NOTE: This document is a modified description of our legacy Options Level 1 Fair Value to Market Value Hedge Ratio solution still featured with Level 2's Price Analyzer charts. It is an alternative method of determining an option pair's forward value. However, the recomended method to forward value an option is implied pricing using implied volatility's in combination with sticky decay processes that are the central feature of Options Level 2's Implied Pricing Model. The recommended method to model forward spot values is to send market straddles from the CBOE Parser View to Options Level 2's Implied Pricing Model. The American and European Models (closed form) best forcast near the money options from 2 to 2 1/2 weeks out from the market date. Deep position prices can only be serviced by the American and European Models. The 3rd week out from the market chain's date, the convergence model delivers the most reliable forecast. After 4 weeks, near the moneys spots are better serviced by Level 2's [sticky] decay (theta/delta). However, you may find utility in the hedge ratio approximations. They are suprisingly close to backtested outcomes, but they are not the generally accepted method to value options.

IMPORTANT: A market hedge ratio feature has been added to the pricing surface legends. It is an editable input field labeled "M:F". It is the ask divided by fair value and helps approximate the a market based CPM (sell too Close Profit Margin). The CBOE Viewer also presents the M:F for each leg of the straddle. We have not updated all site pages to reflect the recently added hedge feature. Please refer to this page for a detailed description of the market hedge ratio feature.

Options Level 1's CBOE Options Chain Parser is fully integrated with the VOHS to provide seamless, usable and timely, forward priced, liquidity assessments for prospective options. The process is simple and Options Level 1's presents forward liquidities in the understandable terms of time and money

VOHS is not a strategy. VOHS is a tool to help you clarify an option's performance to help develop a strategy based on it's future market value, or redeemable liquidity, before it is acquired. Forward liquidity, based on your assumptions, can be used to fine tune your existing trading strategy, for options you may hold, as well as options you are considering.

Brokerage and trading interfaces are useful. But trading on market movement alone, is not as efficient as trading on value. These times are not as forgiving as they once were. There is little room for waste and fewer opportunities to find cover. Brokerage fees and data costs add up. Is your current trading strategy offering as much benefit to you as it may be to your data, or brokerage, providers?

It is always wise to consider forward value, or risk, as it is to consider tick to tick market movement. Shop before you buy. In some cases, an ask to acquire is overpriced. In others, your offer to close, may be less than than it deserves.

Let's first do a "tips and tricks" review of Options Level 1's Interactive Chart Pricing Surfaces. We should note that Option Level 1 was engineered on "older" low clocking systems under 2 GHz. The reason was that it helped performance tune the chart interactions. We like fast! The VOHS has sliders. The sliders are great for synthesizing an option and it's deltas, but not so great when stress testing a "real" options you are considering as a trade. In some cases it may be helpful to tweek the volatilty, cost to carry and risk free interest sliders. However, resetting the strike, or price, can completely farkle the reliability of your forward liquitidy assessments. Don't buy something you can't eat!

That being said, and before we look at how VOHS services the forward liquidity prospects of a "real" American option, we should take a minute to look at the chart pricing surface:

Now, lets price the potential forward liquidity of an option downloaded (free!) from the CBOE: There are two transactions that produce liquidity. One is to exercise the option when the underlying stock breaches the strike. Exercising the option transfers ownership of the underlying stock.

The other is a "closing sell", or "sell to close". Most options are traded through a closing sell. Closing sells do not require custodial transactions, or stock ownership, as do writing or exercising. And, in many cases, closing transactions will produce a more favorable return, in less time, and with fewer complications.

Options Level 1 helps you shop for "best value" opportunities using free CBOE Option Chains. In cases where profit expectations are less than desirable, Options Level 1 will help you understand how to minimize premium loss.

This following case will study a simple buy and hold analysis for the more affordable leg of an option striking reasonably close to the current market value of an actively traded option pair. We will look at a 25$ Microsoft call option expiring 7 months out. Keep in mind that the price to trade a closing sell has more to do with demand and fair value than it does to the relationship of strike to stock price.

