|The Option Model for the New Millennium.
|OPTION SERVICES for COMMODITIES, CORPORATION:
A message from Tom.
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.
What we did:
Thus a proprietary set of formulas was developed that solves these problems and the option pricing problem for all strike prices at the same time. These formulas also provided a very unique insight into option premiums because they were "independent" of the futures and showed just what was going with the option premiums themselves. They also allowed for easy transportation of values across time. We now call these formulas the OSCC Option Model. As much as possible a complete explanation of this program is provided on the OSCC Option Model page.,
Where we are going:
The object of this web site is to use the OSCC Option Model to help traders as much as possible increase their profits and reduce their losses. The capabilities of this model has allowed us to develop a system for doing that. This has resulted and continues to result in more new features for this system.
What's in the future?
OSCC may add other commodity options from time to time as we acquire data and the resources to do them. We do have a next generation model that is more specifically designed to handle the "Hold Back - Push Out" human outcry pit phenomena. The present model runs itself and does a very good job of "merging" the various parameters to get overall accurate figures. However, the next generation model is significantly more complicated and although I can run it manually and adjust between the various opposing groups, I have not yet been able to teach it to run by itself. This may take another year or two.
For continued information please read our Option Overview page.
We also have a new
"chart explanation page" to help explain
what these charts show and how to use them.
OR Go to: Forums visited
list and contact information.
Please read our DISCLAIMER AND AGREEMENT for use of this site.
The change in values for the at the money strike prices for calls and puts on 30 year Treasury Bonds for June 4th, 1999 plotted with the change in the September future from CBT time and sales data.
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Last Updated on 10/31/2019
By Tom B
As used throughout this web site: 10/31/2019
This site relates to option trading of commodity options and futures with strategies that buy or sell
puts and calls either long or short for profit on treasury bonds and notes, Dow Jones Index, soybean products, corn, wheat, oats, rough rice and T-Bond
options on the CBT, Chicago Board of Trade through "floor
traders". We are also doing 6 currencies from the CME, the Chicago
Mercantile Exchange, the Japanese Yen, British
Pound, Swiss Franc, the Euro FX (ECU) and the Australian and Canadian dollars.
We also do 5 agriculture products, the S&P 500, NASDAQ 100 and Eurodollars
related to European and Economic Monetary Union (EMU) interest rates. Commodities are a high risk speculative hedging investment
and traders should use brokers for trading contracts who keep
their funds and money in accounts with high rates. This site provides free commentary, and technical analysis on commodity futures
and option premiums by OSCC from our futures charts and option charts for
use by traders.
This site no longer provides free quotes, although we do provide a free commodity ticker.
Copyright 1999-2007 by OPTION SERVICES for COMMODITIES, CORPORATION