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Optionvue Update

Discussion in 'OptionVue Forum' started by Kevin Lee, Dec 24, 2015.

  1. Kevin Lee

    Kevin Lee Well-Known Member

    I discussed at length with Len Yates of OV about the issues related to modeling. I shared with him that having a more accurate IV curve fitting may not result in a better model. In my opinion, a better approach is to focus on forecasting the vol skew instead.

    Len agreed with the approach and decided to roll back the modeling to what was in v7.67. After that, he may try to implement the new idea. I think that's great news if we can get back the model that worked well for us in the past.

    Please see below Len's reply to me in an email. He asked me to inform the community of this decision.

    Kevin,
    Excellent information. Good illustration, and I think you have put your finger on the problem exactly. I can even begin to see how a tighter curve fit might be harmful, because the curvature of the tightly fitted line fluctuates more. With a sloppier line fit, the line remains more or less straight.

    I’ve decided on a course of action. I will (painstakingly) return the volty skew curve fit algorithm back to what it was in 7.67 and publish a new release. Then, once we make sure that customers are ok using that new version, we can take our time trying to figure out how we can possibly model the curvature change phenomenon that you discussed below.

    Len

    -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    Hi Len,

    Following up on our phone call, the graph below depicts how the slope and shape of the IV curve change when market moves up. This is an old study that I did. I got this data directly from TOS using DDE to Excel.

    1. RUT went up from 1194 to 1210. IV naturally dropped. Blue line is RUT @ 1194 and Orange line is RUT @ 1210.

    2. However, IV did not drop evenly across the strikes. Upper strikes, ie those strikes higher than ATM, zone "A" in the diagram, IV dropped more than those in lower strikes, ie Zone B.

    3. Look at the table, upper strike IVs declined more in percentage term as well as absolute term.

    4. So if I have a butterfly with its right long leg sitting on 1250 and the shorts at 1200. The 1250 will suffer a bigger loss than the 1200 from the IV decline. That'll result in a bigger loss in the position than what was predicted by the T+0 line.

    5. Essentially, this example shows the slope of IV curve steepens when IV falls. The reverse is true that when IV increases, the slope flattens. In addition, if you look at the part of the blue line that curls upwards (ie in zone A), the zone straightens on the orange line. I believe this phenomenon introduced the most inaccuracies in the IV modeling.

    6. Take note that the slope and shape of the IV curve will also change with time. With everything else unchanged, the closer to expiration, the steeper the slope.

    So.... my point is if there is a way to model this shifts in the slope and shape of the IV curve more accurately, the entire modeling accuracy should improve significantly. And to achieve that, perhaps we can start by doing a systematic empirical analysis of historical IV data. I did try to do that before, but to get large amount of historical IV data from TOS into excel was too daunting.

    There are better examples but this is the first one I found in my PC. Hope this helps.

    upload_2015-12-24_4-8-16.png
     
  2. Al G.

    Al G. Well-Known Member

    Great analysis Kevin, I am reminded of the old adage, "if ain't broke, don't fix it"
     
  3. Jay Winger

    Jay Winger Active Member

    That's great Kevin. Whatever you said apparently worked, because I've been trying to get Len off the dime on this since day one (I started emailing him detailed studies on 10/29) - he was dead set on his idea for a better curve fit leading to a better predictive model, when if he'd just listened to our screams for help and 'painstakingly' returned the vol skew to the 7.67 model immediately, this probably would have been a 2 day affair, instead of a 2 month melo-drama. I'll keep my fingers crossed that he knows how to get it done this time after not being able to figure it out the first time.
     
    dacamon and Kevin Lee like this.
  4. GreenZone

    GreenZone Well-Known Member

    This would appear to imply that, purely from a skew perspective, the greatest profit potential for a future bullish move is an ITM put credit spread (which is the equivalent of rolling down your upper long of your butterfly); and the greatest profit potential for a future bearish move is an ITM put debit spread (which is the equivalent of rolling up your upper long of your butterfly).
     
