Option Leg Filters

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Trade Scan Option Filters

Option Leg Filters are applied to scans for individual options when the Scan for Options mode is selected.

When Scan for Options is selected only the Option Leg Filters criteria will be used in the scan, and all individual options that meet the criteria will be returned. The Trade Parameters tab is removed from the tab group as it is irrelevant to a scan for all options that may or may not be used in the trading constructs that it identifies.

When Scan for Trades is selected in the function bar, the scan will be performed in conjunction with the definitions of options trades made in the Trade Parameters tabbed page. Only trades which meet the criteria set on both the Trade Parameters and Option Leg Filters tabs will be returned. Refer to the Trade Parameters topic for more information.

The Option Leg Filters parameters page is divided into seven sections:

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Price

The Price filters allow you to specify an option's Strike price, Last traded price, Bid price, Ask price, and/or the Last traded price of its Underlying stock.

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This is useful for filtering out options that are too deeply OTM or ITM, or that are so thinly traded that their bid, ask or last traded price is not an accurate reflection of their true value and liquidity may be an issue.

Set the difference between the Bid and Ask prices (the spread) so that it is not large enough to preclude profit.

To apply a filter check the box to the left and select a value equal to, greater than or less than the entered value.

When being used in the Scan for Trade mode in conjunction with the Trade Parameters settings, the value entered, and the direction selected, will depend on the strategy defined in the Trade Parameters tabbed page and whether it focuses on ITM, ATM or OTM options.

Volume and Open Interest

Specify values for the Volume and Open Interest of the options to search for or that you wish considered for your strategies.

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Ideally you want to detect and include in the results liquid options i.e. options that have good Volume (number of contracts traded during each trading interval) and adequate Open Interest (total number of contracts for the option currently open) so they can be bought and sold quickly and easily.

You can also specify how recently (in days) the options last traded. This will also help to filter out illiquid options, i.e. options that are not traded often and that can be difficult to trade in and out of.

To apply a filter check the box to the left, enter a value and select one of three comparison operators - equal to, greater than or less than - used to apply the entered value.

Theoretical /Model Values

Specify the relation of the Model Price to an absolute value, or a percentage value relative to the Last trade, Bid, Ask or Mid-point price of the option.

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On a basic level we can also use the model price criteria to ensure scans only return options greater than a certain value. We may do this for strategies that involve sold legs, where some of the potential options may be trading under lower volumes.

Options that are traded under lower volumes may not have last traded prices that accurately reflect the option's current value. In this case, we can run scans based on the model price rather than last traded.

Note - The selection of the Pricing Model used throughout Your SOFTWARE (i.e. Black-Scholes or Binomial) is set in the Option Model dialog, a shared utility. This dialog can be accessed from the Trade Scanner's Action menu.

Money

The Money filter group allows you to specify whether the scan includes options within a certain percentage range of the current underlying price thus making them In-the-Money (ITM), Out-of-the-Money (OTM) or At-the-Money (ATM).

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To apply a filter, check the box to the left and enter a percentage value and then select whether the "Money" level is equal to, greater than, less than or within the given percentage value.

Again, when being used in the Scan for Trade mode, this is setting dependent on the strategy defined in the Trade Parameters tabbed page. For example you can filter out options too deeply OTM or ITM for your purposes.

Greeks

The Greeks help measure an option position's risks and potential rewards and therefore the probability of an option or trade making money.

Greeks provide traders with a variety of risk-exposure measurements, for example means to determine how sensitive a specific trade is to quantifiable factors such as price fluctuations, volatility fluctuations, and the passage of time.

The Greeks filters allow you to specify various "Greeks" for options to be included in the results of your scan:

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Delta

Measures an option's sensitivity to changes in the price of the underlying stock. It is often thought of as the probability of the option expiring ITM.

Settings range from 0 to 1, 1 indicating that the option will change $1.00 for each $1.00 change in the underlying value. In another example, the price of a call option with a Delta of .5 will increase $0.50 for every increase in the underlying asset of $1.00.

The entry can be less than, equal to or greater than a given value and specifies the Delta for each option to be included.

It is especially important for the call buying as it will tell how much of an increase or decrease can be expected for short term moves by the underlying stock. The value you enter depends on the strategy you wish to employ.

Gamma

Gamma measures an option Delta's sensitivity to changes in the price of the underlying stock. It is merely a precise measurement of how fast the Delta is increasing expressed as a percentage.

The entry can be less than, equal to or greater than a given value and specifies the Gamma for each option to be included. Deeply OTM of ITM options have gammas close to zero because the Deltas will hardly move at all for a significant change in the underlying stock. Likewise gamma increases as an option moves from OTM to ITM or vice versa.

Theta

Theta measures the time decay of an option generally expressed as a negative value and as the amount by which an option value will change.

For example, a theta of -0.12 means an option will lose about 12 cents per day.

Theta will be higher on highly volatile stock than on a low volatility stock because being more volatile they are more expensive and thus have more time value to lose.

Vega

Vega is the amount by which the option price changes when the volatility, always expressed as a positive number, changes by 1%.

More volatile stocks have more expensive options thus if volatility rises or falls the option price will rise or fall also. Vega is merely an attempt to quantify how much the option price will increase or decrease as the volatility moves, all other factors being equal.

To apply a filter check the box to the left and enter a value equal to, greater than or less than a given percentage value.

Time to Expiry

Whether scanning for individual options in the Scan for Options mode, or scanning for trade strategies in the Scan for Trades mode, you will often want to limit the scan results to options with the same expiry date. Use the Time to Expiry setting to set this requirement:

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This allows you to specify what time period you want to include for option expiry in your scan, for example greater than 30 days but less than 90 days. This is useful for example when you are scanning for debit spreads and you want to avoid options with too much time premium that will be too expensive.

Volatility

Volatility is one of the most important variables in options trading.

Depending on your strategy, you may want to concentrate your scan on options with generally higher or lower levels of volatility. In addition to different levels of volatility, there are also different kinds of volatility.

The Option Leg Filters tabbed page's Volatility settings allow you set the scan to detect an wide range of different volatility levels and types:

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IV Comparison Operators

The first three settings allow you to specify whether the Implied Volatility (IV) of the Model Price, Bid price or Ask price is greater than, equal to or less than a user defined percentage value.

Model IV compared to Historical Volatility

The option's Model IV can also be compared to its underlying asset's Historical (Statistical) Volatility.

Model IV Above/Below Percentile

The option's Model IV can also restricted in relation to its Percentile (values 1 thru 100) for the volatility type. The type is set in the Implied Average Type drop down box and the two comparison operators available are Above or Below the set percentile level.

This is calculated using the highest and lowest volatility value for the period of months specified in the Months for implied average calculation text entry box. As a default, a six-month period is used, however this can be adjusted in line with your preferred trading strategy.

The total range of the period is divided into 100 equal portions and the current value for each volatility type is then placed into the relevant percentile band and then the user's settings are applied to restrict the results.

Note - The selection of the Pricing Model used throughout Your SOFTWARE (i.e. Black-Scholes or Binomial) is set in the Option Model dialog, a shared utility. This dialog can be accessed from the Trade Scanner's Action menu.

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