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.

Options Level 2's CBOE Option Chain Viewer and Pricing Surface interfaces include features to assist in determining an "approximate" ROI a prospective option might offer at closing. It is not a theoretical model. It is not a forward implied model. It is a "current" market based approximation of the future market liquidity an option offers. Please review our case study here.

Our website has not kept pace with our production and release versions. It is important that you review this description of Options Level 2's 109b and 109c updates before reviewing, and as you consider, additional information related to Level 2's pricing surface features.

The 1.09b update added 4 columns to the CBOE Viewer. Two of the new columns report the ratio of the CBOE asks to Level 2 fair values, or leg ask / leg fair value . These features extend to corresponding edit fields on the VOHS and HD Pricing Surface Chart legends also labeled M:F. As with the "ask" fields on the pricing surface legends, the M:F, or market to fair value ratio, can be edited to help approximate the future CPM market value, or sell to Close Profit Margin for price time data points on the pricing surface.

CPM is a guess at the possible future close to market liquidity, or ROI, a prospect option might offer.

The other new columns on the CBOE Viewer report the straddle's stock to strike ratio, S:X, or stock / strike price, and Days out to expiration. These features munge an approximate market to fair value ratio, M:F for the data points being price "tested". On the pricing surface legend, under the date are two unlabled, in grey, corresponding values. One is the percent stock to strike ratio. The other is days to expiration.

S:X, Days out to expiration and M:F were also added to Level 2's Pricing Surface legends. These features in the CBOE View and Pricing Surface legend help approximate a "future" market based sell to close profit margin (the leg's closing market value less it's acquisition price), or CPM. CPM is a guess at the ROI the data point on the pricing model surface might offer. Interactions with the pricing surface reset the legend's (unlabled) days and S:X legend values to reflect the selected data point's corresponding S:X and Days values.

Remember: the points selected on the pricing surface are the assumptions we are using to model, or stress test, a prospect options possible future market liquidity. It's a guess. Just because it shows don't mean it's so. If the model is being used to stress test a redemption strategy, we are, in effect, shopping for stock prices to write a pegged to stock standing limit price and stop loss price trading order.

The short story: By correlating the unlabeled S:X and Days out to expiration from the pricing surface with row S:X and Days in the CBOE Viewer columns, and then using the correlate CBOE row M:F values to infer a guestimate for the M:F to apply in the pricing surface legend to imply and calculate a hedge adjusted market ROI guess as CPM, or:

(M:F x FV x 100) - (ASK x 100).

Options Level 2's approximates forward liquidity as CPM, or "sell to Close Profit Margin". The default CPM model uses a 100% M:F ratio. With M:F set to 100%, the market value is the fair value.

Options are sold, or closed, back to the market typically offer an ROI measured as a multiple the option's fair value. Features to help guess possible future ROIs offered by the close have been added to the CBOE Viewer and as an edit field in the legends of the VOHS and High Definition Charts.

Version update 109c added Market to Fair Value determinations to be forwarded to the pricing legend by correlating days to expiration and Strike to Stock ratios (SX) with other options in the CBOE chain, automatically, as data points on the pricing model surface (charts) are selected. The feature presents for CBOE options sent to the Price Analyzer by clicking the "M:F" labels on the pricing legends. Please read the entire page. The bottom section better explains how the process works. The snag below describes the automated 109c Fair Value to Market (closing) Value approximation feature.

A bid approximation based on the assessed M:F conversion ratio and spot fair value can be rendered by hovering the mouse pointer over the "CALL" or "PUT" leg labels. The image below prices the call bid about one month out for a March 10 pricing model of 15$ July Call (to Apr 17 at a 17.28$ stock price) with the current stock, or model price at 16.48$. You can read more about this feature, including a case study, here.