for the underlying can impact the value of each option. To step forward in time, users may also adjust the date by making edits to the calendar. Click the Edit button under Date and choose any date through expiration. In this example I will maintain changes to both price and implied volatility but advance time by around a month. Click Apply and the Custom Scenario will display the adjusted premiums for price, volatility and time.

Conclusion – Use the Custom Scenario within IB Risk Navigator to estimate the forward price for option contracts. There, users may formulate strategies in advance helping them understand the impact on premium of changing price and volatility through time. This may be extremely useful for investors wanting to find an appropriate entry and exit points for their strategies.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or click here. Multiple leg strategies, including spreads, will incur multiple commission charges.

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