Abstract:
A method for predicting an option&#39;s performance includes calculating three components of the set of components including decay profit and loss, implied volatility profit and loss, directional profit and loss and total option profit and loss. Once the three components are calculate, simple addition and subtraction is used to derive the fourth component and all four components are displayed to help manage profit and loss positions.

Description:
BACKGROUND OF THE INVENTION  
       [0001]     1. Field of the Invention  
         [0002]     The present invention relates to a method for predicting investment performance. More specifically, it refers to a method that uses historical data to provide indices of future expectations and risk for options.  
         [0003]     2. Description of the Prior Art  
         [0004]     Financial management software has been around for many years. In general, financial management software gathers information about stocks, bonds, options and other financial instruments and provides various information regarding the present and past asset allocations and performance. Most of the data presented by the financial management software is historical and a user must look at a myriad of charts, graphs and numbers to predict their future positions, earnings, growth and losses. Furthermore, profit and loss is generally reported as a single value and not broken into components that may provide a more valuable summary of the instrument&#39;s performance.  
         [0005]     What is needed is a method to predict how an option trade has performed and how it will theoretically perform in the future as well as a decomposition of the profit and loss into its component values.  
       SUMMARY OF THE INVENTION  
       [0006]     For the purposes of this application, an application may be any software program running on any computing system, for example an application designed to run under Microsoft Windows® on a personal computer utilizing an Intel processor. Profit and loss refers to the difference between the current value of an option&#39;s position and the position&#39;s initial cost. Profit and loss (P&amp;L) can be represented in several different components, including total option P&amp;L, implied volatility P&amp;L, Directional P&amp;L and Decay P&amp;L.  
         [0007]     Implied volatility represents the market&#39;s expectation of forthcoming volatility in the underlying asset. Therefore implied volatility P&amp;L is the portion of an option position&#39;s overall profit and loss that may be determined specifically by a change in implied volatility. An underlying asset may include, for example, stock, indexes, currencies and futures.  
         [0008]     Directional represents the change in price of the underlying asset. Therefore directional P&amp;L is the portion of an option position&#39;s overall profit and loss that may be determined by changes in the underlying asset&#39;s price.  
         [0009]     Decay represents the erosion of an option&#39;s premium due to the passage of time. Therefore decay P&amp;L is the portion of an option position&#39;s overall profit and loss that may be determined specifically by decay.  
         [0010]     Baseline is a point in time at which the current value of an investment is used as its cost-basis for subsequent profit and loss calculations. The baseline is automatically set everyday at the close of the market. The baseline option quantity is the number of option contracts recorded on the baseline date, while the current option quantity is the number of option contracts currently owned; perhaps some were sold.  
         [0011]     The time to expiration is represented by the number of days between the current date and the expiration date of the option.  
         [0012]     The assets per contract refers to the number of assets in each contract, usually 100 assets per contract.  
         [0013]     In one embodiment, a method for predicting option performance is disclosed including calculating a total option profit and loss, calculating a decay profit and loss, calculating an implied volatility profit and loss and deriving a directional profit and loss by subtracting the implied volatility profit and loss and the decay profit and loss from the total option profit and loss.  
         [0014]     In another embodiment, a method for predicting option performance is disclosed including calculating a total option profit and loss, calculating a decay profit and loss, calculating a directional profit and loss and deriving an implied volatility profit and loss by subtracting the directional profit and loss and the decay profit and loss from the total option profit and loss.  
         [0015]     In another embodiment, a method for predicting option performance is disclosed including calculating a total option profit and loss, calculating an implied volatility profit and loss, calculating a directional profit and loss and deriving a decay profit and loss by subtracting the implied volatility profit and loss and the directional profit and loss from the total option profit and loss.  
         [0016]     In another embodiment, a method for predicting option performance is disclosed including calculating an implied volatility profit and loss, calculating a decay profit and loss, calculating a directional profit and loss and deriving a total option profit and loss by adding the implied volatility profit and loss and the decay profit and loss and the directional profit and loss.  
         [0017]     In another embodiment, a method for predicting option performance is disclosed including calculating an implied volatility profit and loss, calculating a decay profit and loss, calculating a directional profit and loss and calculating a total option profit and loss.  
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0018]     The invention can be best understood by those having ordinary skill in the art by reference to the following detailed description when considered in conjunction with the accompanying drawings in which:  
         [0019]      FIG. 1  illustrates a schematic block diagram of a computer system of an embodiment of the present invention.  
         [0020]      FIG. 2  illustrates a flow diagram of an embodiment of the present invention.  
         [0021]      FIG. 3  illustrates a flow diagram of an embodiment of the present invention.  
         [0022]      FIG. 4  illustrates a flow diagram of an embodiment of the present invention.  
         [0023]      FIG. 5  illustrates a flow diagram of an embodiment of the present invention.  
         [0024]      FIG. 6  illustrates a flow diagram of an embodiment of the present invention.  
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0025]     Reference will now be made in detail to the presently preferred embodiments of the invention, examples of which are illustrated in the accompanying drawings. Throughout the following detailed description, the same reference numerals refer to the same elements in all figures.  
         [0026]     Referring to  FIG. 1 , a schematic block diagram of a computer-based system of the present invention is shown. In this, a processor  110  is provided to execute stored programs that are generally stored within a memory  120 . The processor  110  can be any processor, perhaps an Intel Pentium-5® CPU or the like. The memory  120  is connected to the processor and can be any memory suitable for connection with the selected processor  110 , such as SRAM, DRAM, SDRAM, RDRAM, DDR, DDR-2, etc.  
         [0027]     Also connected to the processor  110  is a system bus  130  for connecting to peripheral subsystems such as a hard disk  140 , a CDROM  150 , a graphics adapter  160 , a keyboard  170  and a network adapter  180 . The graphics adapter  160  receives commands and display information from the system bus  130  and generates a display image that is displayed on the monitor  165 . The monitor  165  may be any display device such as a Cathode Ray Tube (CRT), Liquid Crystal Display (LCD), Plasma display, projection display or the like.  
         [0028]     In general, the hard disk  140  may be used to store programs, executable code and data persistently, while the CDROM  140  may be used to load the programs, executable code and data from removable media onto the hard disk  140 . These peripherals are meant to be examples of input/output devices, persistent storage and removable media storage. Other examples of persistent storage include core memory, FRAM, flash memory, etc. Other examples of removable media storage include CDRW, DVD, DVD writeable, compact flash, other removable flash media, floppy disk, ZIP®, laser disk, etc. Other devices may be connected to the system through the system bus  130  or with other input-output functions. Examples of these devices include printers; mice; graphics tablets; joysticks; and communications adapters such as modems and Ethernet adapters.  
         [0029]     Referring now to  FIG. 2 , a flow diagram of the present invention is shown, starting with entering an asset symbol, option type and option price  210 . The asset symbol refers to a symbol such as used on the NASDAQ or New York Stock Exchange (NYSE), for example, IBM for International Business Machines. The option type may be American Style, in that it can be exercised at any time on or before its expiration date, or European Style, in that it can only be exercised on its expiration date. The strike price is the price for which the option may be exercised, regardless of the current market price.  
         [0030]     Next the decay profit and loss is calculated  220 . The decay profit and loss is calculated by: 
 
