The Option Model for the New Millennium.

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This formula is protected by both a Patent Pending filing and a Registered Copyright. The Registered Copyright allows us to recover damages and attorney fees. We have set damages at $100.00 per option side traded, determined or data distributed per second.


We need to understand how options decay.
The theory and the reality.

Everyone understands options decay in value. See illustration #1 
However, that is not reality. Here is reality. We have overlaid a yellow line on the theory curve. This  illustrates what is actually happening. As you can see the values are all different. You could have over a 100 of these up and down swings on a day to day basis. You can have just as many during a single days trading. See illustration #2


 What we mean by "options" is the time value of all options in the entire monthly contract,  at every strike price, from deep in the money, to "at" the money, to deep out of the money.  This is defined as the entire strike price distribution curve or ESPDC for short. When traders look at their screens they do not see a value for every strike price, only those currently listed, even though it may have traded hours ago at entirely different future value. Every contract has an option premium for all strike prices, whether  listed or unlisted. Our option model was originally created as a real-time option pricing program, this enables us to fill in a value for every strike price. Both puts and calls have their own ESPDC. The area under that curve is the total of all the strike price option premiums added together at that moment and we define this as the "OSCC "Max Premium"" and can be represented by the "Max Premium" which is what we actually calculate. 
See illustration #3 for a better understanding of what we mean.
We average the put and call values. Normally the difference is insignificant.
However, the entire "actual ESPDC" will get smaller as we go to expiration. See Curve #1and Curve #2 on illustration 4. You can look at these curves as an example of changes in the ESPDC total..

     Now as the future moves from side to side the actual option premiums at every strike price goes either up or down and traders see this as rapid change in their option values, Thus the actual time value of an option will go up or down slowly or very fast depending on how close your strike price is to the future on the ESPDC. This is how options have to work and we all see it happen every minute of the day. However, the entire "actual ESPDC" in theory "falls" or decays as we go to expiration. See Curve #1and Curve #2 on illustration 2 for an illustration of this "fall" or decay. 

     What traders do not see is that the entire ESPDC also moves up down unrelated to any market condition that we can find. The only conclusion we can therefore arrive at in our opinion is that someone is manipulating this ESPDC for their own benefit.

     The "OSCC "Max Premium"" will be different at 100 or 60 days to expiration.. In order to be able to compare these totals we adjust these "OSCC "Max Premiums"" for time. We call this the "OSCC Adjusted "Max Premium"" (ATOP),( it is actually what we get by dividing the instantaneous "Max Premium" by the square rot of the number of days to expiration. The actual "OSCC "Max Premiums"" is found by a simple integration using the "Max Premium" and the slopes of all the put and call in and out of the money time values at all strike prices. I found that these totals to be insignificantly different from the "top Premium" as the slopes are "adjusted to maintain a steady value. This is now a relative number that can be used for comparing the ESPDC at two different times, such as 100 days to expiration and 60 days to expiration. If the ESPDC moves up or down this number measures that movement. The ESPDC value should remain constant for the life of the contract and would be a straight line on our charts if it was not moved up or down.. (you can look on illustration 4 at Curve #1 and curve #2 as being adjusted ATOP curves even though the underlying ESPDC would be lower for Curve #3) This would indicate that the ESPDC changed from the standard value. Curve #3 would be indication of a "Steady" value of the ATOP. If a trader is looking at a contract at 100 days to expiration , he needs to know if it looks like this entire ESPDC is rising or falling faster (being over sold) or slower (being over bought) than it should.  If our data point falls, it is decaying faster than normal and it is over sold and all options are losing premium faster than a trader anticipates. If the ATOP is rising it indicates that the ESPDC is decaying slower than it should and is being over bought. If the momentum is high , it could in fact indicate that the ESPDC is actually increasing such that all the options have greater value, These ATOP points are the data point numbers on our charts. 

     Here is how our ATOP helps traders the most. If a trader believes that the future is going up and buys an out of the money such as Data point 1 on illustration 4 and then the future went up as the trader expected, but ATOP dropped to Curve #2 his option value would the be at Data point 2 and he would have lost money even though he was correct on the futures. However, had he looked at our charts and saw that the ATOP was falling he could have skipped the purchase or had his broker construct a different strategy.

     As a trader can see these ATOP points move all over and different contracts can and do move in different directions. This shows that these entire curves are not related to the futures.  You will see some commodities that have some monthly contracts rising and another one falling.
See illustration #4

Mis-priced contracts.

You will notice that not all our data points for he "OSCC Adjusted Total Option Premium" (ATOP). are on the same area of chart as most of the rest of the data points. When we adjust the "OSCC Total Option Premium" for the same risk the number we publish would be exactly the same for all contracts on a commodity. However, this is seldom true, many times the ATOP is significantly different for some contracts. This is the changing of the ESPDC  value. The pricing shows up on our charts as different contracts having their own line, either above or below the others and sometimes going in different directions. What you are looking for are humps and valleys in these lines. Valleys are a good place to ask your broker about buying a long call or put. This may not always be the best thing, so listen to your broker. Once you see a valley, the lowest line should always be the most undervalued. Be aware that option prices change extremely fast, so that what may look good on one of these charts may in fact be bad when the market opens. Look to see if the current average is above or below the 1 year or 3 month averages. This will help guide your decisions. Our over bought/sold list has a scale for this pricing-pricing. Over the years we have seen very few instances when a mis-priced contract did not eventually get in line with the rest of the contracts, but it has happened.

Tables that show:

Options that in our opinion are over bought with a rating of +1 to +5

Options that in our opinion are over sold with a rating of -1 to -5

Options that in our opinion are steady with a rating of 0.
  with special notes on some commodities.

Go to this page for our rating definitions.

Frequently asked questions

About Option Premium Momentum

The average option premium has the same characteristics as a future. Therefore it also has "Momentum". That is, when most of the  traders see the risk in the options getting higher or they perceive the under lying future is getting unstable, they push up their offer bids (over buying). This gives Momentum to the option premiums and all of the contracts for that commodity start to rise to some degree. If traders see nothing happening, they lose interest in the options on that commodity and quit bidding. This drives down momentum and it can actually move to the negative side (over sold).

Be careful, watch the scales on the right as some have a history of very little momentum and some a great deal of momentum.

See our discussion of Future's momentum.    See other changes we have made recently.

For continued information please read our Option Overview page.

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We also have a new "chart explanation page" to help explain what these charts show and how to use them.
For a better understanding of what we do please read these pages.
--- About Us What we found that prompted us to develop our option program.
--- The OSCC overview of option trading.
--- The OSCC Option Model.
--- Products
--- The Accuracy of the OSCC Option Model.

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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.