Black-Scholes Easy Calculator

This simple calculator downloads the last prices of US stocks from Google and short-term treasury yields from the treasury.gov websites. This calculator’s resulting option prices and greeks are comparable (but not the same, of course) to tools from the popular online brokers, such as, OptionsXpress. Even though broker online tools are convenient, they do not disclose what models, assumptions, and inputs they use. For example, what risk-free rate is being assumed? Are dividends being taken into consideration, and if so, are they using a continuous or discrete payment assumption?

Most Black-Scholes calculators online are not clear as to what risk-free rate you should use. Some will simply default to a number, such as 5%, which would be completely inappropriate for the past few years in which we have had very low interest rates. Theoretically, you should use the treasury yield that most closely matches your option’s time-to-expiration. Example, if your option expires in 3 months, use the 3 month treasury rate.

This calculator automatically downloads the most recent 1 year treasury rate for your convenience. But, you have to adjust this accordingly. You can go to the treasury.gov website to get the rates that you should use: http://tinyurl.com/hh6l7d4

Another useful feature is that the calculator allows you to see the implied volatility that is currently reflected on market prices. Calculations for the most useful option greeks are automatically provided (Delta, Gamma, Theta, Vega, and Rho).

All the formulas that were used in this calculator were taken straight out of Wikipedia: http://tinyurl.com/q2ptgea

If a dividend is provided as an input, the calculator treats it as a single discrete proportional payment. Even if a dividend is automatically downloaded from the Google server, make sure that it happens within your time-to-expiration. If the ex-dividend date is not within your option-holding-period, remove it.

Date inputs are in days in order to make it more user friendly. If you don’t know how many days there are until expiration, there is an alternative calendar picker is that automatically calculates the number of days.

This calculator is completely FREE. There are no annoying banners, registration, or license agreements. The only permissions required by this app are “Internet” (because the calculator downloads prices from Finance.Google.com and Treasury.gov). This calculator does not collect or store any personal data.

Please be careful and do not rely on any single tool to make option purchasing/selling decisions. Options are extremely risky and I am not responsible if you lose your money. Keep in mind that the Black-Scholes model makes many extremely unrealistic and dangerous assumptions. Some of these assumptions are that you will be holding the option until expiration (European-style); that the stock prices fit perfectly into a normal distribution; there are no transactions costs; and that the markets are efficient. Ridiculous!!!

Happy trading,
Valtinho