decay profit and loss=( np−bp )× q×apc  
 
         [0031]     where np is the new price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option when the baseline was set and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These models and approximations are known in the industry. For example, the binomial model has been proven over time to be a flexible and intuitive approach to option pricing. It is based on the premise that over a period of time, the option can only move from its current price to two possible levels. It also embodies a risk-neutral valuation principle which can be used to shortcut the valuation of European options. Certain models are better at calculating European style options while others are better at calculating American style options. These models and approximations are explained in the following references: 
    Chriss, Neil A.  Black - Scholes and Beyond Option Pricing Models , New York: McGraw-Hill, 1997.     Haug, Espen Gaarder.  The Complete Guide to Option Pricing Formulas , New York: McGraw-Hill, 1998.     Jackson, Mar and Mike Staunton,  Advanced Modeling in Finance Using Excel and VBA , Chichester, England: John Wiley &amp; Sons Ltd., 2001.     Wilmott, Paul.  Paul Wilmott Introduces Quantitative Finance . Chichester, England: John Wiley &amp; Sons Ltd., 2001.    
 
         [0036]     Next the total option profit and loss is calculated  230 . The total option profit and loss for long options is calculated by: 
 
total option profit and loss=( cp−bp )× q×apc  
 
         [0037]     or the total option profit and loss for short options is calculated by: 
 
total option profit and loss=( bp−cp )× q×apc  
 
         [0038]     where cp is the current option price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option and apc is the number of assets per contract.  
         [0039]     Next the implied volatility profit and loss is calculated  240 . The implied volatility profit and loss is calculated by: 
 
implied volatility profit and loss=( cp−np )× q×apc  
 
         [0040]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the current asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These example models and approximations are known in the industry.  
         [0041]     Next, the directional profit and loss  250  is derived from the previous results using the following equation: 
 
