IVolatility Jargon

% Change vs. yesterday
Average of Puts and Calls IV
Beta
Call Bid/Ask Mean
Call / Put Volatility Ratio
Change vs. yesterday
Correlation
Delta
Expiry
Historical Volatility or HV
Implied Volatility or IV
Implied Vola as a % of the latest 30 day HV level
Volatility within a scaled range of its 52 week hi/low
IV Index Call
IV Index Put
Open Interest
Option Pricing Model
Option Symbol
Option Value
Put Bid/Ask Mean
Strike Price
Volatility
Volume
VIX Futures Premium

% Change vs. yesterday

The IV Index % Change number is derived by comparing the Implied Volatility Index last figure shown on the screen against the previous night's level, this difference is then expressed as a percent. In the case of HV % Change, this number is calculated by taking the difference between the Historical Volatility last figure shown on the screen and the previous night's level. The difference is then expressed as a percentage.

Average of Puts and Calls IV

This number is derived internally by finding a simple average or a mean of the put and call implied Volatility.

Beta

Beta is a measure of how a stock moves in relation to the movement of a broader stock market index or benchmark. It subsequently measures the stock's risk in relation to the broad market, or an alternative benchmark. A stock with a beta of 1.5 would be expected to move 1.5 times more than the broad market is return. For example, if the S&P 500 index was expected to return 10% then we would expect, on average, the individual's stock return to be 15%. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.

Top

Call Bid/Ask Mean

This number is calculated by finding a simple average of the market maker's bid and ask price for call options only.

Call / Put Volatility Ratio

This is a variation of the traditional volume based Put / Call Ratio. However, in this particular case, the Put / Call Ratio is based on a vega weighting of implied Volatility. The ratio is arrived at by dividing the vega weighted implied call Volatility by the vega weighted implied put Volatility. What this does is express more accurately and more succinctly the bullish / bearish sentiment of market participants. When people are bullish on the market they will tend to buy calls and / or sell puts. When this happens the implied call Volatility will rise while the implied put Volatility will fall. Dividing the implied call Volatility by the implied put Volatility will create a number that is greater than 1. However, at some extreme point, buying will be overextended and a reversal of fortune could occur. Conversely, when traders are bearish they will tend to initiate long put positions and / or short call positions. In such a case, implied call Volatility will fall while implied put Volatility will rise. Division of these two will now yield a ratio that is smaller than one. After some period, if the trend gets overextended a reversal will take place. Thus the call / put Volatility ratio can mark extremes in trading behavior.

Top

Change vs. yesterday

When in the implied Volatility section this number can be derived by comparing the Implied Volatility Index last figure to its previous night's level. However, when in the historical Volatility section this number is derived by taking the Historical Volatility last figure and comparing to its previous night's level. In both cases, the differences are then expressed as simple numerical changes.

Correlation

Correlation is a statistical measure of how closely two markets move together. The number traditionally ranges from a -1 to a +1 (or from -100% to +100%). A measure of +1 means that the two markets move together 100% of the time. In a situation such as this, the two markets will move in a similar fashion; however the magnitude of their moves may not be identical. A measure of +0.5 reflects two markets moving together approximately 75% of the time. A reading of 0.0 reflects the two markets moving together only 50% of the time, while readings of -0.5 and -1.0 reflect two markets that move 25% and 0% of the time together respectively.

Alternatively, a correlation coefficient measure can be viewed so that a positive number shows the degree of positive relationship between the two markets while a negative number shows the degree of negative relationship between the two markets. A zero number indicates that there is no relationship between the two markets being examined.

The reason that traders use a correlation study is that they can sometimes create an opportunity that offers superior trading characteristics when compared to a more traditional hedge. Furthermore, by utilizing options instead of the cash instrument, traders can further take advantage of two powerful aspects of options trading. The two advantages that a trader can take advantage of through options trading is the ability to limit risk to a predetermined amount along with the ability to leverage a position beyond a conventional cash stock position.

Top

Delta

Delta can be defined in several different ways. The first way it can be thought of is as a percentage change in the option's price given a one point change in the underlying stock's price. For example, a delta of 50% indicates that the option will move up (down) by one half point for each 1 point rise (decline) in the underlying stock. Call options have positive delta; put options have negative delta. Call deltas increase as the stock price rises and decrease as the stock price declines. Consequently, put deltas increase as the stock price declines and decrease as the stock price rises.

The second way to view delta is as an approximation of the probability that an option will finish in the money. A delta of 50% has approximately a 50% chance of finishing in the money while an in-the-money option with a delta of 85% has an 85% chance of finishing in-the-money at expiration. Finally, an out-of-the-money option with a delta of 20% has approximately a 20% chance of ending in the money at expiration.

Expiry

This is the last day (in the case of American-style option) or the only day (in the case of a European-style option) in which the option may be exercised. For U.S. stock options, this date is the third Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option buyer's (holder's) intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.

Top

Historical Volatility or HV

Historical Volatility is the Volatility that actually occurred to the underlying stock over some previous time period. It can be derived in several different fashions. The most common way to calculate historical Volatility is to use the daily closing prices and compare them over some past time period. Normally, this time horizon would be based on a month of prices going back several years. However, you could use any time period you would like and it is a matter of personal preference. An additional method for calculating this number has been designed using the day's high and low values. An even more accurate way, according to studies, is to use the daily, high, low and closing prices to determine the historical Volatility. A final note: market convention dictates that historical Volatility as well as all other types of Volatility are always quoted on an annualized basis.

