The Position Size Calculator - Instructions
Before jumping into details, please note that we have posted an interestingcovering the basic idea behind our Position Size Calculator in which we will particularly explain how it differs from other, theoretically similar models that you can find on the internet. Learning about this model may take several minutes of your time, but considering the amount of money you might earn in the future thanks to this tool, these will be well-spent minutes. After all, as Benjamin Franklin once said, an investment in knowledge always pays the best interest. First of all, this model in its current form suggests the optimal structure for your options portfolio, given that you are risk tolerant – meaning that you don’t care how much your capital decrease temporarily, as long as it gives you greatest chances of achieving biggest gains in the long run.
We strongly suggest using results from this model as a maximum exposure of your risky positions, rather than reading the results directly. According to our calculations, as long as your positions do not cross the critical values calculated with the Position Size Calculator, you will on average gain less than you theoretically could. In other words, if you use less capital for your trades than this tool suggests, you will still likely make money in the long term. However, putting more of your capital on the table than this model suggests will decrease your long term return on your capital and its likely that you will eventually lose money in the process.
Since the Position Size Calculator is versatile and can serve several purposes, this instruction is divided into several sections, so that you easily find the part that is most useful to you.
Betting on a single transaction
The simplest way to use the PSC is to calculate the right amount of money you should invest in a single transaction. PSC is developed in a way that besides complicated (and realistic) situations allows you to compute the amount of money you should put into a simple, single transaction. In order to use the tool in this way simply put the probability of success in this particular transaction in the probability box corresponding to the short-term options. Next step is entering how much you expect to gain on this transaction. Fill the appropriate box (short-term options) with the gain that is to be realized on this single transaction and all that is left for you to do, is to click on the "Calculate" button. Click it and voilà!
Please note that on the results page it will look like you have entered the same probability for all time frames. Please ignore this fact, as it needs to be visible due to limited possibilities of displaying the data in Java applets. This affects only the table where your initial data is presented and does not alter the final outcome. Calculations are not influenced by this fact.
Speculation in two time frames
The Position Size Calculator is able to handle investing in whole three time-frames, however you may decide to distinct only two time-frames: short and long term. In that case fill only boxes with probabilities and predicted gains for short- and long-term options leaving medium-term option boxes blank. Please note that the chance for realizing gains on short-term options should be smaller than respective value on the long-term options. On the other hand short-term options should be characterized by higher potential gains. If that is not the case after you’ve filled the boxes, then you might want to double-check and correct these values. Please make sure that you fill the same option types in both: probability and gains section. After you fill these boxes, click on the “Calculate” button and review the results.
Investing in three time frames
This is the most realistic and complex situation that you can optimize with this tool. You take into account putting money into short-, medium- and long-term options. This situation is fairly easy to imagine, you decide to invest some money into very long-term options that you consider to be an almost sure bet, medium-term options is what to use to speculate that the move you expect take place will materialize before the expiry date of these options. The short-term options would represent super-risky but extremely lucrative bet on the move to take place within the short period before these options expire. Naturally all boxes need to be filled when putting money in all three types of options. Probability boxes are the place where you enter chances for profiting on short, medium and long-term options. Predicted gains for each type of options need to be established and put in appropriate boxes. Further instructions can be found in the Likely Scenario section below. After entering values in appropriate boxes, click on the "Calculate" button and review the results.
All option types are used to profit on price move of the same range – most likely the case is that you predict a large price move up or down but you are not sure whether it will happen immediately or in several weeks or months. You may be convinced that it will happen right away, but still, prudence requires you to diversify and give at least part of your capital more time for appreciation. Following is a step-by-step instruction to obtain the information needed to fill in appropriate boxes in the model. First you need to make a price prediction regarding the underlying securities and establish probabilities that this prediction will materialize before expiration of different options. Then, taking into account this prediction, you need to establish future value of each type of options. If you are not sure when exactly your predictions will materialize, we suggest (conservatively) assuming that they will do so precisely on the day of options’ expiration.
This approach has also additional advantage, besides making a conservative forecast. You can easily calculate the value of each option as it's time value is 0 – it’s the difference between the price of the underlying security and options strike price (call options) or difference between strike price and the price of the underlying security (put options). If you wish to price these options before their expiration date, you can use ourtool. After you’ve established the potential options value in the future, it’s time to calculate the potential gains percentage-wise. In order to do that you simply need to divide the future value of options by their current value, multiply by 100% and subtract 100%. These gains are the values that you need to put into our Position Size Calculator along with probabilities. These probabilities are chances that the price objective of the underlying security (or group of securities) will be reached before the expiration of respective option types.
There's not much to say about the probability as this is the value that you will base on your (or our) analysis. Still, please remember that it is always better to enter too conservative value (low probability of achieving gains) than over-optimistic (high probability).
