Options Area Explanations

Equities Underpriced Explosion List

This is the list of stocks whose option premiums are lowest relative to the historical volatility of the underlying. It is among the underlyings on this list that you should look for option purchases, backspreads and long straddles and strangles, as these options are cheap relative to their theoretical value. To see a list of the five most underpriced calls and the five most underpriced puts and the five most theoretically favorable calendar spreads on a stock in the Equities Underpriced Explosion List, click on the stock name.

Equities Overpriced Implosion List

This is the list of stocks whose option premiums are highest relative to the historical volatility of the underlying. It is among the underlyings on this list that you should look for option sales, covered writes and short straddles and strangles, as these options are priced high relative to their theoretical value. You should however be cautious about short naked positions in these underlyings, and make certain that hedged positions are adequately protected against large movements in the underlying. A high premium on a stock option can, for instance, represent a forthcoming earnings announcement that could send the stock price soaring, and unprotected short call positions can lose dramatically in this circumstance. To see a list of the five most overpriced calls and the five most overpriced puts and the five most theoretically favorable calendar spreads on a stock in the Equities Overpriced Explosion List, click on the stock name.

Futures Underpriced Explosion List

This is the list of those futures contracts whose option premiums are lowest relative to the historical volatility of the underlying. It is among the underlyings on this list that you should look for option purchases, backspreads and long straddles and strangles, as these options are cheap relative to their theoretical value. To see a list of the five most underpriced calls and the five most underpriced puts and the five most theoretically favorable calendar spreads on a futures contract in the Futures Underpriced Explosion List, click on the name of the futures contract.

Futures Overpriced Implosion List

This is the list of those futures contracts whose option premiums are highest relative to the historical volatility of the underlying. It is among the underlyings on this list that you should look for option sales, covered writes and short straddles and strangles, as these options are priced high relative to their theoretical value. You should however be cautious about short naked positions in these underlyings, and make certain that hedged positions are adequately protected against large movements in the underlying. A high premium on a futures contract option can, for instance, represent an expected supply shortage that can send the futures price soaring, and unprotected positions can lose dramatically in this circumstance. To see a list of the five most overpriced calls and the five most overpriced puts and the five most theoretically favorable calendar spreads on a futures contract in the Futures Overpriced Explosion List, click on the name of the futures contract.

OEX Underpriced Explosion List

This is the list of those options on the OEX whose premiums are lowest relative to the historical volatility of the OEX. It is among the options on this list that you should look for option purchases, backspreads and long straddles and strangles, as these options are cheap relative to their theoretical value. Options on the OEX are today very rarely underpriced, probably because sellers are still stung from the extreme market collapse in late 1987. As a consequence, this list will normally be empty. If it is not, to see a list of the five most underpriced calls and the five most underpriced puts and the five most theoretically favorable calendar spreads on the OEX, click on Underpriced Explosion List.

OEX Overpriced Implosion List

This is the list of those options on the OEX whose premiums are highest relative to the historical volatility of the OEX. It is among the options on this list that you should look for option sales, covered writes and short straddles and strangles, as these options are priced high relative to their theoretical value. You should however be cautious about naked positions, and make certain that hedged positions are adequately protected against large movements in the OEX. A sudden shock to the market can cause unprotected short put or even call positions to lose dramatically. To see a list of the five most overpriced calls and the five most overpriced puts and the five most theoretically favorable calendar spreads on the OEX, click on Overpriced Implosion List.

Ratio

Ratio is the ratio of the implied volatility to the 100-day Historical Volatility. For an individual call or put in the lists of overpriced and underpriced calls and puts, a ratio greater than 1 means the option is overpriced relative to its theoretical value and a ratio less then one means that the option is underpriced relative to its theoretical value. A ratio of 1 means that the option is precisely fairly priced relative to its theoretical value. In the Overpriced Implosion List and the Underpriced Explosion List, the ratio is a composite of the ratios of the various active near-the-money options on the stock. Here, a ratio greater than 1 means that, on average, the active calls and puts are overpriced relative to their theoretical values, and a ratio less than 1 means that, on average, the calls and puts are underpriced relative to their theoretical values.

Historical Volatility

This is the volatility measurement that describes the degree of volatile movement of the underlying over a past time period, typically 100 days. It is normally expressed as an annualized percentage. A 100-day historical volatility of 32%, for instance, means that over the last 100-days the underlying has fluctuated in such a way that it would be expected to fluctuate about 32% in a year's time. So if the underlying were now priced at exactly 100, one would expect to see values between 68 (100-32% of 100) and 132 (100+ 32% of 100).
> The volatility measurement used in theoretical option pricing models is an estimate of the future volatility of the underlying. Since one does not have access to the future, the standard way of estimating future volatility is to use the historical volatility over a recent time period.

100-day H.V.

The 100-day H.V. is the Historical Volatility of the underlying, computed as the standard deviation of the percentage changes in the underlying over the last 100 days, converted to an annualized percentage. A 100-day H.V. of 45% means, roughly speaking, that you can expect the stock price after one year to be within 45% of its current value with probability about 2/3.

Option Premium

This is the price paid for the option.

Premium

In the Overpriced tables, this is the amount you would have probably received if you had sold the option as an off-floor trader at the close of the previous day, whose date is shown at the top of the page. In these tables, it is the closing bid price of the option.

Cost

The cost of a spread (also call the "debit") is the amount of money that is debited to your account when you enter a position. If you purchase a July 150 call for $12.00 and sell an April 150 call for $8, the cost is $12 - $8 = $4.

Note that the cost can be negative: If you took the opposite position at those prices, you would spend only $8 for the April 150 call but take in $12 for the July 150 call, so you would have a net inflow of $4 for this position and the "cost" would be -$4, commonly called a "credit" of $4 (as in the $4 credited to your account in this case).

The cost shown in the spread table is based upon the bid or ask price from the close of the previous day. The spread has qualified for the best-five list based upon the bid price for sales and the ask price for purchases. If you enter an order for a spread in the table and wish to obtain prices at least as favorable as those which qualified the spread for the list, you should require a debit in the transaction no larger than the one shown in the table--that is, the spread should cost no more than it did at the close yesterday.

We use "cost" for calendar spreads and any spreads we may recommend that by their nature have a debit.

Theoretical Value (ThVal)

The theoretical value of an option is the value computed according to an option model. The standard option model is the Black-Scholes model, which derives a theoretical value for an option based upon its type, strike price, time left to expiration, current interest rate, and volatility of the underlying and other factors that affect the behavior of the underlying. The Black Scholes model is based upon certain mathematical assumptions about the behavior of the underlying, which may not apply to a particular situation.

In the Overpriced and Underpriced tables, ThVal is the theoretical value of the option at the closing price of the underlying the previous day, computed using the 100-day Historical Volatility (100-day H.V.). In the Calendar Spread table, ThVal is the cost of the spread if both options were priced at their theoretical values. As these spreads are chosen to be favorable if future volatility equals the 100-day H.V., the cost of a spread appearing in these tables will always be less than its ThVal. The difference between the value and the cost is your expected profit on the spread.

Call I.V.

The Call I.V. is the implied volatility of the individual call.

Put I.V.

The Put I.V. is the implied volatility of the individual put.

Bid I.V.

The Bid I.V. is the implied volatility of the bid price of the individual option. This is the implied volatility which is shown for options which are overpriced, that is, options which you may wish to sell. If you are going to sell an option from off the floor, you will probably sell to a market maker, who will pay you the bid price of the option, so this is the appropriate price upon which to based the implied volatility.

Ask I.V.

The Ask I.V. is the implied volatilityof the ask price of the individual option. This is the implied volatility which is shown for options which are unerpriced, that is, options which you may wish to purchase. If you are going to purchase an option from off the floor, you will probably buy from a market maker, who to base the implied volatility.

Spread

A spread is a position consisting of several options on the same underlying, some of which benefit if the underlying rises and others of which benefit if the underlying falls. The following are spreads: ( long 1 Apr 150 call, long 1 Apr 150 put), ( long 1 Apr 150 call, short 1 Apr 140 call), ( long 3 Apr 150 call, short 2 Apr 160 calls), ( long 5 Apr 150 calls, long 2 Apr 150 puts, long 4 Jul 150 puts). But (long 1 Apr 150 call, short 1 Apr 150 put) is not a spread, because both "legs" of the spread are bullish. Because the long option always expires after the short option in our calendar spreads, the premium expended will always exceed the premium taken in and the credit will always be negative.

Calendar Spread

A calendar spread is a position consisting of one long option and one short option, where the long and short options are of the same type (call or put) and have the same strike price but different expiration dates. For instance, (long 1 Apr 150 call, short 1 Jul 150 call) is a calendar spread, as are (long 1 Jul 150 call, short 1 Apr 150 call) and (long 1 Apr 150 put, short 1 Jul 150 put).

Credit

The credit is the amount of money that comes into your account when you enter a position. If you purchase an Apr 150 call for $8.00 and sell a Jul 150 call for $12, the credit is $12-$8=$4. Note that the credit can be negative. If you took the opposite position at those prices, you would spend $12 for the Jul 150 call but take in only $8 for the Apr 150 call, and so you would have a net outflow of $4 for this position and the credit would be -$4. The credit shown in the spread table is the credit based upon the bid or ask price from the close of the previous day. The spread has qualified for the best five list based upon the bid price for sales and the ask price for purchases, so if you enter an order for a spread in the table and wish to obtain prices at least as favorable as those which qualified the spread for the list, you should require a credit at least as large as the one shown in the table.

