The actual time decay Chart of OTM option Theta and Vega

I'm interested to understand the real time-decay of my high probability option selling monthly income portfolio. I tried to use the TOS software without success, since it's designed to show the Greeks of various strike prices mainly. The ThinkScript has some bugs that prevent me from writing a script to display the time decay for every trading day. If ThinkOrSwim can fix the bugs, I may be able to design such a script for TOS chart.

For now, it's possible to display Theta and Vega hourly chart for a single option. So I used a sold SPX May put as the initial example which is shown below. The TOS chart also has a bug that prevent me to display it in daily chart. I had to use intraday (4 hour is selected to present more data) chart for this purpose.

As we can see from the chart, the sold put kept losing value as time passed by and SPX rose. It's apparent that Vega kept losing value as time passed by. It also reacted inversely to the SPX price (in the same direction as IV). My goal is to display implied volatility and Vega's impact on option values. Unfortunately, the IV functionality in ThinkScript is not working. I'm waiting for a response from TOS tech support to see if they are going to fix these type of issues.

The Theta time decay ((32.5-25)/32.5 = 23%) in last month was not that much when compared with that ((170-57)/170 = 66%) of the Vega. The Theta's reaction to SPX's price is similar as Vega: a reverse relationship with price (direct relationship with IV). Theta peaked on 2nd last Thursday as that was the lowest price day of SPX in the period. At the same day, the put option price also had a smaller peak to the market sell-off.

It looks to me an iron condor with negative Vega would benefit more time decay than a double calendar which has positive Vega if the spreads are opened two months before expiration. Is it really true? I'll have to analyze it in a future post.

What it really matters is that the put option price has been falling down since the open date. This is the ultimate effect of all Greeks. I'll continue to monitor the option price drop till the expiration day to get a overall picture of the option time decay.

Update: Since this post is becoming one of the popular ones of my blog, I'd like to update additional thoughts here.
1. As shown in the top section of the graph, it's apparent that Delta or index price changes have the most significant impact on option prices. The sold put option is out of the money, so the option price is made of time value solely. Using a moving average of the option price in the chart may better illustrate the decay of time value. I can do that in a future post.
2. Option Theta value becomes larger as the option price increases. But the percentage of Theta over time value may change different. I will create a ThinkScript to track the Theta value as a percentage of time value in a future study as well.

Second Delta Adjustment for May non-directional option income portfolio

In the last 3 days, the market started to rise significantly again. My last adjustment to support a market correction scenario appeared to be invalidated. This will be the 2nd time this strong bullish market has done that this year if IBD declares correction over later today or tomorrow. My high probability option selling portfolio has Delta reaching over -50 level as shown below. In particular, the RUT position chart had its price beyond the far right side of P&L zone.

So I made some calendar adjustments to neutralized Delta by 7 points or so. The adjustment made Gamma/Theta to increase as well. Vega changed from -110 to +170. There are some capital increases due to the adjustments. The portfolio overall risk is increased close to $10K. The Greek value changes are acceptable for me so for.

Even though the mid price of the double call calendar was moving up and down, I had difficulty to get it filled within 30 minutes. I had to break the single order as two separate calendars to get them filled today. I'm starting to feel that it's easier to get index calendars filled in market falling days. A standard double calendars with calls and puts on each side may also help it getting filled.

Now, there is still opportunity to profit in the next week or so if market (SPX) does not continue to rise to 1600 level. If that happen, I have to make new adjustments which will include trimming down losing positions.

Discrepancy of Implied Volatility Data in TOS ThinkOnDemand

ThinkOrSwim is my favorite option software at the moment and I use it almost everyday. To use it most effectively, we need to understand what it really provides. In my recent efforts to track down how implied volatility (IV) impacts high probability, premium selling, monthly income option portfolio, I found there are some discrepancies in TOS IV data, as posted before.

Today, I was able to use ThinkOnDemand feature to track down IV of SPX options. Although the option chains only provides 12 strikes near the momey, it's possible to get other OTM Greeks in the order pane as shown in the following image. The question is how accurate are the historical Greek data?

I had recorded the IV and Delta of my options in April 14, 2013. So I cut and pasted related section into the lower left corner of the ThinkOnDemand page and I also noted down the IV numbers one-by-one on the side for easier comparison. I found the following differences:

• VIX on Watch List of the TOD is 12.06 while the recorded data is 12.25.
• There is over 1% point differences in the OTM call strikes.
• There is over 0.25% point differences in OTM put strikes (which are smaller than those of the call strikes).

