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Screen 2: Setting up my Data

This screen lets you clean up and interpolate from the data retrieved from the opening screen.  

You can override automated data cleaning/adjustments with manually inputted data if you wish by entering data directly into the options data grid in the bottom part of the display window.

Date Adjustment 

You can observe two little < > buttons beside the current machine date.  Sometimes this is out of alignment with the actual date on the day.  This function lets you make data adjustments, if required.

Interpolate Interest Rates

This button automates the interpolation of the risk free rate from the yield curve information retrieved from the opening screen.  This is a most convenient feature when working with a large number of options across different maturities.

Interpolate Div Yields

This builds the dividend yield information into the raw option data.

Cleaning up the Data

Four selections are possible here:

i.  You can use the mid point of the bid/ask spread.  The advantage of this is that posted spreads are competitively determined and must not exceed certain pre-specified (by the CBOE) limits.  A market-maker must be prepared to be hit on either side (bid or ask).  As a result, the mid-point is very informative in terms of what the price is likely to be; ignoring transaction costs associated with options trading.  As a result, if you are extracting information from option prices (e.g. implied volatility) or trading using limit orders, then this is the preferred price with which to work.

Important Note:  If you are using this module out of trading hours and the bid/ask prices are not present you should ensure that the box Use Midpoint of the Bid and Ask is left unchecked.  This will let you work with the last traded prices.

ii.  You must indicate whether or not you are working with American style (i.e. can be exercised at any time) options.

iii.  You can choose to Ignore Bad Prices.  If you are working with a large number of option prices then many contracts may not be trading or even have a bid/ask posted.  The software will automatically ignore these contracts if you select this condition.

iv.  Ignore stale prices.  This is also a recommended option because very often the underlying asset price is more recent than the last time a particular option contract trades.  This is referred to as a stale price.  This module will automatically screen out stale option prices.

Restore All Options

This lets you change your mind regarding what criteria you want to use, and start again.

Calculate Implied Volatilites

Options trade volatility.  As a result, one of the most relevant pieces of information that can be inferred from an option price is implied volatility.  This module lets you extract this information for an entire set of options.

Smile Buttons

This set of buttons lets you plot the implied volatility smile for a set of options.  The smile is defined as the plot of implied volatility against strike price holding both maturity and exercise style constant.  Thus, the date function lets you specify the maturity, and the Put Smile/Call Smile buttons let you specify the exercise style.

Note on the Implied Volatility Structure

The Implied Volatility Structure plots implied volatility as a function of time-to-maturity, holding strike price and exercise style constant.  This module also provides you with important information on the Implied Volatility Structure by plotting the smiles by date.  Hence, by interpreting the color-coded smiles by their respective dates you can observe the implied volatility structure.  

Final Notes 

You can manually rescale the graphs or edit the option price grid by clicking inside the grid/scale text boxes and changing any number.

OS Financial Trading System, PO Box 11356, Pittsburgh, PA 15238 USA, Phone 1-800-967-9897, Fax 1-412-967-5958, Email fts@ftsweb.com,