directional profit and loss= to−iv−dcy  
 
         [0042]     where to is the calculated total option profit and loss, dcy is the calculated decay profit and loss and iv is the calculated implied volatility profit and loss.  
         [0043]     Once all calculations are performed, the decay profit and loss, the total option profit and loss, the implied volatility profit and loss and the directional profit and loss are displayed  260  on a computer monitor  165 , either in numerical form, graphical form or both.  
         [0044]     Referring now to  FIG. 3 , a flow diagram of the present invention is shown, starting with entering an asset symbol, option type and option price  310 . The asset symbol refers to a symbol such as used on the NASDAQ or New York Stock Exchange (NYSE), for example, IBM for International Business Machines. The option type may be American Style, in that it can be exercised at any time on or before its expiration date, or European Style, in that it can only be exercised on its expiration date. The option price is the baseline (starting) price of the option.  
         [0045]     Next the decay profit and loss is calculated  320 . The decay profit and loss is calculated by: 
 
decay profit and loss=( np−bp )× q×apc  
 
         [0046]     where np is the new price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option when the baseline was set and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These models and approximations are known in the industry. For example, the binomial model has been proven over time to be a flexible and intuitive approach to option pricing. It is based on the premise that over a period of time, the option can only move from its current price to two possible levels. It also embodies a risk-neutral valuation principle which can be used to shortcut the valuation of European options. Certain models are better at calculating European style options while others are better at calculating American style options.  
         [0047]     Next the total option profit and loss is calculated  330 . The total option profit and loss for long options is calculated by: 
 
total option profit and loss=( cp−bp )× q×apc  
 
         [0048]     or the total option profit and loss for short options is calculated by: 
 
total option profit and loss=( bp−cp )× q×apc  
 
         [0049]     where cp is the current option price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option and apc is the number of assets per contract.  
         [0050]     Next the directional profit and loss is calculated  340 . The directional profit and loss is calculated by: 
 
directional profit and loss=( cp−np )× q×apc  
 
         [0051]     where np is the new price, cp is the current option price, q is current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, the current implied volatility and time to expiration as inputs. These example models and approximations are known in the industry.  
         [0052]     Next, the implied volatility profit and loss  350  is derived from the previous results using the following equation: 
 
implied volatility profit and loss= to−d−dcy  
 
         [0053]     where to is the calculated total option profit and loss, d is the calculated directional profit and loss and dcy is the calculated decay profit and loss.  
         [0054]     Once all calculations are performed, the decay profit and loss, the total option profit and loss, the implied volatility profit and loss and the directional profit and loss are displayed  360  on a computer monitor  165 , either in numerical form, graphical form or both.  
         [0055]     Referring now to  FIG. 4 , a flow diagram of the present invention is shown, starting with entering an asset symbol, option type and option price  410 . The asset symbol refers to a symbol such as used on the NASDAQ or New York Stock Exchange (NYSE), for example, IBM for International Business Machines. The option type may be American Style, in that it can be exercised at any time on or before its expiration date, or European Style, in that it can only be exercised on its expiration date. The option price is the baseline (starting) price of the option.  
         [0056]     Next the directional profit and loss is calculated  420 . The directional profit and loss is calculated by: 
 
directional profit and loss=( cp−np )× q×apc  
 
         [0057]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, the current implied volatility and time to expiration as inputs. These example models and approximations are known in the industry.  
         [0058]     Next the total option profit and loss is calculated  430 . The total option profit and loss for long options is calculated by: 
 
total option profit and loss=( cp−bp )× q×apc  
 
         [0059]     or the total option profit and loss for short options is calculated by: 
 
total option profit and loss=( bp−cp )× q×apc  
 
         [0060]     where cp is the current option price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option and apc is the number of assets per contract.  
         [0061]     Next the implied volatility profit and loss is calculated  440 . The implied volatility profit and loss is calculated by: 
 
implied volatility profit and loss=( cp−np )× q×apc  
 
         [0062]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the current asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These example models and approximations are known in the industry.  
         [0063]     Next, the decay profit and loss  450  is derived from the previous results using the following equation: 
 
decay profit and loss= to−d−iv  
 
         [0064]     where to is the calculated total option profit and loss, d is the calculated directional profit and loss and iv is the calculated implied volatility profit and loss.  
         [0065]     Once all calculations are performed, the decay profit and loss, the total option profit and loss, the implied volatility profit and loss and the directional profit and loss are displayed  460  on a computer monitor  165 , either in numerical form, graphical form or both.  
         [0066]     Referring now to  FIG. 5 , a flow diagram of the present invention is shown, starting with entering an asset symbol, option type and option price  510 . The asset symbol refers to a symbol such as used on the NASDAQ or New York Stock Exchange (NYSE), for example, IBM for International Business Machines. The option type may be American Style, in that it can be exercised at any time on or before its expiration date, or European Style, in that it can only be exercised on its expiration date. The option price is the baseline (starting) price of the option.  
         [0067]     Next the decay profit and loss is calculated  520 . The decay profit and loss is calculated by: 
 