  5. Kevin Lee

    Kevin Lee Well-Known Member

    Ron,

    You are absolutely right. Depending on whether the skew is flat or steep, it'll sometimes be more advantageous to roll up (or down) the shorts and some other times to roll up (or down) the longs, although they provide the same amount of delta. Sometimes, looking at the skew curve, it can help us decide which exact strike to place the long and short options.
     
    Last edited: Dec 25, 2015
  6. Jay Winger

    Jay Winger Active Member

    For me currently, the placement of my verts (say rolling up a short put vs. rolling down an upper long) primarily depends on whether I want to control gamma or theta for the same amount of deltas (ITM for gamma control, OTM if I want more theta and dont mind the added vega). Considering skew and possible changes in steepness might be another factor to consider for placement, although I think the real benefit of the vol skew slope changes would be realized if there was a way to integrate it into a model as Kevin mentions.... I hope Len considers it.
     
    Last edited: Dec 25, 2015
    ACS likes this.
  7. Bruno

    Bruno Moderator Staff Member

    Very interesting comments here. Thanks Ron, Kevin and Jay.
    However to keep things as simple as possible, isn't a Iron Fly the best way to deal with the current situation ?
     
  8. Kevin Lee

    Kevin Lee Well-Known Member

    I received beta version of 7.82. Looked
    Hi Bruno,
    Why's Iron Fly a solution to the issue ? Not sure I understand.
     
  9. Bruno

    Bruno Moderator Staff Member

    Hi Kevin,
    I could be wrong but isn't the OTM modelling less affected by the current issue ? To me the latest release is the worst but my Weirdors still looked OK until then.
     
  10. Kevin Lee

    Kevin Lee Well-Known Member

    I have tested the v7.82 beta that OV released to me two days ago. V7.82 is supposedly the version that brings back the old volatility model.

    Preliminary test is quite positive. The greeks and T+0 line are very close to v.7.64. Looks like they might have found a way to revert back to the "good old" model. Let's hope they can release a stable version soon. :)
     
    Rick and TheSpeculator152 like this.
  11. Kevin Lee

    Kevin Lee Well-Known Member

    Bruno,

    I might be missing something but I can't think of why the modelling less affect OTM options. In fact what I know is the impact is greater at the two ends of the strike range, either deep OTM or ITM depending on Put or Call.

    In addition, as we are dealing with bearish butterfly, an Iron Butterfly's options aren't all OTM, like an ATM butterfly does. A bearish Put butterfly has 3 OTM + 1 ITM options. Likewise a Bearish Iron Butterfly has 3 OTM + 1 ITM options too.
     
    RayM likes this.
  12. Jay Winger

    Jay Winger Active Member

    As far as I can tell, Len's epiphany has little to do with Kevin's illustration. Len is talking about the efficacy of having a tight 'curve fit' across strikes and it possibly resulting in too much fluctuation in the skew curve in general, and Kevin is talking about modelling the natural inclination of the skew curve to flatten iits slope in high IV and get steeper in low IV and closer to expiration. (correct me if I'm wrong Kevin) I hope Len got the idea Kevin was trying to convey, because I do think it would be a valuable addition to modelling algorithms.

    I can't help but throw a little cynicism in here regarding Len having v7.82 ready this fast, possibly replicating 7.67 already. If this is all it took to get a model close to 7.67 all along, I have to doubt the reports that Len was working hard on rolling back the model around Thanksgiving time. I believe he was dead set on his tighter skew fit model idea all along and wasn't really committed to rolling back until now.

    Additionally, I emailed Len yesterday suggesting that he use 7.64 as his reference for the roll back vs. 7.67. If you'll recall, OV had the bad v.7.65 model changes they rolled back, and I was never convinced that 7.66 and 7.67 were the exact same model we had for years prior, represented in 7.64 and before. To this day I still use v.7.64 for all my live trade management.
     
    Last edited: Dec 27, 2015
    Andrei likes this.
  13. Kevin Lee

    Kevin Lee Well-Known Member

    I spoke to Len about three related but slightly different issues : (a) the new projected iv curve despite being tighter fitting to MIV, actually caused the unintended consequence of poorer modelling accuracy, (b) the greeks of 7.81 seems to be jumping around constantly in live trades, (c) the greeks seems to be different when viewed in live trades and back trading.

