Guidelines for use of the OSCC Variance Values

When planning option strategies you have to make assumptions as to how much you believe the option premiums and the futures are going to change in the future.. Your only guides are your brokers opinion and what the option premiums and the futures have done in the past. We can give you our opinion of the latter. It is:

Variance

A very important part of an option strategy is knowing the amount by which you can expect the future and the OSCC "Max Premium" to change (Variance). The amount of Variance depends on your planned time frame for trading.

Why a variance on both futures and options?

 Because the variance of the future is independent of the variance of option premiums. 
 Futures change in response to market changes.
 "Max Premium" is controlled by option market makers in the pit and oscillates independently of the futures.

Time Frame Definitions an how we calculate our Variance values

Option traders can be divided into four basic groups: Day traders, Near Term, Long Term. and Hedgers. We have a value for each group for both the option premiums and the futures. For each of these groups we define a time frame for the planned strategy. We then look back twice that length of time to make an estimate of the probable change in the future for this group of traders. Traders can make adjustments between these values to suit their particular strategy time frames. We use the same look back for both the option premiums and futures for each group.

 What we did was look at our data, keep a moving average over the number of look back trading days and then average that number over the last 300 trading days. When we first started this project we made charts for several commodities for both the futures and options for the look back days. Surprisingly what we found was that, except for the scale, the charts all had the same oscillating characteristics and that the options and futures had absolutely no coordination. The 300 days made a nice line through the middle of each look back period and was longer than the hedgers time frames. So rather than make a bunch of useless charts, we decided to just post the numbers. These values are posted at the top of the futures charts for futures and at the top of the summary chart for options.
 The four groups are:

Day Traders

These are traders who are in and out in 5 days or less. For them we post a look back period of 10 days.

Near Term

These are traders who are in and out in  about 15 days. For them we post a look back period of 30 days.

Long Term

These are traders who hold their options in the 40 day range. For them we post a look back period of 80 days.

Hedgers

These are traders who are hedging futures transactions out beyond 120 days. For them we post a look back period of 240 days.

FTI

This value is found on the Option Summary chart. See definition

What is "Max Premium"?

Everyone thinks option premiums do also. This is because when the futures rise they see their call premiums rising and put premiums falling. But option premiums are made up of two parts, intrinsic value (future value) and extrinsic value (time value). The intrinsic value is the "in the  money" value of the option related to the future price. The extrinsic value represents the risk in the option.

 This extrinsic value exists on all strike prices within range of the future depending on how close to expiration we are. This extrinsic value is a long sweeping curve called a log normal distribution curve. See reference. What gets lost is that while the future is rising the extrinsic value of the in the money call strike prices should fall EXACTLY in PROPORTION to the amount that the out of the money strike price extrinsic values are rising. That is the total of the extrinsic values at all the strike prices that could be available should remain constant. Unfortunately it doesn't. Thus we have the OSCC Adjusted "Max Premium" to show how it varies.

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.
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--- Products
--- The Accuracy of the OSCC Option Model.

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