Track 'n Trade Futures End of Day Options
In this Track 'n Trade Pro Options trading training video, I want to talk to you about the two different indicators and the data that comes with Track 'n Trade on Options.
The two indicators that I want to talk to you about first, is the OSV Indicator, and the Strike Indicator. You'll notice they're down here on the indicator settings button bar, and there are several different settings that you can have in the Control Panel. If we go into the Control Panel, and we go to OSV and Strike- of course, this only comes with the Options Plug-in Simulator program. You'll notice that we can change the different colors of the theoretical values and of the reported market values.
We have two different indicators here. The Strike indicator and the options strike indicator. Of course, the Options Strike value indicator, which is the OSV indicator is a overvalued or undervalued indicator. It has two different colors that you can change it so that you have the upper band and the lower band.
Of course, the Black & Scholes theoretical value, you can have as a solid line or a dotted line, or the reported market value you use either solid or dotted line, and then your different colors here. You have these buttons here to turn them on. We may apply the changes to our active charts. Then, we hit Okay.
When we come back out to the Software, what we're looking at, is this is the strike, (STRK indicator). What that is, is it's just basically charting the price of the underlying options price. So, if we slid that all the way to the top, all we're looking at is, and I'm going to hit H to get rid of that window. All we're looking at is we're actually charting the Options price. Now, there are two lines there, because we have theoretical value which is the Black & Scholes numbers, and if you're not familiar with the Black & Scholes numbers go and listen to the Black & Scholes video, before you listen to this video, then come back and you'll understand what we're doing with the Black & Scholes numbers. But the red line is the Black & Scholes number, so it's the theoretical value calculated from Black & Scholes and the green line is the actual data that comes down from the exchanges.
When you do your data download from Gecko Software everyday, we update this green line. The red line is a calculated line and you'll notice how close they are, and how uncanningly close we're able to calculate the theoretical value vs. the actual value of the underlying futures. When the green line goes above the red line, then of course the option is trading at a premium; so, I'm going to slide this back down. You can see how it corresponds with the underlying futures market.
We're a chart based application, so we always like to look and compare everything to our underlying futures contract. Because we're buying an option, we're buying an option on the price of this underlying March 2004 Wheat contract. It should correspond with the price movement and price action within that chart.
Let's go through and we can scroll a little bit through this. We can see that we've got the different strike prices that are available for this day. I'm just going to use my arrow keys, I'm going to go through these. Now, notice that this one on this strike the 325 put, we don't have any green line. That means you're not provided with actual options data from the exchange on this particular strike. So, what we did is we just calculated the theoretical value. Now, you can still go through and using Track 'n Trade Pro, you can simulate trading the theoretical value of this option and use your option strategies and use them to test and practice your skills using theoretical values. But it's nice to have the real market value there, so you can see the difference between the- whether the price is overvalued or undervalued.
We're not giving all the data on all the strike prices of all the futures contracts all the time. So, sometimes there are gaps. So, what we do is we take Black & Scholes data, the theoretical value- you see, that's the red line, and we insert it where we should have received data from the exchanges and didn't. So, that's why you'll have some charts that only have the red line, where we calculate the theoretical value, and not the actual green line.
As we scroll through them, you'll see some might have the green line where the exchanges are providing us with data and some that only have the red line where they're not.
Now, you'll see others that are like this. See the green line how it's very flat? What this means is that the price is not changing. That somebody traded this option and now the price is staying level, and it's not changing until somebody trades it again. These are generally very illiquid options, so that's why you'll have large areas of flat sections where the prices won't change. So, if you're simulating trading these options, you'll have long periods of time where you're profits and losses will not change. That's because the underlying option is not trading on the exchange. So, when you get a big jump, that's when somebody finally traded that option and the price- and we had some price action changing. Then, it's updated, then it go flat for a long time, then suddenly it will be updated again.
You can simulate trading with the real live market data, and that's what the green line is, or we calculate the theoretical value and that's what the red line is.
Alright, now, I'm just going to move through these more and there's another one without any green line. There's another red one. Now, there's a green one. Look at that! That's why a lot of the times, we don't get data on some of these strikes. See how flat it is? For a period of 1, 2, 3, 4, 5 months; nobody traded it. They just stop sending down data sometimes. What we do, is we calculate it with the red line, the theoretical value, which gives you a lot more realistic view of the market.
As we go down through them, you can see which ones have the real market data and which ones don't. Of course, the real market data are the ones you probably want to be trading in the real life, because those are the ones that have the high value and high open interest and those are where people have lots of interest in trading that particular option.
Now, let's go over and look at the OSV indicator. Notice that it's a different style of indicator- it's a histogram. What we do, is we call it the premium side, and the discount side. What we're doing is we're taking the actual value. If we go back to the strike, notice this is the exact same one. See, the green line and the red line. Now, we go and look at it in the histogram view, and what we're seeing is the actual value of the option compared to the theoretical value. So the theoretical value is the zero line, right straight through the center. That's the theoretical value of the option.
Then, we calculate the actual value of the option and put it on the histogram. So, if the actual value of the option is trading below the theoretical value. You'll get the histogram pointing down to the bottom side and that's our discount side. Meaning that the price of the option is relatively inexpensive, or cheap compared to the theoretical value.
Then, the upside is when the option becomes expensive, and it is trading at a premium or you're paying more for the option than what we calculate the theoretical value to be. Of course, you'll notice that those also correspond with another indicator that we have on here called the historic volatility. When historic volatility is high the prices of options are generally over-valued. When historic volatility is low the prices of this particular strike or option is undervalued. That's how the historic volatility compares to and works with in-conjunction the options market value indicator and the strike indicator.