NASDAQ LEVEL II
TIME AND SALES
Option Analysis Values - Defined
- Options Checklist
Up an Options QuotePage
and Black-Scholes Calculations
- Equity and
Index Options Setup
- Historical Volatility
Historical Volatility reflects how far an instruments price has deviated from it's average
price (mean) in the past. On a yearly basis, this number represents the one standard
deviation % price change expected in the year ahead. In other words if a stock is trading
at 100 and has a volatility of 0.20(20%) then there is a 68% probability(1 standard dev =
68% probability) that the price will be in the range 80 to 120 a year from now. Similarly
there is a 95% probability that the price will be between 60 and 140 a year from now (2
standard deviations). The higher the volatility number the higher the volatility.
Within Investor/RT, there are two methods to choose from when computing volatility:
The Close-to-Close Method and the Extreme Value Method. The Close-to-Close Method
compares the closing price with the closing price of the previous period, while the
Extreme Value Method compare the highs and lows of each period. The method used,
along with the number of periods used in the calculation, and the
periodicity (duration of
each period) may be set by the user in the Options Analysis Preferences.
(Volatility Computation Details)
- Theoretical Value
The Theoretical Value of an option is expressed without the influences of the market, such
as supply/demand, current volume traded, or expectations. It is calculated using a
formula involving strike price, exercise price, time until expiration, and historical
volatility. Currently, Investor/RT uses the Black-Scholes model to calculate the
theoretical value of the option, although other model options may be added in the future.
(Black-Scholes Computation Details)
- Implied Volatility
Implied Volatility is calculated by inspecting the current option premium, and determining
what the volatility should be in order to justify that premium. It is determined by
plugging the actual option price into our Theoreticl Value model and solving for
volatility. This implied volatility can be compared to the historical volatility of
the underlying in search of underpriced and overpriced options.
Delta is the rate of change of the theoretical value of an option with respect to its
underlying. It is also defined as the probablility that an option will finish in the
money. Higher deltas(approaching 1.0) represent deep in-the-money options, and lower
deltas(approaching 0.0) represent further out-of-the-money options. At-the-money
options generally have deltas around 0.50, representing a 50% chance the contract will be
in the money. This also represents the fact that if the underlying moves 1.0 point,
the options should move 0.50.
Gamma represents the rate of change of an options Delta. If an options has a delta
of 0.35 and a gamma of 0.05, then the option can be expected to have a delta of 0.40 if
the underlying goes up one point, and a delta of 0.30 if the underlying goes down one
Theta is also commonly referred to as time decay. It represents the options loss in
theoretical value for each day the underlying price remains unchanged. An option
with a theta of 0.10 would lose 10 cents each day provided the underlying does not move.
Vega is the sensitivity of an options price to a change in volatility. An option
with a vega of 0.25 would gain 25 cents for each percentage point increase in volatility.
Lambda measures the percentage change in an option for a one percent
change in the price of the underlying. A Lambda of 5 means a 1
percent change in the underlying will result in a 5 percent change in
Rho measures the sensitivity of an option's theoretical value to a
change in interest rates.