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 Option Chain Parse Viewer and Pricing Surface interfaces include features to assist in determining a "reasonable" ask an option could be offered at closing. It is not a theoretical model. It is a "practical" market based method to approximate the future market value of the option.

One of Options Level 1's forward liquidity features, CPM, or "sell to Close Profit Margin" is the fair value, of the assumptions being tested, less the premium, or ask: 100 x (FV-ASK). CPM is a conservative "fair value" measure of the "ask" an option could be offered at when closed. There is a body theoretical work that "desires" to explain how a market value might be determined from a fair value. Some methods munge functions of delta, theta, gamma and rho. Others suggest that the only way to determine a market value is the tedium of back testing. Still, at best, all prescribed methods to render a market value from fair value are guesses. The market does not guess. The market is what it is. Options Level 1 does not pretend to have the answer, either. Instead, Level 1 offers a feature that allows traders to approximate an "ask" from the fair value of an option being "prospected" based on the market ask of options actively traded.

How it works:

The option being "prospected" carries the same strike price through maturity. Assumptions, affected through click interaction with the VOHS and HD pricing surfaces, are time (days to expiration) and price (of the underlying stock).

Options Level 1 has been updated with 2 additional columns for CBOE option chains parsed to the CBOE View. One is the percent difference of stock to strike [(stock-strike)/strike]. The other shows days till expiration.

For an option being prospected, or considered for purchase, clicks to the pricing surface are in effect, asserting a different expiration and a different stock price assumption. An assumed change in price also changes the stock to strike ratio. The VOHS and HD pricing surface legends present the assumed days to expiration and the assumed stock to strike ratio.

The intent being that the CBOE Parser will conveniently contain an option with an a approximate, corresponding combination of days remaining in term and strike to stock price ratio. Should the chain offer an option approximating our "prospective" option's "assumed" profile, then we could reasonably assume that the relation of the marketed option's ask to fair value is an indication of the market value, or "ask" we would be able to offer to close our "prospective" option at, should the market, indeed, deliver our assumptions.

This information could be used, for example, to write a standing execution "closing" order that specified the price of the stock to trigger the close, and the ask the option is to be closed at!

A quick snag of how this feature is used: