Daily Options Analysis

I have developed a c#/sql system and web-site (www.my-market-positions.com) whereby im getting the USA options downloaded for a few tickers every night (attached file) via yahoo and calculating greeks/black-scholes pricing. Then what I'm trying to see if there are any miss priced options, with low volatility, at the money and buying $1 to $2 strikes away. Alternatively selling high volatility over priced options and collect premium. Now sometimes this works and sometimes not, as technical indicators help a bit but not 100%.

What kind of entry signals do options traders look out for and when to exit options? Is the data sheet I got worth developing a system on or is this another throw the dice game?

i don't consider myself an expert options trader by any means, and i haven't branched out to US options yet, i've just been restricting myself to trading ASX stock options for now. but my opinion is that MMs have access to a raft of info you and i probably don't, have sophisticated computer systems at their disposal, and on top of that are very savvy operators - if you try to catch them out purely on the basis of mispriced IVs, you are going to lose more often than not.

so i don't try to trade options on the basis of mispriced IV. instead i form views on particular stocks based on things i read, what i see in the charts etc., then i think about which options strategy/strategies would let me best trade that view. if i like what the market is quoting, i'll make the trade. if i don't, i'll hold fire and wait. i went into an example of a recent trade i did in a thread i started a while ago (https://www.aussiestockforums.com/forums/showthread.php?t=26867).

i had formed an opinion on QBE, and decided that call calendars at 16 was the strategy i wanted to use. about a week before may expiry, the market gave me the opening i was looking for - the underlying got to 16, and with just a week to expiry some serious time decay would soon kick in, so it was a good time to put on the calendars with may being the near leg. the spreads were about 3c wide on both legs, which is probably as good as you're going to get in QBE for any contracts with a decent premium to them. i figured it was likely i'd be able to roll the near leg into june short calls (or june synthetic short calls - i didn't know which one it was going to be on expiry day - which is the topic of the above thread) at a good price because with a week to expiry, and the significance of the 16 level, there was a decent chance it would be near 16 at expiry, or soon after. adding all that up i decided it was good enough to make the trade, so went ahead and did it. whether the IVs were mispriced or not didn't factor into my thinking at all.

not saying that's the right way to do it, as i said i'm not an expert. so i'd also like to find out the approach other option traders take.

one other thing. i haven't looked at your spreadsheet yet, but i am in the software field, and can understand C#, so i might do at some point if i find the time. however from what you've said it sounds like you are looking for low IVs and high IVs in absolute IV terms, as opposed to mispriced IV - which is an expression i generally take to mean that someone is suggesting that the IVs of the MM quotes are way off what they think the RV will be. which is why i wrote what i wrote in the first para. i might be wrong on the correct usage of the term though - i have seen it used before to describe lower strikes of the same underlying and expiry having a higher IV than that of the higher strikes and are therefore mispriced, when to me that is simply normal delta skew which you will see just about all the time anyway in stock options. maybe the term is amorphous and can mean many things. can you clarify what you meant?

to find mis priced options you would have to know what the 'correct' price should be, which means you would have to know what the correct volatility input should be. How are you establishing that? To use a single HV figure is too simplistic to work as the market doesn't base prices on any particular HV period

To reflect real life you would also have to know what the correct 'risk of jump' premium should be, which would often account for all of the mispricing you think you have found if using a simplistic HV vol input based on past price movement alone.

Obvious example is IV rising before an earnings report or court decision which reflects the jump risk premium rightly added. Does not necessarily make it mispriced

village idiot said:

to find mis priced options you would have to know what the 'correct' price should be, which means you would have to know what the correct volatility input should be. How are you establishing that? To use a single HV figure is too simplistic to work as the market doesn't base prices on any particular HV period

To reflect real life you would also have to know what the correct 'risk of jump' premium should be, which would often account for all of the mispricing you think you have found if using a simplistic HV vol input based on past price movement alone.