Implied Volatility or IV

Implied Volatility is the market's best guess of future Volatility, and it is obtained by plugging the current option price into an option pricing model and finding this unknown Volatility on an iterative basis. You must remember that Volatility is the only unknown factor in traditional option pricing models like the Black-Scholes model and therefore must be estimated. Implied Volatility is therefore calculated by asking: Given the known factors of time until expiration, interest rates, dividends, stock price, and strike price, what implied Volatility must be inserted into the model that would result in the current option price?

Top

Implied Vola as a % of the latest 30 day HV level

This figure is calculated by taking the Implied Vola last and dividing it by the 30 day historical level. The resulting figure is then expressed as a percentage.

Volatility within a scaled range of its 52 week hi/low

This figure is calculated by taking a Volatility measure and dividing it by its 52 week hi/low range. The result will lie within a scaled range of 0 to +1, with 0 indicating that a new Volatility low has been set while a maximum reading of +1, means that a new high in Volatility has just been established. We produce scaled calculations for both the 30day historical and 30-day implied mean Volatility. This measure can be used to identify option values and underlying stock price movements that are near high or low extremes relative to a 52 week range.

IV Index Call

This is a specially designed vega weighted average of implied Volatility using only call options.

Top

IV Index Put

This is a specially designed vega weighted average of implied Volatility using only put options.

Open Interest

Open interest is defined as the number of outstanding contracts on a particular option class (all put or call contracts on the same underlying stock or index) or series (all options on the same underlying stock or index having the same strike price and expiration date) that are still open. As of the reporting date, these options have not been exercised, closed out or allowed to expire. The level of open interest for option contracts is reported in the financial section of most newspapers as well. This number can additionally be reflected to show just call or put open interest as well as total open interest. Traders use these numbers as a measure of market sentiment.

What can cause open interest to change? Open interest will increase by one contract when a buyer is entering a new long position and the seller is entering a new short position. When a buyer is entering a new long position but the seller is simultaneously closing an old long position, open interest remains the same. Open interest also remains the same when the seller is establishing a new short position but the buyer is closing an old short position at the same time. Finally, if the buyer is closing an old short position and the seller is closing an old long position, open interest will decrease by one contract.

Top

Option Pricing Model

An option model is used to assess an option's price. Originally the Black-Scholes model led the way in the pricing of equity options back in 1973. However, as options trading has grown, various refinements to the Black-Scholes model have been introduced. Nevertheless, most models still incorporate the following factors into their pricing assumptions: the underlying security price, the strike price, the time until expiration, any dividends to be paid, the level of interest rates, and the Volatility of the stock.

Option Symbol

According to the OCC Options Symbology Initiative plan, starting Feb 2010 all options symbols are created using the new method as described below.

Converting a stock symbol to its appropriate option symbol is quite simple process. Suppose you would like to determine the option symbol for Microsoft call option with strike 32.5 and expiration date 22 January 2011.

The option symbol consists of 21 characters. The first six characters are a so-called option root which is determined from the underlying stock's ticker symbol. In most cases (including Microsoft) the option root symbol is just a stock ticker. However, a number of SPX options has option root SPXPM, rather than SPX. In addition all non-standard and LEAPS options have different option root.

Therefore in our case the first 6 characters of the option symbol are MSFT(space)(space).

The next 6 characters is the year, the month and the date of the expiration. Since expiration date is 22 January 2011, it gives us 110122.

Then there is one character representing option type ("C" for call or "P" for put), so it is C in our case.

The last 8 characters stand for strike. The first 5 of them show the integer part of the strike (00032) and the last 3 show the decimal part of the strike (500).

Collecting all these characters one will derive, that the correct symbol is MSFT 110122C00032500.

Before the new symbology was implemented, the option symbol had been consisting of three to five characters. This method had been used for over 25 years but it posed a several limitations and inconveniences in the current marketplace. The first one to three characters were the root symbol. The root was used to convert a stock or index symbol to appropriate option. The next letter indicated the expiration month and option type (Call or Put). And the last letter in the symbol was the code of the strike.

Top

Option Value

This is the option's price as determined by the parameters input into the option model. The inputs consist of the following: the underlying security price, the strike price, the time until expiration, any dividends to be paid, the level of interest rates, and the Volatility of the stock. Please note that our site uses our own internal database to draw upon the correct interest rate and dividend schedule (if any) for calculating the option price, freeing you from this burden.

Put Bid/Ask Mean

This number is calculated by finding a simple average of the market maker's bid and ask spread for put options only.

Strike Price

The stated price per share for which the underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Top

Volatility

Volatility can be defined as the propensity of the underlying security's market price to change in either direction and is based on the standard deviation of the asset's return. It is quoted as an annualized percentage rate. Volatility is a variable that appears in option pricing formulas and therefore the greater the Volatility, the greater the premium of an option. There are several different types of Volatility. These include historical, implied, actual, seasonal and forecasted Volatility. Each type of Volatility is self-explanatory.

Volume

Volume is defined as the actual number of stock shares or option contracts that traded on that particular day.

VIX Futures Premium

The Volume Weighted VIX Futures Premium is calculated based on VIX index spot price, futures prices of two nearest futures and their volumes.

The Volume weighted VIX futures premium= [(VX(M1)-VIX)*V(M1) + (VX(M2)-VIX)*V(M2)]*VIX/V(M1+M2)

VX(M1) and VX(M2) are futures prices of the first and second months,
V(M1) and V(M2) are correspondingly their volumes,
V(M1+M2) is their total volume
and VIX is the index price.

It represents how much the professional investment management community is willing to bid up the futures prices as they implement hedging strategies using the VIX with its higher volatility compared to other hedging alternatives. At the extremes, when negative or when exceeding 20% it usually signals a change in the short-term trend of the VIX and therefore the S&P 500 Index.

Top