|You're The Options Expert
|OptionVue version 8.40 started shipping March 16, 2018.
1. We were able to develop an excellent new volatility skew model and incorporate it into the program. See the special section
about this below.
2. We made further improvements to the Volty Skew Graph in response to customer suggestions:
a. The graph remembers user-entered dates, times and settings when you close the graph, choose a different section in the
Matrix, and re-open the graph.
b. A new button in the lower right corner allows you to toggle between aligning the strikes vertically by strike (the only mode that
has been available so far) or aligning the strikes by moneyness. Aligning by moneyness is the new default, as aligning by
moneyness is almost always the best approach. Please read the explanation below.
c. When using a set of dates/times, the legend in the lower left displays the underlying prices at the various dates/times.
d. We added a new control in the top section of the Volty Skew Graph to allow you to switch between Calls, Puts, or Both.
| e. Directly to the left of that is the choice whether to simply connect the dots with short line segments or to display a line
representing OptionVue’s model of the skew. We made it so your choice in this regard is remembered globally (all assets) and
permanently (when you stop and re-start the program).
|3. In Graphic Analysis, we made it so the manually entered horizontal axis center price and intervals are remembered from day to
day, indefinitely. However, they are reset if you jump back in time using BackTrader.
4. In the BackTrader section in the top of the main screen, we made it so the little “<” button would automatically jump to the date
indicated by the position of the wand in a Price Chart.
1. In Graphic Analysis, let’s say you set the graph to show T+7 and after that, either changed accounts or changed the Max Proj
Date. This would cause the T+7 to automatically switch back to default. We changed this to make the program retain the T+7.
2. Also in Graphic Analysis, side-by-side more, the auto-refresh would reset the selected line to T+0 and reset Volty Change to
zero. We changed the program so that these settings are retained.
3. Also in Graphic Analysis, steps were taken to make the line legend not “hop around” so much in response to minor changes.
4. When working with a futures-based asset, users were having to re-enter custom strikes to the matrix. This problem was
The New Volatility Skew Model
After spending several weeks in concentrated work on the volatility skew model, we are happy to report that we were able to find a
superior approach to the model that has existed in the program all this time. The new, 5-parameter approach produces a much
better curve fit, which should result in better numbers in three areas:
1) More accurate fair values and greeks in the Matrix, as these calculations will be based upon projected volatility numbers that are
much closer to each option’s current MIV.
2) More accurate Graphic Analysis, for the same reason.
3) The T+0 line should naturally pass very close to, if not directly through, the Graham Dot now, possibly eliminating the need for the
We will, of course, be interested in customers feedback about the new model.
We are calling this new model the New Variable Volatility model. You will see it as a new choice in the Model Volatility form (under
the “Other” tab), and in the Matrix in the lower right section as “New Variable” or “New Var”.
|We kept the older, 3-parameter Variable Volatility model in the program, which works the same as it always has, and the program
does not automatically switch any matrix from using the old model to using the new model. Thus, users can make the transition to
the new model at a time of their own choosing. It is easy to switch between the old and new Variable Volatility models using the
switch in the lower right section of the Matrix (shown above), and we encourage you to view one or more Volatility Skew Graphs
while using the old model, and then view the same graphs using the new model and see how much better the new model is. (Be
sure that you select “Show Projected IVs”.)
Another goal was to develop a model that accurately anticipates changes in the shape and steepness of the skew curves in
response to various moves in the underlying. Unfortunately, we were unable to make progress in this area. We studied a great
many instances in history when the markets were moving significantly, not only to the downside, but also to the upside. However,
our studies revealed that changes in skew curve steepness in response to market moves were inconsistent and unpredictable.
We also consulted with two experts who had done similar studies and reached the same conclusion. Therefore, lacking any basis
for predicting changes in the shape of the skew curve, we were not able to add anything that could help in this regard.
The Volty Skew Graph and Moneyness
As you know, the “Times” drop-down in the upper left corner of the Volty Skew Graph allows you to enter up to three separate
dates and times. Doing so causes the program to display multiple volty skew lines, which is great for comparing past skew curves
to see how they may have shifted or tilted. (For example, sometimes a market sell-off causes the skew curve to steepen.)
However, there is a problem with the way we’ve displayed the skew curves up until now. To illustrate the problem, a picture will be
worth 1,000 words. The skew graph below shows three lines representing three consecutive trading days during a swift market
sell-off. Surprising, it looks as though volatility decreased during the sell-off, as the darkest line, representing the most recent date,
is at the bottom.
|But there is a problem with the way this graph is constructed. Because each option (each strike) is aligned vertically, it is as if the
position of each option relative to the ATM marker remained the same as the market fell, and that is not right. From one date/time
to the next, as the market fell, the moneyness of these options changed. They became closer to the money or more in-the-money.
So in order to represent this correctly, the lines for the past dates (all but the most recent date) need to be shifted horizontally by an
appropriate amount so that the various points (each point representing an option) are aligned appropriately by moneyness.
The following graph is conceptually more correct:
|It is possible to switch between these two modes by clicking a small new button that was added to the form in the lower right
corner. By default, the program uses the moneyness mode when the graph is first opened. The button displays a dollar sign when
the graph is in moneyness mode.
Under Consideration for the Next Release
Miscellaneous other improvements per customer input.