First, we retreive a CBOE option chain for Microsoft (MSFT):

Before we look at the "forward" liquidity features of our example, we should review how VOHS presents the information. The VOHS pricing chart, in this example, is a Black Scholes wave form surface. More specifically, an American Call option. Black Scholes is the industry standard for determining the fair price, or fair value of an option. We should note that the value offered by an option is as much a function of it's underlying stock's volatility, and term, as it is the stock's market value. Those parameters can be tweaked using the VOHS sliders. For this example, however, we will leave the option as is.

It may be helpful to take a moment to read this article regarding rules, and conventions, related to the ask, or bid, spread to fair value. To start, let's examine the forward pricing interface as it relates to the the output forwarded to the chart's legend resulting from click interactions with the pricing surface:

Don't let the arrows and context descriptions overwhelm! VOHS does a lot of stuff for a bunch of esoteric wave forms to study exotic deltas, like saddles and straddles. For our study we will focus on the legend in the top row. We are particularly interested in the CPM, or closing sell profit margin; XPM, or exercise profit margin; FV, or fair value price; effective pricing date, in blue, and the stock price assumption at the effective date, in green.

We need to add a disclaimer: Volitility and dividend structure impact the fair value price of an option. The effects of dividend corrections to the options future market value can be entered in the cost [to carry] field on the CBOE Parser, Portfolio or Price Analyzer. Make sure that CBOE market or Porfolio Options use the cost value on their respective screens, before they are forwarded tot the Price Anlyzer and pricing surfaces. When the cost value is edited on the Price Anlyzer, the market ask on the pricing surfaces will be the straddle legs fair value. Option Level 1's CBOE Parser uses (free) imported historical volatities. Those volatilities are typically 1 to 2 quarters behind the market. Before you consider a trade you will need to research, or seek advice, regarding volatility and dividend values and their effect on pricing. It is always prudent to research news related to the company issuing the stock underlying any options you are considering.

The "legend" values we are interested in will update through mouse clicks to the cross thatched data points on the wave form's price to time surface area. Keep in mind, that though the pricing form below presents both legs of our 25$ MSFT Jul 17 2008 strike, our liquidity stress analysis will focus on the call. In other words, we're going to "shop" the call.

Okay. Now that we've downloaded the CBOE chain, in six easy steps, reviewed the VOHS interface and are now ready to stress test our call option leg. We chose the call because of it's December 27, 2008 affordability and it's strike's trading activity, on both legs, and, of course, "our" educated hunch that it's underlying stock's current (Dec 26 2008) at 19.13$, will profitably advance spectacularly towards, and hopefully beyond, it's 25$ strike before it expires, Jul 17, 2009!

So now, let's review our assumptions are translated to returns (liquidity), should we indeed decide to buy this option at the offered .88$ ask:

If we were to buy this call option we would first need to assure our volatilty and cost assumptions were correct. A prudent shopper would look for a more recent volatility and then replace the default CBOE value with a more "reliable" value before assessing forward liquidy (liquidity stress testing).

We could buy this option or select another from the CBOE chains, or look at a chain underlying another stock.

We might also want more detail, and review the option with Options Level 1's high resolulution pricing surface that is made available through the chart dropdown menu, or, by holding down the shift key and left clicking the mouse on the BSA 2002 chart in the Price Analyzer's chart viewer. With the high resolution chart, there are 1682 price at time data points to test forward market assumptions!

But before you can do any of this, you need to purchase an Options Level 2 license! There are few, if any option pricing tools out there that reduce probable option liquidities to a simpler more understandable format. Sure, you can pay more and burn the candle learning exotic technical indicators, but Options Level 1 offers those as well. Why wait? You've arrived, begin now and take advantage of leveraged trading with a tool that gives you what you need, when you need it!