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Using the profit/loss calculator for equity option strategies of a trading platform, it displays estimated P&L curves for some date in the future and across the prices of the underlying with a current and optional change in volatility. It must be using some algorithm to estimate the options price over time and underlying price. I'd like access to this algorithm in my own code (using Julia if it matters). I understand how to add multiple curves/legs together, but it's the curve for a single option across time/underlying that I need.

I found a financial library that uses option model algorithms and tried to use its implementation of Longstaff-Schwartz but I had to tweak the parameters a lot to match the actual current price which doesn't give much confidence. Also, it would be too slow to run it across lots of dates and prices.

I'm pretty sure the smooth curves that are being displayed are just a curve function with appropriate coefficients which would be fine for what I need. Take current price and info, final price and info, then fit some curve between them. I saw something about fitting a spline in an answer to a question on here (but didn't understand the context, I'm new to the quant world).

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    $\begingroup$ I don't know what they use but I have a suspicion it is just Black Scholes, nothing fancy (and slow) like Longstaff Schwartz monte carlo. Another possibility is BS plus Ju Zhong American option approximation (quite fast). $\endgroup$
    – nbbo2
    Commented Feb 3, 2022 at 9:50

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They only display a chart? No values? What is the platform?

If that is just a plot, I am inclined to say all they do is to run Black Scholes, shorten the time (if you go 6m into the future, just make the expiry 6m shorter), and reprice with a few different spot values. I don't think there is anything fancy. If it's a bit more sophisticated, the vol would adjust, using the fact that tenor is now shorter and you move along the term structure. However, you ruled that out by writing it uses current (and optional vol). So you also do not move along the smile.

In Julia, you could do this in a few lines of code to get Black Scholes in a DataFrame:

using Plots, Distributions,DataFrames, PlotThemes
theme(:juno)

N(x) = cdf(Normal(0,1),x)

function BSM(S,K,t,rf,d,σ)
  d1 = ( log(S/K) + (rf - d + 1/2*σ^2)*t ) / (σ*sqrt(t))
  d2 = d1 - σ*sqrt(t)
  c  = exp(-d*t)S*N(d1) - exp(-rf*t)*K*N(d2)
  return c
end

S = 6:0.1:15 # spot range
t = 1        # start tenor (1 year)
shift = 6    # months shift
t_new = t - shift/12 
df = DataFrame(Call = BSM.(S,10,t_new,0.0,0.0,0.2))

You can plot current value (assuming all else equal but spot changes) vs some day in the future (all that changes is the term to maturity; and spot).

plot(S,df.Call , label = "Call Option Price in 6 Months")
plot!(S,BSM.(S,10,t,0.0,0.0,0.2), 
                label = "Call Option Price Today",
                legendposition = :topleft)

enter image description here

Adding a few lines computes the PnL (subtract initial cost), makes it dynamic (with slider for term and vol) and also allows you to play around with different notional values.

original_cost = BSM.(10,10,t,0.0,0.0,0.2)

function call(N, t_new, σ)
    payoff_call = N.*(BSM.(S,10,t-t_new/365.0,0.0,0.0,σ) .- original_cost)
end

function start_val(N, σ)
    payoff = N.*(BSM.(S,10,t,0.0,0.0,σ) .- original_cost)
end

S = 7:0.1:13
using Interact
call_gui = @manipulate for t_new = 1:1:364, σ = 0.01:0.01:0.41,
           Notional = spinbox(label="Notional"; value=1);
    
        plot(S,call(Notional, t_new, σ), 
                label = "Call Option PnL in $t_new days ($(t*365-t_new) days left to expiry)", 
                legendposition = :topleft,
                size = (800,500))
    
        plot!(S, start_val(Notional, σ), 
                label = "Call Option Payoff Today with K = 10",
                xlabel = "Spot",
                ylabel = "Pnl",
                size = (700,500),
                title = "Option PnL for K = 10, t = 1 year, 0 divs and rates and 20% vol at initiation",
                titlefontsize=10)
end
@layout! call_gui vbox(hbox(:t_new, :σ, :Notional),observe(_))

enter image description here

And changing a few params:

enter image description here

Now most equity markets are American, but in my example, the results would be identical for an American option anyways. In more general cases, you would need to implement this with a model that prices American options (PDE solver for example). You could also display the actual values in a DataFrame as opposed to just the chart.

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    $\begingroup$ Great answer and examples. +1 $\endgroup$
    – user46424
    Commented Feb 5, 2022 at 2:22
  • $\begingroup$ Thank you so much for this detailed answer. The platform shows a graph and values similar to what you have shown here. I ran a Black Scholes algorithm and compared the results. In order to best match the platform, I calculated time to expiration in hours and used midnight for start day, and market close for end time. It wasn't a perfect match but it did track the curve pretty closely which I think is sufficient. It's ok if an estimate doesn't exactly match another estimate. $\endgroup$
    – mentics
    Commented Feb 10, 2022 at 6:08

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