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Protection of our formula.
This formula is protected by both a Patent Pending filing and a
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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
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
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
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.
notes on some commodities.
Go to this page for our rating
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
Return to formula page
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
--- About Us What we found
that prompted us to develop our option program.
--- The OSCC overview of option trading.
OSCC Option Model.
--- The Accuracy of the OSCC Option Model.