    The suspected reasons are : (a) the older modeling, ie 7.67 or before, projects IV linearly, ignoring the curling upwards section For the higher strikes. From a curve fitting perspective, that's clearly wrong, but ironically, it turns out to be a more accurate curve to model IV once the market moves up and IV falls. (b) when we set IV to combine Call and Put and set range to Large, there are many more input data points to calculate the projected IV. For example, even when the MIV of a totally irrelevant option change, the projected IV will change and hence affect the greeks. That's why the delta seems to be in constant fluctuations, (c) this one is somewhat related to (b). If we uncheck combined iv and set range to small or moderate, the issue should be less. In addition, OV derived the the projected IV thru an iterative process. The process will stop and produce ananswer once the tolerance level is met. So the looser the tolerance level the more differences we'll see in the greeks everytime we refresh even though all the input parameters are exactly the same.

    So... I'm not sure if Len was refering to different aspects of all the different issues. But the important thing is we quickly get the new version that's good enough to get us back to business as usual. Then OV can work on future improvements.
     
    Andrei likes this.
  14. Andrei

    Andrei Well-Known Member

    [QUOTE

    So... I'm not sure if Len was refering to different aspects of all the different issues. But the important thing is we quickly get the new version that's good enough to get us back to business as usual. Then OV can work on future improvements.[/QUOTE]

    In my opinion the key here is "good enough to get us back to business as usual". In the past several weeks we have spent more time discussing OV's problems than on discussing trading. I don't think there is a "Holy Grail" of IV modeling, what we need a stable and resilient model which can provide reliable readings even (and especially) in fast moving markets. So "close enough" should be "good enough". Currently John Locke is doing his weekly updates on EIOIO model. This is probably not optimal, but it tells me the strategies can be adapted to different IV models as long as they are reasonable and stable. My main issue with OV is the erratic and unreliable behavior of their models and their development staff, it is had to trade when I can't trust my "navigation instruments".

    I really hope ONE is going to provide us with a reliable alternative.
     
  15. Kevin Lee

    Kevin Lee Well-Known Member

    Totally agree. We ought to be spending time trading rather than tweaking trading software. Hopefully, the next version will put an end to this.

    Having said that, one upside for me personally is that while trying to understand this issue, I spent so much time looking at details that I would otherwise not paid attention to. I felt I have learned a lot over the past two months. :)
     
  16. TheSpeculator152

    TheSpeculator152 Well-Known Member

    Update from Andy a few hours ago on data and new model:

    Code:
    From the feedback we have already received, the projections using our new model are already more accurate than other products, including OptionVue. We do offer CEV which can be enabled as part of the modelling configuration.
    
    We provide EOD data from Jan 2005 and 5minute intra-day data from Oct 2010, which we are extending in a future release. Unfortunately, I cannot provide a definite timeframe for this work to be complete at this time.
    Very promising ;-)
     
  17. Boomer34

    Boomer34 Well-Known Member

    That is very encouraging...let's let these 2 battle for our betterment!
     
  18. DavidF

    DavidF Well-Known Member

    Yeh anything consistent would be welcome, my OV curves are all over the place in recent weeks, no matter if it´s in EIOIO or variable. Can even markedly change it (way beyond what can be accounted for by change price) in a few minutes by continually opening and closing the analyse graph. As Kevin mentioned, been good for learning about how these models work. Also paid a lot more attention to how successful traders operate in relation to the available models. But has also cost me capital, bailing on positions where I lost confidence due to uncertainty. So short term been very negative experience but perhaps long-term has some benefits.

    This is a current position in EIOIO and variable , both of which are way off reality.

    Screen Shot 2015-12-29 at 13.45.11.png
     

    Attached Files:

  19. Meteor528

    Meteor528 Member

    Hey everyone. Option Vue just released V 7.82 which it claims "returned the vertical skew model to what it was in versions 7.67 and 7.64". Start up Option Vue and you'll get prompted to update the software.
     
  20. Boomer34

    Boomer34 Well-Known Member

    Great News!!!
     

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