Share is care!
Option Calculator 3.0.0 is shared with all my friends today after a long time waiting.
1. Release Notes
- Improved IV calculation algorithm.
- Added strike predication trend chart.
- Changed put/call skew calculation algorithm to be similar to that on fdscanner.com (see explanation below).
- Added PCR trend chart (see explanation below).
- Added correlation to inverted-UVXY
- Bug fixes
2. Installation
3. Analysis Screen
- App only accept Yahoo Finance tickers, for example, "^SPX" rather than "SPX".
- EM means Expected Movement, it is expected market price change when sigma scale is one.
- The chart is spitted into 3 different areas by three X-axes: date, probability and premium.
- Candlesticks area
use mouse to drag and move the candlestick chartscroll mouse wheel to zoom chart.
- Probability area
shows the probabilities of call/put on each point, you can move mouse to the point to display the probability the market hits it.
- Premium area
shows the theoretical price of your option at each point, you can move mouse to it to display the premium.
- Solid horizontal line is the current market price.
- Thick green horizontal line is the call strike at 2 sigma.
- Thick red horizontal line is the put strike at 2 sigma.
- Thin green horizontal line is the call strike at 1 sigma.
- Thin red horizontal line the put strike at 1 sigma
- Blue horizontal line is the max pain point.
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| Analysis Screen |
4. Let App Monitor Your Options for You.
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| Alarm Setup Screen |
- Midpoint is the point where the market has 50% chance to hit. You are suggested to set the midpoint limit to be your option strike, so that you will receive alert once the possibility of win or lose is break even.
- You can disable monitoring an option by set its midpoint limit to zero.
- If you leave midpoint empty (zero is not empty), app will automatically set midpoint to 2-sigma strike price when you click Save button.
- You can select the expiration date of the option you want it to monitor, empty expiration means the nearest valid expiry.
5. IV Trend
Implied volatility (IV) is denoted by the symbol σ (sigma). It can often be thought to be a proxy of market risk, it is expressed using percentages and standard deviations over a specified time horizon. My app calculates IV with Black-Scholes option model.
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| Trend Charts Screen |
6. What is Put/Call Skew?
On fdscanner.com, put/call skew is defined as the price of 10% OTM puts/10% OTM calls on option expiry. A put skew of 2.1 means the 10% OTM put is 2.1x the price of 10% OTM call. There are often underlying reasons worth researching before entering option position for stocks with high/low skew.
Theoretically, an equally OTM put and call trades at the same price after accounting for cost of carry, dividends and shorting costs. However, the real world doesn't always follow theory. Demand supply imbalances do happen and below are some possible reasons.
- Institutions using the Collar strategy, buying puts and selling calls to limit downside at the cost of upside.
- High demand/Low supply for puts, driving up put prices. Usual occurrence during bear markets.
- Low demand/High supply for calls, driving down calls prices.
- Stock had recent huge upward price movements and is grossly overvalued, shifting the supply/demand curve for puts.
- Dividends contributes to put skew, especially if the dividend is a large percentage of stock price.
Calculating the skew requires 4 option prices, the 2 put options surrounding 90% current share price, and the 2 call options surrounding 110% of current share price. All 4 of these options must have bid/ask spread of below 25% to be included in the Put/Call Skew Index.
Example Computation
The midpoint price is taken as the price for that option.
Interpolate between the midpoint price of the 2 call and put options.
7. Strike Trend
The strike trend in the above screenshot is a predication of a stock price. The app display Max Pain trend and a few predication prices in the chart.
First, the app calculates the max-pain point of the stock on each expiry, to indicate the rough market movement. To predicate market with max pain sometimes works well on large cap ETFs, such as SPX and QQQ, that are not easy to manipulate by individual institute.
Second, the app use a prediction model to predict the next 5 trading days of the stock prices, please see the prediction lines in app screen.
8. What is PCR?
PCR is the abbreviation of put call ratio, there are two kinds of PCRs: PCR(OI) and PCR(Volume).
PCR(OI) = sum of open interests of put options on a given day/sum of open interests of call options on the same given day.
PCR(Vol) = sum of volumes of put options on a given day/sum of volumes of call options on the same given day.
How to interpret the Put Call Ratio to take a view on markets
If you browse through any derivatives report put out by a broker, you will find a lot of emphasis on the PCR. So, how exactly do you interpret the Put Call ratio in practical terms?
One of the most important things that you need to understand is that the PCR is normally used as a popular contrarian indicator. That means the conclusions are actually counterintuitive. Let us understand this point in greater detail. There is nothing like a range for PCR or an ideal level for PCR. It is the trend that is more important. Here are a few key pointers pertaining to PCR interpretation..
Normally, times of greed and fear are reflected by significantly high or significantly low levels of PCR. Contrarians believe that PCR is normally headed in the wrong direction when markets are overbought or oversold and that becomes a key guiding factor.
Let us assume that the PCR has gone up sharply in the last few days and the market index has also corrected by 15% during the last 1 month. How do we interpret this situation? Contrarians believe that there is too much pessimism as small and retail investors are just buying too much of puts to hedge their downside risk. In any F&O market, the put writing is typically done by savvy traders and institutions. High PCR means aggressive put buying by small and medium investors but it also means aggressive selling by more savvy traders. Typically savvy traders sell only when they believe that downside is limited. That could be an indication that markets are bottoming out.
The reverse situation holds when markets have shot up and the PCR is falling. It means small and medium investors are heavily buying into calls but it also means that savvier investors are selling calls. That is an indication that markets may be topping out.
Combining PCR with Implied volatility (IV)
A smart way of interpreting PCR is by combining it with IV. Remember, IV is the volatility that is implied in the option price and it reflects the risk perception in the market. Here are a few pointers..
If the PCR increases with an increase in IV, it indicates that the put activity is increasing with a heightened sense of risk. That is a bearish signal.
If the PCR increases with a decrease in IV, it indicates that put activity is increasing with a falling sense of risk. That means more writing of puts and is a bullish signal.
If the PCR decreases with decrease in IV, it is indicative of unwinding of Puts and can be interpreted as a signal that markets may be bottoming out.
If the PCR decreases with an increase in IV, it means that puts are just being covered and the markets will again fall once the covering is done with.
9. Correlation to Inverted-UVXY
If UVXY is trader's fear gauges, the inverted-UVXY is peace gauges. Let's say you want to see the correlation between QQQ and inverted-UVXY, you can select QQQ in the ticker drop down list and then select "1 month/day" as data granularity, and you will be able to see a correlation coefficient chart as below.
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| Correlation to Inverted-UVXY |
