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How to make the P/L dot fit on the T+0 line in Optionvue?

Discussion in 'General Discussion' started by hwm, Jun 26, 2015.

  1. hwm

    hwm Member

    I am a new Optionvue user and need your advise on how to make the P/L dot land on the T+0 line. Right now the P/L dot is quite a gap below the T+0 line. see the graph below. I like the dot land on the line so that I can estimate the adjustment point more accurately. Do you know how to make the dot land on the T+0 line? Thanks.
    upload_2015-6-26_10-2-22.png
     
  2. Rick

    Rick Active Member

    Having the two match is probably not the best model. There is a video (I think Steve Lentz) on OV's website that explains why they don't match. Perhaps ask your sales rep where to find it.
    Otherwise go to Model - Volatility - Other - select "EIOIO" Volty Model instead of default of "Variable". This setting also causes the model to more closely resemble the TOS T-0 line.
    The other often debated issue is using combined Put/Call Skews. You can search here on CD Forums for lots of discussion on this.
     
  3. Venkat

    Venkat Guest

    I am not an expert on volatility but here is my understanding.

    Projected T+0 is based on the theoretical prices calculated from the options model that you choose (Black-Scholes, Yates etc). Based on all the knowns till then (Volatility, Strike Price, DTE etc) these models proceed to calculate the price of a long call and all other prices (short put, long put and short call) are derived based on the price of long call using options synthetics. The volatility that these option models use is Historical Volatility (Statistical Volatility) which is known.

    The dot represents the actual price of the option (market price). Using all the knowns and this actual price of option, you then proceed to calculate the unknown, i.e., implied volatility. In reality, when market is moving, the actual price of every option (every strike, every expiration) is determined based on supply/demand. In other words, IV is the manifestation of supply vs demand for every single option. The gap between the dot and T+0 denotes the divergence between implied volatility and projected volatility. As the market moves and prices get updated, HV and IV tend to converge thereby minimizing the gap between T+0 and the dot.

    If you choose "Use combined put/call skews", you are choosing to smoothen the skew curve. If the dot is below T+0 line in OV, that typically means that market makers haven't released theta yet and you may eventually see a bump in your profits soon (either EOD once prices get adjusted or in 1-2 days once market settles). If the dot is above T+0 line, you made too much money than the theoretical prices and it's time to take profits :)

    If you uncheck "Use combined put/call skews", dot and T+0 typically tend to converge. One caveat though. In this situation, both dot and T+0 tend to fluctuate a lot based on vol skews. I guess that's the reason why most people advocate choosing "Use combined put/call skews" as it shows not just the current P/L but also projected P/L in the nearest future.

    Vol skews in OV are also affected by how many strikes are polled (small/moderate/large strike range). Since the presence of one mispriced OTM option can throw off the vol skews, it's advisable to go with "variable" volatility model rather than EIOIO.
     
    Last edited by a moderator: Jun 27, 2015
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  4. vega4mike

    vega4mike Well-Known Member

    very good explanation Venkat....Thanks
     
  5. hwm

    hwm Member

    Thank Rick for pointing out the video by Steve Lentz. I found video on youtube: <iframe width="560" height="315" src="https://www.youtube.com/embed/ljo1quZrsQg" frameborder="0" allowfullscreen></iframe>

    Also thank Venkat for the explanation - Steve Lentz said about the same thing in his video.
     
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  6. Venkat

    Venkat Guest

    Thanks for sharing! Now I understand better how OV does their volatility modeling.
     
  7. GreenZone

    GreenZone Well-Known Member

    Here's another one:
     
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  8. Trader G

    Trader G Well-Known Member

    I recently got OV and after running a couple of M3 trades through it, I am finding that the theoretical line can be pretty far off (I am talking about the T+0 not the dot). Based on what my T+0 looked like Friday I should be out of my trade today with the down move at max profit (or close) and find that I am actually at breakeven. I understand a lot of this has to do with the low volatility we have been having and a move like today jumped the volatility more than the models predicted. However, even the last couple of months were off (not as dramatic as this though). I wanted to bring it up because I know a lot of people trade and adjust based on what that T+0 looks like. Just remember no matter what software you are using, it still is just providing an estimate and you really need to understand your position.
     
  9. GreenZone

    GreenZone Well-Known Member

    Trader G:
    I recently ran a study on this very topic, and also looked at comparing OptionVue to Optionet Explorer as well.
    The biggest factor which will give you a "weird looking" T+0 line is when you turn on the option to "combine call/put skew".
    I realize that John Locke recommends having this setting turned on, but you'll find that:
    a) all of the senior staff from OptionVue recommend turning that option off when it comes to trading the major indexes (as you see in the 2 above videos)
    b) in my analysis, I found that I got more accurate simulations with that option turned off; this was the case with multiple trade types, including M3 trades

    I've gone back and forth with John Locke over this issue, but he is sticking to his guns saying that he believes that more accurate simulations will be given by having the option turned on.
    My analysis, and also another analysis by a trader friend of mine, found that more accurate results are obtained with the option turned off.

    The second point is that even when you have the option to combine skews turned on, and you get that funky looking T+0 line, even John Locke acknowledged that you should not base your profit/loss based on that T+0.
    You need to imagine that the black dot is connected by a string to the T+0 line, and the distance between the black dot and the T+0 will remain the same as price moves up and down. Think of the black dot going for a roller coaster ride and being attached to the T+0.
    So, for example, if the black dot is lower than the T+0, and the black dot shows a profit of $200 yet the T+0 shows a profit of $500, then you now know that the difference between the two is $300.
    Now, when you project what would happen if you were to move up or down in price, then you would follow the T+0 line, but you need to remember that "reality" is actually $300 under where the T+0 is currently projecting. So if the T+0 says that you would be at break-even, then in reality you would be at a loss of -$300.

    Based on my analysis, you'll get the most accurate simulations in OptionVue with the following settings (under the Model section):
    [​IMG]
    Option Pricing: Yates
    Delta, Gamma: True delta, gamma
    Skew curves: turn *off* the setting for "use combined call/put skews"
    Slippage: none
    Commissions: included
    Option Market Price: (10Bid +10Asked + Last) / 21
     
    Last edited: Jun 30, 2015
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  10. Venkat

    Venkat Guest

    Ron: I agree with your findings... that's my observation too!
     
  11. Gabor Maly

    Gabor Maly Well-Known Member

    Hi GreenZone,
    Does it mean that you have basically run a few years of backtest with combined call/put skews turned on and off so you actually have two data sets to compare? I understand you are saying it is more accurate but was the difference between the two significant?
    Many Thanks for your insights!
     
  12. GreenZone

    GreenZone Well-Known Member

    The difference wasn't huge, but I found that turning it off gave me results which were 10% to 20% more accurate.
    On top of that, you get a much more "normal looking" T+0, where the black dot is no longer that far away from the T+0 line.
    My analysis looked at a number of prior time periods where we got a quick and strong move up and down, and I then looked at both an M3 trade as well as a jeep/weirdor trade.
    I later confirmed with various other John Locke traders I know that they have also seen more accurate results with turning off "combine call/put skew".
    Another trading friend also ran similar tests on a whole bunch of other trade types (verticals, naked longs/shorts, standard ATM butterflies, etc), and he also had results which were consistent with mine.
     
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