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An Online Option Trading Reference Manual

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Judging by the lack of reader email over the past couple weeks, I think we have just about exhausted our long discussion on the topic of option pricing as it relates to the various Greeks. So I thought I would use our time together this afternoon to summarize the numerous tools we have discussed in the recent past, putting together a central reference point for valuable option trading tools.

One of the more common questions I have gotten in recent months is what is a good resource for finding reliable option quotes. During market hours, I rely on my broker, Preferred Trade. In addition to providing a first-rate trading platform (shameless plug), they also give access to reliable option quotes. Just enter that symbol and Voila!, a real-time option chain. But it gets better from there, as once the desired option is selected in the trade entry window, Preferred gives me the ability to check the Bid/Ask on each of the major exchanges, to see where the best pricing and best liquidity exists. If you'd like to check out the service they provide, click on over to their site HERE.

For those that are happy with their current broker, there's a convenient solution as well. The Chicago Board Options Exchange provides a first rate option quote service. Delayed quotes are free of charge and if you can't live with the 20-minute delay, the real-time quotes only cost $8 per month (including OPRA exchange fees). For active traders, that's a bargain! Here's a link to their Delayed Quotes page (CBOE Delayed Quotes) and you can navigate to the Real-Time quotes page using the links at the top of the page.

Just obtaining price quotes on options is only the tip of the iceberg, as we have chronicled in these pages in recent months. If we really want to understand the pricing (or more importantly the value) of an option we are considering trading, we need to look at the Greeks that influence that pricing. While the bread and butter of their service centers on option volatility, the folks over at iVolatility.com provide us with a wealth of valuable information. We've covered that in great detail in the recent past, so if you're looking for the roadmap to that site, check out my past articles below:

Oh, That Vexing Volatility
Volatility - Part Deux
Varying Views on Volatility
A Primer on Online Volatility Tools

As you will recall, the iVolatility.com site gives us data on all the Greeks, and the price of the basic service (FREE!) is hard to beat.

Our next stop on the Greeks Education Express was the topic of Probability. As you'll recall, 80-90% of all options expire worthless, and I think a big part of the explanation for that statistic is that many traders fail to grasp the often low odds of success when buying a specific option, particularly one that is far out of the money. That led us to our second installment on Online Volatility Tools, where we explored a couple of probability calculators in the following article.

A Primer on Online Volatility Tools

In addition to the site I listed in that article, Larry McMillan's Option Strategist, there is a more sophisticated probability calculator found at http://www.hoadley.net/Options/barrierprobs.asp?. I'll leave the exploration of that tool up to you, but if you understood the process we went through on McMillan's site, it should be self-explanatory.

We wrapped up our discussion of option volatility by taking a glimpse at volatility skew and how it can be used advantageously by spread traders. While I didn't list it last week, one site that I like for the glimpse it gives me of what the skew looks like is Option Metrics.com. Just type in your symbol in the Quote field and hit Go. Up comes an option chain with a small chart of volatility plotted by strike price, giving us a snapshot view of the shape of the skew. Then clicking on the Show Greeks button gives us IV, Delta, Gamma and the rest of the Greeks for each of the strikes shown in the option chain. Then the links at the top of the page give us the same data for different expiration cycles.

Isn't it amazing the wealth of information that is available to us with a few clicks of the mouse? I hope this recap of our adventure in Option Pricing has been valuable. Barring a fresh round of questions on the topic, I think we're done with the Greeks. If any of what we have covered since the first of the year is unclear, don't hesitate to email me. It is entirely possible that others share your confusion, and I'll happily share the answer with everyone that cares to tune in over the weeks ahead. And of course, if you have an option-related question that I haven't covered recently, send it along. I'll do my best to help.

See you next week!

Mark

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