decay profit and loss=( np−bp )× q×apc  
 
         [0068]     where np is the new price, bp is the price of the option when the baseline was set , q is quantity of contracts for the option when the baseline was set and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These models and approximations are known in the industry. For example, the binomial model has been proven over time to be a flexible and intuitive approach to option pricing. It is based on the premise that over a period of time, the option can only move from its current price to two possible levels. It also embodies a risk-neutral valuation principle which can be used to shortcut the valuation of European options. Certain models are better at calculating European style options while others are better at calculating American style options.  
         [0069]     Next the directional profit and loss is calculated  530 . The directional profit and loss is calculated by: 
 
directional profit and loss=( cp−np )× q×apc  
 
         [0070]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, the current implied volatility and time to expiration as inputs. These example models and approximations are known in the industry.  
         [0071]     Next the implied volatility profit and loss is calculated  540 . The implied volatility profit and loss is calculated by: 
 
implied volatility profit and loss=( cp−np )× q×apc  
 
         [0072]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the current asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These example models and approximations are known in the industry.  
         [0073]     Next, the total option profit and loss  550  is derived from the previous results using the following equation: 
 
total option profit and loss= d+iv+dcy  
 
         [0074]     where d is the calculated directional profit and loss, iv is the calculated implied volatility profit and loss and dcy is the calculated decay profit and loss.  
         [0075]     Once all calculations are performed, the decay profit and loss, the total option profit and loss, the implied volatility profit and loss and the directional profit and loss are displayed  560  on a computer monitor  165 , either in numerical form, graphical form or both.  
         [0076]     Referring now to  FIG. 6 , a flow diagram of the present invention is shown, starting with entering an asset symbol, option type and option price  610 . The asset symbol refers to a symbol such as used on the NASDAQ or New York Stock Exchange (NYSE), for example, IBM for International Business Machines. The option type may be American Style, in that it can be exercised at any time on or before its expiration date, or European Style, in that it can only be exercised on its expiration date. The option price is the baseline (starting) price of the option.  
         [0077]     Next the decay profit and loss is calculated  620 . The decay profit and loss is calculated by: 
 
decay profit and loss=( np−bp )× q×apc  
 
         [0078]     where np is the new price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option when the baseline was set and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These models and approximations are known in the industry. For example, the binomial model has been proven over time to be a flexible and intuitive approach to option pricing. It is based on the premise that over a period of time, the option can only move from its current price to two possible levels. It also embodies a risk-neutral valuation principle which can be used to shortcut the valuation of European options. Certain models are better at calculating European style options while others are better at calculating American style options.  
         [0079]     Next the total option profit and loss is calculated  630 . The total option profit and loss for long options is calculated by: 
 
total option profit and loss=( cp−bp )× q×apc  
 
         [0080]     or the total option profit and loss for short options is calculated by: 
 
total option profit and loss=( bp−cp )× q×apc  
 
         [0081]     where cp is the current option price, bp is the price of the option when the baseline was set, q is quantity of contracts for the option and apc is the number of assets per contract.  
         [0082]     Next the implied volatility profit and loss is calculated  640 . The implied volatility profit and loss is calculated by: 
 
implied volatility profit and loss=( cp−np )× q×apc  
 
         [0083]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the current asset price, baseline implied volatility and time to expiration of the option contracts as inputs. These example models and approximations are known in the industry.  
         [0084]     Next the directional profit and loss is calculated  650 . The directional profit and loss is calculated by: 
 
directional profit and loss=( cp−np )× q×apc  
 
         [0085]     where np is the new price, cp is the current option price, q is the current quantity of contracts for the option and apc is the number of assets per contract. New price, np, is calculated using a standard pricing model such as the Binomial Model, the Trinomial Model, the Black-Sholes Model, the Barone-Adesi and Whaley Approximation and the Bjerksund and Stensland Approximation, using the baseline asset price, the current implied volatility and time to expiration as inputs. These example models and approximations are known in the industry.  
         [0086]     Once all calculations are performed, the decay profit and loss, the total option profit and loss, the implied volatility profit and loss and the directional profit and loss are displayed  660  on a computer monitor  165 , either in numerical form, graphical form or both.  
         [0087]     An example of the use of these equations will be shown using sample numbers in the tables below. Table-1 shows baseline numbers for the sample option when purchased on April 13. Table-2 shows closing prices for that option on April 13. Table-3 shows the profit and loss breakdowns for those options on April 14.  
                                                   TABLE 1                           Baseline Date Apr. 13, 2005                DESCRIPTION/       BASELINE           STRIKE PRICE   QUANTITY   PRICE                            June 2005 - 150 Put   1   11.75           June 2005 - 135 Put   1   5.50                      
 
