OsCcOptionCharts.com
Title
OSCC Option Trading Tools
Description
Where we come from:
All traders have a common problem. When they call their broker for a quote on an option or look at their own screen what they normally get is the value of the last trade. Many traders see these quotes, but are in this for the long term and make the trade with a "market order" anyway. However, there can be differences as large as 20 ticks between the last trade on the screen and the actual trade. That is why some traders call for floor quotes when they are not comfortable with market orders. This sometimes can and does take up to a half-hour or longer. In the span of just a couple of second's, futures and option values can vary wildly, and considerably more in half an hour. Thus traders can not be sure if this floor quote was made in the last few seconds or half-hour ago. This leaves too much to chance in today's markets. See chart for pictorial representation of a near term contract showing screen quotes versus actual trades versus the distance the strike price is from the future.
What we found:
A search was conducted for a formula that could track option prices on a PC and produce something approaching the actual "BID-ASK" price on the floor that might give a trader some guidance in knowing what price to trade at. The formulas that were found took much to long to calculate to be practical. What I found is that virtually every option program calculates only one "implied volatility" for the entire contract and uses it for all strike prices. This gives inaccurate numbers because implied volatility can vary from about .4 to 1.0 depending on far the strike price is from the future. These programs can do this because the far out options are less used and no one notices it and the trading frequency is so low that the "last price" changes can be big, and no one can tell what happened. I checked by talking to the programmers themselves. Also the calculations are too intense. You have to iterate every strike price with every change in the futures to get an accurate answer. They simply can't and don't do it for every option trade. A real "implied volatility" number for a contract can vary from 0.4 to 1.0. They normally use the lowest value close to the money. If any option program says that this is not so have them put the statement in writing and send you the actual calculations done by the most popular public option model. The most popular option model also "twists" with significant changes in the futures. That is, it over values options to one side of the future and under values to the other side of the future as the future moves up or down, significantly. This is inherent in the formula and can cause pricing errors.
The programs found were based on an assumption that options change in value proportional to the change in value of the future. In reality the floor traders are just like anyone else when it comes to losing money. They will hold their position if they can, as long as they can. Which means that options seldom truly move in proportion to the futures. This is the human element in the open outcry pit that all the option programs and models I saw could not account for. I call this the "Hold Back - Push Out" phenomenon. A chart on the bottom of this page shows just how far off this can cause values to be.
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