There are big differences for the IV data in TOS software. But how important is it to have accurate IV data for option analysis since they are used for estimation only?

Update: IV is a calculated value using different algorithm or formula, using option price, time to expiration, strike price, interest rate, etc., as input to the formula. TOS probably use different formula to calculate IV and Greeks in different places: option chain, position analyzer, ThinkBack/ThinkOnDemand, etc. So the key is that consistency must be maintained when using the TOS software.

Adjusted May non-directional option portfolio for more neutral Delta

Market was selling off early today and my RUT position showed some damage as RUT dropped below $905 while the SPX gained some value as its position had some negative Delta. The following chart was intended to recreate the portfolio P&L situation before adjustments (but it's captured after adjustment since I forgot to capture it before adjustments). I also marked the P&L zone changes in the chart.

Since the recent dramatic market moves happened 3 weeks after the initial positions were established, there was no major damage to the portfolio and the Delta was close to -20 before my adjustment (not -36 at which point I usually make adjustments).

When looking for adjustment strategies, I felt the VIX shot up way above the Bollinger band and may come down later. So I did not use calendars alone and used a bear call vertical spread as well. After the adjustments, my portfolio has a significantly reduced Delta and acceptable Vega. The Theta is also significantly higher as well. My goal is to close the portfolio some time next week if market gives me a profit opportunity.

It should be noted that in this highly volatile day, my orders for the RUT spreads were all filled with market price quickly.

The issue of ThinkOrSwim software when analyzing volatility's impact caused by Vega

I have been using the TOS analyzer to estimate the volatility's impact on portfolio or position's profit/loss for quite some time. I believe there are many other option traders & instructors analyzing it in the same way as I did. Recently I discovered there was a major issue in my past volatility analysis using the TOS platform.

After identification of some discrepancies in volatility used in TOS in my first post of the series and another discussion on how to estimate option implied volatility changes of each position in a Beta-weighted portfolio, I'd like to discuss the real issue here and figure out a way to work around it.

The above chart of ThinkOrSwim showes that Delta and Gamma are Beta-weighted while the Theta and Vega are not. For Theta, there is no issue since each instrument contribute time decay daily based on its corresponding Theta. But for Vega, the situation is different from Theta and somewhat similar to Delta. Like P&L caused by Delta of each instrument, the P&L caused by Vega of each instrument changes differently in each market day.

For example, if SPX moves 1%, the VIX may change 2 points. The IV of OTM options of the SPX position may change 0.6 percentage point. At the same day, RUT may move 1.2% (just an example number) point and its volatility RVX may change 2.5 points. The IV of OTM options of the RUT position may change 0.8 percentage point. So if we assume a 0.6 point change of IV of the SPX beta weighted portfolio, and use the straight sum of the aggregated Vega to calculate the IV induced P&L, our results are not accurate at all. This is particularly an issue for larger trading capitals. The estimated results will be close to the actual P&L if we use some kind of special weights for Vega of each different position.

Besides the lack of proper weighting in the Vega analysis, I had used the analyzer by adjusting the volatility field according to VIX. I had assumed if SPX changes 10 points, the VIX is likely to change 1 point (which is OK). Then, I would adjust the volatility field by 1 point and observe the new P&L in the live price slice section. It usually generates a substantial change in P&L. This is a total overestimation of the volatility impact on P&L. In reality, the portfolio's IV does not change 1 point as the VIX does. The portfolio or position IV actually changes much less than the VIX, could be 30% of the VIX only.

In another word, if the IV of the position is adjusted for 1 point in the TOS analyzer, it would mean the VIX changes over 3 points and market has a major sell-off or jump-up. If we adjust the IV field by +2 points, it may require VIX to increase 6 points, which may correspond to SPX to drop 60 points.

I did not realized this before. So, it is an major error that I had in my previous Vega related calculations, including the post on proper Greek  values of Delta neutral portfolios.

The TOS analyzer does not help either. If a user increases the volatility field by 1, the analyzer increases all option IV by 1 and VIX (or RVX) by 1 as well. It gives user an impression that option IV changes at the same rate as the VIX. In the future, I need to figure out how to calculate the equivalent position IV change based on SPX changes so that we can use TOS analyzer more accurately.

Estimating option volatility changes using ThinkOrSwim Analyzer

Today, I'd to continue to discuss the TOS analyzer, option volatility, Vega and $VIX. This is the 2nd post on this topic after the post yesterday which focused a little bit more on the discrepancy side.