         [0088]    
       
         
               
             
               
               
               
               
             
               
               
               
               
             
           
               
                 TABLE 2 
               
             
             
               
                   
               
               
                   
               
               
                 Closing Prices Apr. 13, 2005 (Current Price) 
               
             
          
           
               
                   
                 DESCRIPTION/ 
                   
                 BASELINE 
               
               
                   
                 STRIKE PRICE 
                 QUANTITY 
                 PRICE 
               
               
                   
                   
               
             
          
           
               
                   
                 June 2005 - 150 Put 
                 1 
                 11.75 
               
               
                   
                 June 2005 - 135 Put 
                 1 
                 5.50 
               
               
                   
                   
               
             
          
         
       
     
         [0089]    
       
         
               
             
               
               
               
               
               
             
           
               
                 TABLE 3 
               
             
             
               
                   
               
               
                   
               
               
                 Sources of P&amp;L on Apr. 14, 2005 
               
             
          
           
               
                 DESCRIPTION/ 
                 TOTAL 
                 DIRECTIONAL 
                 IV 
                 DECAY 
               
               
                 STRIKE PRICE 
                 P&amp;L 
                 P&amp;L 
                 P&amp;L 
                 P&amp;L 
               
               
                   
               
               
                 June 2005 - 150 Put 
                 395 
                 332.31 
                 69.88 
                 −7.19 
               
               
                 June 2005 - 135 Put 
                 235 
                 206.60 
                 34.94 
                 −6.54 
               
               
                   
               
             
          
         
       
     
         [0090]     In both cases, one option contract was purchased (quantity=1) with the standard 100 assets per contract (apc=100) and the time to expiration is 57 days. Total option profit and loss may be calculated by: 
 
total option P&amp;L=( cp−bp )× q×apc  
 
         [0091]     Inserting the values from this example: 
 
total option P&amp;L 150 =395=(15.70−11.75)×1×100 
 
total option P&amp;L 135 =235=(7.85−5.50)×1×100 
 
         [0092]     Implied volatility profit and loss may be calculated by: 
 
implied volatility P&amp;L=( cp−np )× q×apc  
 
         [0093]     where np is calculated using the binomial(cp, strike, time to expiration)  
         [0094]     Inserting the values from this example: 
 
implied volatility P&amp;L 150 =69.88=(15.70−15.0012)×1×100 
 
         [0095]     where np is calculated using the binomial(15.70, 150, 57) 
 
implied volatility P&amp;L 135 =34.94=(7.85−7.5006)×1×100 
 
         [0096]     where np is calculated using the binomial(7.85, 135, 57)  
         [0097]     Decay profit and loss may be calculated by: 
 
decay P&amp;L=( np−bp )× q×apc  
 
         [0098]     where np is calculated using the binomial(bp, strike, time to expiration)  
         [0099]     Inserting the values from this example: 
 
decay P&amp;L 150 =−7.19=(11.6781−11.75)×1×100 
 
         [0100]     where np is calculated using the binomial(11.75, 150, 57) 
 
decay P&amp;L 135 =−6.54=(7.85−7.5006)×1×100 
 
         [0101]     where np is calculated using the binomial(7.85, 135, 57)  
         [0102]     Directional profit and loss may be calculated by: 
 
Directional P&amp;L=Total Option−Implied Volatility−Decay 
 
         [0103]     Inserting the values from this example: 
 
Directional P&amp;L 150 =332.31=395.00−69.88−(−7.19) 
 
Directional P&amp;L 135 =206.60=235.00−34.94−(−6.54) 
 
         [0104]     Equivalent elements can be substituted for the ones set forth above such that they perform in substantially the same manner in the same way for achieving the same result.  
         [0105]     It is believed that the system and method of the present invention and many of its attendant advantages will be understood by the foregoing description. It is also believed that it will be apparent that various changes may be made in the form, construction and arrangement of the components thereof without departing from the scope and spirit of the invention or without sacrificing all of its material advantages. The form herein before described being merely exemplary and explanatory embodiment thereof. It is the intention of the following claims to encompass and include such changes.