Obvious example is IV rising before an earnings report or court decision which reflects the jump risk premium rightly added. Does not necessarily make it mispriced

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using black-scholes to price the options should be enough for now, there are other models out there. My concern is what rules to apply to get in and the rules to get out? what do we look out for here?

skeezwiz said:

using black-scholes to price the options should be enough for now, there are other models out there.

Click to expand...

it is really the IV one must look at in order to determine if an option is overpriced or not. black/scholes doesn't determine IV, it just backs out the "fair value" premium from IV (plus some other, mostly known, inputs - however one other important factor that isn't always known is dividends).

the MMs/instos do have proprietary models they use to price IV, but they spend millions in devising those models - these are way more complex than black/scholes. i don't know about you, but i know there's no way i could come up with anything as accurate as those.

skeezwiz said:

My concern is what rules to apply to get in and the rules to get out? what do we look out for here?

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IMHO it's not a binary decision of enter position here, exit position there. you have more "options" in what you can do with a position vs stocks. you can simply close it out, but you can also roll (close out the front month leg, enter into a back month leg), you can transform the risk profile of the position into something else by adding a leg (eg. buy outright puts, if underlying falls as expected, spread it off by selling a lower strike put to get your premium back), or subtracting a leg (eg. 1 by 2 ratio put spread, stock barely moves, buy back the lower strike puts once they've significantly decayed, leaving you with what are effectively cheap - or even free - long puts), you can even combine it with a stock position (eg. if you wanted to delta hedge) etc. there are tons of combinations - too many to make up hard and fast rules for.

when i have an options positions active i'm constantly watching the underlying and asking myself, is my opinion of the underlying still the same? is my options position still consistent with that opinion? can i adjust it to make it fit that opinion better eg. roll or transform? have to be constantly assessing the situation and act on what you see.

just about the only rule i have is - if i have a limited reward position eg. a vertical spread, and can close it out for 80% of max profit assuming i have to completely cross the bid/ask spread on every leg, then i do it. but even that has some caveats, i may have sold outright puts over something i'm willing to take delivery on, in which case even if i can pay < 20% of the original premium by hitting the offer to close out, i won't bother doing so if the situation is unchanged and i still don't mind getting it put to me - why cough up the remaining EV + spread + commish if i'm totally ok with taking delivery at the strike?

Sharkman said:

one other thing. i haven't looked at your spreadsheet yet, but i am in the software field, and can understand C#, so i might do at some point if i find the time. however from what you've said it sounds like you are looking for low IVs and high IVs in absolute IV terms, as opposed to mispriced IV - which is an expression i generally take to mean that someone is suggesting that the IVs of the MM quotes are way off what they think the RV will be. which is why i wrote what i wrote in the first para. i might be wrong on the correct usage of the term though - i have seen it used before to describe lower strikes of the same underlying and expiry having a higher IV than that of the higher strikes and are therefore mispriced, when to me that is simply normal delta skew which you will see just about all the time anyway in stock options. maybe the term is amorphous and can mean many things.

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Exactly.

Mispricing in this context can only be determined in retrospect as RV can only be determined when it is actually realized.... today's IV will rarely exactly match actual volatily when realized. Ergo, almost all options are mispriced to a degree... in this context mispricing is not the correct term.

Mispricing is when a single option in a chain is so out of whack that there is an arbitrage opportunity .

Good luck finding those before an insto supercomputer is all over it like a rash.

ye thats right, these days u need super computers, we little guys have no chance!

wayneL said:

Exactly.

Mispricing in this context can only be determined in retrospect as RV can only be determined when it is actually realized.... today's IV will rarely exactly match actual volatily when realized. Ergo, almost all options are mispriced to a degree... in this context mispricing is not the correct term.

Mispricing is when a single option in a chain is so out of whack that there is an arbitrage opportunity .

Good luck finding those before an insto supercomputer is all over it like a rash.

Click to expand...