To have a good understanding of the impact of volatility on high probability option portfolio, I need to be able to estimate how the option portfolio P&L changes when volatility changes, using the TOS analyzer (or some other option analysis software in the future).  In particular, the values of volatility of each strike are different. So how do we estimate the portfolio P&L changes if we use one IV value in the TOS analyzer?

On 4-3, I recorded the following IV vs Strike chart during market hour. It revealed a couple of relationships that I could understand at the moment:

Volatility skews

• Put options have higher IV than call options
• Front month IV changes fastest and further back month IV changes slower
• Future month IV is visibly higher in the middle price range for put options only
• As strike prices increase, the IV of both call and put options decreases.

The IV of calls and puts in the chart appeared to increase 0.3 if SPX declined 10 points(which might cause VIX to drop 1 point). It is a significant observation for me that if VIX drops 1 point the IV's of my portfolio options may drop 0.3 only. I'll focus the overestimation of P&L changes from Vega x IV  in one of my future post.

I also captured the IV vs Strike chart today (11 days after the above one) during market hour. This time, I noticed the VIX & RVX had discrepancies in the quote pane and the Analyzer as shown in the circled fields. These numbers matched pretty well in my previous image. Now the IV appears to make slower changes with the SPX prices in the chart below as time passes by. In theory, the IV/Vega should keep decreasing to 0 at expiration day.

Option Volatility discrepancies in ThinkOrSwim Analyzer

Since my last post on option Theta time decay of my non-directional portfolio over weekend, I realized that there are some issues with the ThinkOrSwim options analyzer in the field of option implied volatility. Starting today, I'd like to describe them in a series of posts.

Right now, I'll discuss the discrepancy I found in a couple of charts around the April 1 time frame. I had recorded my portfolio's Greeks on 3-30 (Saturday) in the chart of my previous post, and on 4-1 morning session in the following chart.

Notably, the chart of 3-30 (which was a 3 day weekend for Wall Street) indicated the SPX volatility ($VIX)  of 13.26. This value was 0.56 higher than the close of last trading day on 3-28. So the ThinkOrSwim platform is tracking $VIX beyond the standard trading time. This extended hour value of VIX is incorporated  into the analyzer. Any customers using the analyzer at weekends for their portfolio analysis should be aware of this fact when working on volatility related analysis.

On 4-1, there was a significant SPX drop that caused $VIX to increase over $1.00 compared to the previous trading day. The TOS software had a VIX increase of 0.54 as shown in the table below.

	Pre Holiday	Sat	Mon	Wed	Wed-Sat
	28-Mar	30-Mar	1-Apr	3-Apr
SPX	1569	1569	1560	1559
DIFF		0	-9	-1	-10
VIX	12.7	13.26	13.8	13.43
DIFF		0.56	0.54	-0.37	0.17
Vola:$1595c	ThinkbackError	9.59	9.95	9.46
DIFF			0.36	-0.49	-0.13
Delta		-32.87	-27.37	-25.34
DIFF			5.5	2.03	7.53

Another important observation from the above table is that the IV of option strikes do not move in the same way as that of the VIX. However, the ThinkOrSwim analyzer uses VIX in the adjustment field of volatility.This can create some confusions when analyzing portfolio options. I'll write another post on this topic in the near future.

To track the option volatility on 3-28 for my analysis, I tried to use ThinkBack feature and found it does not provide the real history of Greeks since it gave a value over 10. It could not be the true value at the 3-30 market close since the real value on 3-30 (weekend) was 9.59. So people who use ThinkBack should be aware of this difference as well. I also tried ThinkOnDemand and found it does not offer info beyond a few strikes ATM.

Exited QQQ Bullish Diagonal Spread

After bullish diagonal entry on QQQ about 1 month ago, QQQ finally broke down below 50DMA and up trending line, leading market to a potential down turn with higher volume.

Considering other market index (SPX & RUT) behaviour, I decided to cut a minor loss on QQQ. I was contemplating for an exit yesterday at a similar time to end it up even, but I felt I need one more high volume sell-off on the market to enter a bearish outlook.

Today, if market ends up in higher volume decline, I will change my market outlook to near term bearish.

QQQ was not a leader in the last few month. It just happened to break out when I shifted to bullish outlook. In review, I should have evaluated its leadership using a performance chart like I did before. A lesson is learned for looking for market leading index.

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