- This model is designed to perfectly suit the type of transaction that is described in the Likely Scenario block; in our opinion it is prudent not to put all one’s money into option transactions. That would imply that the results of calculations do not apply to your whole capital, but only to the part dedicated to speculating on options. For example you decide you want to put 20% of your money into physical silver and gold, 50% into gold and silver stocks and 30% you decide to use for speculation using options. If our model says you should put 10% into short-term options, 60% into medium-term options and left rest in cash, that means putting 3% and 18% of your total capital for these options.
- If you are using this model for a single transaction, you should interpret results (percentage of your capital you are to invest) as a part of the total amount of capital you would draw from in order to cover losses on such transactions. In other words – the part of your capital dedicated to such single transactions. If you make only such single transactions, you may use results directly. However if you plan to limit your exposure and want to be sure not to lose more than – let’s say $15,000 of your $100,000 portfolio, than you should apply results to these $15,000, not the whole $100,000.
- In this model you profit on rising prices by buying call options and you profit on falling prices by buying put options. All types of options are used to profit on the same price move in the underlying security/securities. By "the same" we mean a move of the same direction, range and time frame.
- Naturally the probability of realizing gains is bigger for options that have more time until expiry. On the other hand the more time option has until expiry date, the less leverage it offers. Therefore short-term options are more profitable than medium-term options, which are more profitable than the long-term ones.
- Options you use should be on the same security. It is allowed to use different securities if they are highly correlated (such as stocks from the same sector – gold stocks for example), but it is not advisable, as it reduces the accuracy of calculations. You can also use this tool on groups of stocks as long as you are able to calculate probability that the whole group of stocks will achieve particular gains and what exactly these gains would be. In that case you would expect the top / the moment you wish to close your positions to occur simultaneously for the whole group. Again, that might be the case for stocks from a particular sector of the economy, for example for gold stocks.
- Please note that we never ask you about exact time, which would be needed to calculate options' value in the Black-Scholes model. The reason is that the time should be already taken into account in both probabilities and profits. In terms of probabilities the more time you allow for your predictions to materialize, the more probability of achieving them you get. On the other hand as the time goes by, your' options will lose their time value (so called time decay), resulting in lower profits.
- The positive outcome – for which you are required to enter certain probability is realizing predicted gains on short, medium or long-term options. The negative outcome – the option expires worthless – the probability of such event is of course the difference between 100% and the chance for the positive outcome.
- You decide what short, medium and long term means. This tool will make accurate calculations as long as short-term options expire earlier than medium-term options, which expire earlier than long term ones. It’s up to you to choose how long "short", "medium" and "long term" really is.
If you are reading this, you have probably encountered problems while accessing our tools. In order to make our help more efficient, we have prepared a list of common problems that users of the Website may usually have and sorted them in the order of frequency, in which they appear.
- Please make sure that the Website (including the Java applet) has finished downloading. This may take up to 30-60 seconds, depending on your computer’s performance and the quality of your internet connection. After clicking "Calculate!" button, it may take the same amount of time to complete calculations.
- Restart your computer
- Clear your browser's cache In Microsoft Internet Explorer – go to menu Tools > Internet options > Temporary Internet files section > click "Delete files". In Mozilla Firefox – go to menu Tools > Options > Privacy > click "Clear now". In "Clear Private Data" window put the check mark for "Cache" and click "Clear Private Data Now". Click for more information.
- Clear your Java cache. For Microsoft Windows users detailed instructions can be found . Mac users – please go to Safari menu and select "Empty Cache".
- In order to this tool, you need to have Java installed on your system. Java is a programming language developed by Sun Microsystems. Version 1.6 (also known as version 6) of Java or higher is required. Click to find out what version of Java you have installed. If you haven't installed Java yet, you may click to download and install it on your computer. You will have to restart your computer, before Java is ready to use.
- Check whether Java is enabled in your web browser. Click for more information.
- Your web browser may not support Java at all. You may not be able to access this tool using the old versions of browsers or various appliance browsers (including WebTV). You may decide to switch to a different browser, upgrade your browser or search your browser’s website for proposed solutions. If you are using the beta-test form of a browser you may have to wait (or use an older but fully developed version) for the final version of the product. In order to upgrade your browser you may want to use features such as "Windows Update" or "Check for updates" in your browser. In case of Mozilla Firefox, this can be found in the "Help" menu. In Microsoft Internet Explorer, look under the "Tools" tab. In case of Mac computers, use "Software Update" feature.
- Next problem is associated with slow internet connection. If you still encounter problems we suggest opening one of our tools in a separate window and getting back to it in about 5 – 15 minutes. If it has loaded by that time, then your internet connection is probably very slow. You may still use our tools in this way, but it will not be very convenient to say the least. We suggest contacting your ISP (Internet Service Provider) to solve this problem.
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- Do you have a program installed, which is supposed to accelerate the speed of your internet connection? At times such programs might cause some other software – such as our tools – not to work properly. Try to disable your web-accelerator temporarily and see whether this helps. If it does, you may have to uninstall this program or replace it with a similar one, if you wish to use our tools.
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