Volatility Spread

A volatility spread is a spread that benefits from volatile movement of the underlying. Examples of volatility spreads are long straddles, long strangles, and backspreads.

Stability Spread

A stability spread is a spread that benefits from non-volatile movement of the underlying. Examples of stability spreads are short straddles, long strangles, and covered writes.

Backspread

A backspread is a spread that is long a number of at-the-money options and short a smaller number of in-the-money options (an equivalent position in the underlying) of the same type and the same expiration. For example, if IBM were currently selling for 150, a call backspread in IBM would be (long 3 Jan 150, short 1 Jan 120); and a put backspread would be (long 7 Jan 145, short 2 Jan 170's). A position that is long 3 puts and long the underlying is also a backspread. Backspreads are volatility spreads and are typically constructed to be delta neutral.

Straddle

A straddle is a spread that is long one call and long one put (a long straddle) or short one call and short one put (a short straddle), where the call and the put have the same strike price and expiration. For example, if IBM were selling currently at 150, the following positions are long straddles: ( long 1 Apr 150 call, long 1 Apr 150 put), ( long 1 Jan 140 call, long 1 Jan 140 put), ( long 1 Dec 170 call, long 1 Dec 170 put). The following position is a short straddle: (short 1 Apr 160 call, short 1 Apr 160 put).

Strangle

A strangle is a spread consisting of either long one call and long one put (a long strangle) or short one call and short one put (a short strangle), where the call and the put have the same expiration but different strike prices. For example, if IBM were selling currently at 150, the following positions are long strangles: ( long 1 Apr 150 call, long 1 Apr 160 put), ( long 1 Jan 140 call, long 1 Jan 120 put), ( long 1 Dec 170 call, long 1 Dec 160 put). The following is a short strangle: ( short 1 Apr 140 call, short 1 Apr 160 put).

Covered Write

A covered write is a position consisting of a long position in the underlying and a short position in an in-the-money call option on the underlying. If IBM is currently selling for 150, the following are covered writes: (long 100 shares IBM, short 1 Apr 160 call), (long 100 shares IBM, short 1 Jan 170 call), . The following are not covered writes: (long 100 shares IBM, short 1 Apr 140 call), (long 100 shares IBM, short 2 Apr 160 calls), (long 100 shares IBM, short 1 Jan 170 put), (long 100 shares IBM, short 1 Jan 140 put).

Naked Position

A single option position, either long or short. The following are naked positions:
> (long 1 Apr 120), (short 1 Jul 140).

Hedged Position

A position consisting of both bullish and bearish legs. The following are hedged positions: ( long 1 Apr 150 call, long 1 Apr 150 put), ( long 3 Apr 150 call, short 2 Apr 160 calls), (long 100 shares IBM, short 2 Apr 160 calls), ( long 5 Apr 150 calls, long 2 Apr 150 puts, long 4 Jul 150 puts). The following are not hedged positions: (long 100 shares IBM, short 2 Apr 150 puts), (short 3 Apr 140 calls, long 2 Apr 150 puts).

Delta Neutral Spread

A delta neutral spread is a spread whose exposure to short term movements in the underlying is minimal. The spread ratio, or the size of each leg of the spread, is computed using output from an options pricing model, such as Black Scholes.

Implied Volatility

The implied volatility (also the "implicit volatility") is the volatility figure that, when used in the theoretical pricing model, gives precisely the market price. It is the volatility that is "implied" by the market and "explains" the market price.

Unusual Options Volume

We search out suspiciously high volume activity, eliminating likely arbitrage situations so that your investigation time is spent on the most likely candidates. For example, if a call series and a put series with the same strike and expiration both exhibit unusually high volume, it is likely that a large trader has purchased or sold a straddle or else built a synthetic stock position; this is an instance where unusually high volume is not at all suggestive of inside knowledge. Another example is if the volume is concentrated in one series; this is more likely to be an institution selling calls against a stock position, or purchasing puts to protect a stock position. There are many such situations that are more likely to have a cause other than inside information, and we filter these out so that the list of unusually high volume option trading is distilled to the most likely candidates.

Relative Strength

RELATIVE STRENGTH is the result of calculating the average percentage price changes of the stock over the last 12 months with more weight (40%) assigned to the most recent 3 months and with each of the 3 earlier quarters receiving a weight of 20%. All stocks are then ranked in order of average percentage price change and assigned a value of 99 (highest) to 1 (lowest). A relative strength value of 89 means the stock has outperformed 89% of all stocks in the this list.