IVolatility.com - Intraday Options Scanner - functional enhancement

In response to the feedback from our users we continue to add very valuable functionality to our Intraday Options Scanner service.

New functionality at a glance

The following features made available for you today:

  1. Introduction of our Intraday IV Index value - one of the most popular options indicators is calculated intraday, and available for monitoring and as a scanning criteria.
  2. IV Bid and IV Ask values are finally available, in addition to "common" implied volatility, which is calculated using the mid-price of bid/ask spread. Needless to say that these values give more accurate and helpful estimate of the options cost, depending on the direction of your trade.
  3. Bid Size and Ask Size fields are added - to help you estimate liquidity and possible slippage for the given option contract.

Now let�s talk about each of the enhancements in more detail.

Intraday IV Index and available filters

You might wish to refresh you memory of our IV Index by looking into IVolatility.com newsletters archive available online. Briefly, this characteristic is a "stock implied volatility", that is a typical option cost level for a stock and option expiry. Commonly, by "the" IV Index, the 30-day value is meant, which reflects option prices for short to mid term expiries fairly well. For longer maturities, the longer term IV Index is a more natural estimate; though we avoid using too "far" an IV Index term, as longer maturities are less liquid as a rule and option cost estimate becomes somewhat skewed. As a compromise, we use 1 month and 6 month values of IV Index in our Intraday Options Scanner, to take care of both the short and the long term options. So what are the IV Index-based filters introduced and what is their usage?

First, the absolute value of IV Index, its change from yesterday, or position relative to 52 week EoD IV Index range are different ways to estimate how cheap or expensive the options are. Large positive values for any of these suggest that selling the options on this underlying is probably a good idea (as they are expensive).

Another filter available is the comparison of short and long term IV Index levels has an evident application for looking at Calendar Spreads - larger value of the short-term suggests Long Calendar, and vice versa.

Finally, the third filter (soon to be added yet) is a Call / Put IV Index ratio - a stock sentiment indicator, like all such "ratio-type" indicators. These indicators are generally deemed contrarian - that is Call / Put IV Index ratio larger than parity assumes that stock is overbought and that the Calls are too expensive - so its time to sell the underlying.

As you see from this brief sketch, our IV Index can be useful for any generic strategy - single option, spread, or trading of the underlying. We'll consider a couple of live examples in our next newsletter.

IV Bid and IV Ask

Not unusual is the case when a trade looks attractive while looking at the Implied Volatility calculated from the mean of the Bid/Ask quote, but taking the "real" Bid or Ask into IV calculation can drastically change the picture. For example, an IV Mean of 75 % makes an option contract a good candidate for sale; but if the Bid quote shows implied vola of 25 % at that same time, you'll not be likely to take the short position (it's just too cheap!)

To facilitate the estimation of a real options cost, we introduce the approximate estimates of IV Bid and IV Ask. We do not carry out time-consuming exact calculations of these values, but use IV Mean and Vega (option price sensitivity to implied vola change) to construct the approximation. This works very well for options with narrow Bid/Ask spreads, and even for large ones, given that option price convexity with regard to volatility is not too high. The applicability criteria for this approximation are somewhat cumbersome, but as a rule you would have very nice estimates for IV Bid/Ask.

Bid Size and Ask Size

The last, but certainly not the least of the new features added is a size of the (best) quote. It is always good to know, what size underlies the current market quotes. For example, issuing a market order for 500 contracts to buy, under a market price of $0.5 does not mean that your cost will only be $25,000 ( = $0.5 * 100 * 500). What if the $0.5 quote has a size of just 20 contracts (somebody is going to sell no more than 20 contracts @ $0.5)? You do not know at what average price your order will be filled - $0.5, $0.75, or $ 1.75? This depends on the entire structure of the order book, that is "who's going to sell how much, and at what price".

It is true, that the size of the best quote only (highest bid and lowest ask) does not give the complete information. But this is better than nothing, that�s for sure. If you like, you can just discard the trading opportunities that look attractive, but have too low a Bid or Ask size for a starters (the quote looks attractive, but only a part of you order will be filled at this price). Many pricing "anomalies" could disappear if you took specific contract liquidity into account. Alternatively, you can "discount" your expected profit a bit, taking into account the low size of the best quote or buy or sell what you can at that price level and just have a smaller position (and profit potential) than what you ideally had hoped for.