Four of the precomputed option rankings are based on implied volatility. Two are based on statistical (historical) volatility :

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1 Chapter 8 - Precomputed Rankings Precomputed Rankings Help Help Guide Click PDF to get a PDF printable version of this help file. Each evening, once the end-of-day option data are available online, the Optionetics Platinum site constructs option rankings. These rankings are precomputed using all available options that satisfy these two criteria: The close stock price must be greater than There must be enough IV data to support the rank request. For example, a 6 month ranking will not include stocks that only have 5 months of IV data. Clicking Option Rankers > Precomputed Rankers at the top of any Platinum web page will load the precomputed ranking web page. The page loads with one precomputed ranking already loaded as default. You can set which ranking table is default using Settings > General Settings. Precomputed Rankings has many different rankings available to populate your online stock lists. Four of the precomputed option rankings are based on implied volatility. Two are based on statistical (historical) volatility : 1. Expensive and Cheap are based on a percentile bin IV ranking. 2. Breakout Hi and Low are based on a ATM Bollinger IV ranking. 3. Explosive is based on the highest 6 day SV ( Statistical Volatility) / 100 day SV ranking. 4. Quiet is based on the lowest 6 day SV / 100 day SV ranking. In this help section we will explain how these rankings are obtained and how they might be used. The other stock rankings in "Precomputed Rankings" are also explained below. Two precomputed rankings rank all stocks without a stock price filter. A stock only has to have enough IV data to support the rank request. They are Expensive 1 year and Cheap 1 year under More Rankings on the bottom left side of Option Rankers > Precomputed Rankers. They have the words "All Stocks" below their link. If you click either of those two links and you enter a large number, like 5000, next to the add/replace text box and click the REPLACE button then you will load up the selected list with all valid optionable stocks we have online. You can access historical precomputed stock option rankings. You can access any historical precomputed ranking from 12/14/01 to today. To do so: Go to Site Map. Change the date at the upper right to the past date desired. The earliest date for precomputed stock rankings is 12/14/01. If you set an earlier date, the table will resort to the latest ranking. Click the Go button below the date. Once the Site Map web page updates, click Option Rankers > Precomputed Rankers. Verify the ranked table date is correct at the top right of the table. Be aware that stocks online change all the time. Companies are bought out or go bankrupt. When you save a historical stock ranking onto an online stock list, the stock symbols are filtered, and only stocks still in existence at the latest web site date are saved from the historical ranking. Hence, a ranking can have >1500 stocks, but a lesser number may be saved online when you transfer the historical list to your online list. Only the top 50 ranked are shown in the table. More stocks have been ranked and can be saved into an online lists. The extra saved stocks are only for the Historical and Implied Volatility rankings not the Option Parameter rankings. A single text box is shown next to the Add and Replace buttons. You can increase that number in the text box from the default 50 to any other higher number and save that many ranked stocks into a stock list. If your input number exceeds the available amount of stocks ranked, the stocks saved are capped at the maximum number available. Implied Volatility (IV) Implied Volatility (IV) is the amount by which the stock is expected to fluctuate over a 1-year period and is expressed as a percentage. IV is computed directly from the option price, days to expiration, strike price and current stock closing price using the Bjerksund Stensland American

2 option model equation. Each stock has a different series of options with different expiration months and different strike prices. Each expiration month, strike price, put and call all cause each associated option to have a different IV. The skew charts, viewable in Create Charts, show all the different IVs in a graphical format day ATM IV The Optionetics Platinum site assigns a single overall IV number to a stock, so that stocks can be compared against each other for ranking purposes. The Optionetics Platinum site allows subscribers to pick different methods for computing a stock's overall IV assignment, and they are days 7-30 days days days >90 days The different methods can be selected in Access Stock List Ranker. The "Precomputed Rankings" web page tables only use the day ATM IV assignment method days indicates that all stock options series that expire between 7 and 149 calendar days will be used to compute the stock's overall IV. The site computes a 2nd order polynomial weighted least squares "skew" fit to both calls and puts of the same expiration and then takes the bias term of the polynomial curve fit as the ATM IV value. The weights emphasize at the money strikes to make the curve fit best around the money. The bias term is where the first derivative of the polynomial is zero, ie, the minimum of the "smile" skew curve fit. This IV is usually very close to, but not exactly equal, to the IV where the stock close price intersects the skew curve fit. Throughout the site the stocks's overall IV is labeled as the ATM IV. For example, if the stock closes at 72 5/16 and we have strikes at , we form a curve fit to all the option IVs (one for the puts and one for the calls) around the strikes near the close. The curve fit has as inputs the strikes and has as outputs the IVs. We then find the constant of the curve fit and that is output as the ATM IV for the stock for that series. If there is more than one series in the time span covered by the days such as the days ATM IV, then the different ATM IVs of each series are equally weighted together to find the mean value. This mean value is the single days ATM IV value. Below are two examples of skew charts Figure 1 NASDAQ AUG00 Call and Put Skew Chart

3 Figure 2 Microsoft OCT00 Call and Put Skew Chart The top skew chart is the 7/21/00 AUG00 NASDAQ skew chart available free on the Optionetics Platinum Futures site The Optionetics Platinum site forms a quadratic fit to the futures data, and the chart shows that an excellent fit is possible. The NASDAQ close was at The second skew chart is the 7/21/00 OCT00 Microsoft skew chart. The Optionetics Platinum site fits stock option IV data with a quadratic fit. The minimum values are 39.6% for the call and 37.5% for the put. The Bjerksund Stensland American "model" of the option is used for the quadratic fit for the stock option data. Returning to the days IV, we take all the options series ATM IVs (from the skew fits) expiring between 7 and 150 days and average them together to form the stock's overall IV number. Similarly, the 7-30 day overall IV number averages the minimum IVs that expire between 7 and 30 days. The overall IV number is computed similarly for the other IV methods.

4 Statistical (Historical) Volatility (SV) The Explosive ranking is found by computing the 6 day statistical (historical) volatility (SV) and the 100 day SV, dividing these two numbers then ranking the stocks by the highest value. SV is a measure of the up and down motion variation of the actual stock price that has occurred in the recent past. The Explosive ranking pinpoints stocks that were quiet but have recently "exploded" in stock price changes. These changes can be up or down or sideways. These stocks are candidates for straddles, calls and puts. The top six stocks in the Optionetics Platinum Explosive ranking for 4/10/02 are shown below. Figure 3 Optionetics Platinum Explosive SV Ranking for 4/10/02 The value under 6 Day SV is the volatility of the stock price over the last 6 days. The value under 100 Day SV is the usual value for the stocks past volatility. The ranking formed by dividing these two numbers shows stocks that are making major stock price moves now. The Quiet ranking finds the top stocks where the 6 day SV / 100 day SV have the smallest values over all stocks ranked. These stocks are candidates for sideways trades like Calendar Spreads and Butterflies. ATM IV Bollinger Bands Bollinger Band rankings are based on a computational approach described by John Bollinger. The use of Bollinger bands in this search is NOT based on Stock Bollinger Bands, which widens if the stocks have lots of movement up and down and tightens if the stock price is flat, moving sideways. A stock price Bollinger Rand ranker is available on the Stock Rankers > Bollinger Bands. The Bollinger Band ranking that is used here is based on implied volatility (IV). ATM IV Bollinger Bands, which is what we have on Platinum, get wide if the ATM IV of the stock's options have lots of movement up and down. If the ATM IV is flat and moving sideways then the options IVs are stable and not having IV fluctuations and the IV Bollinger Bands widths are small. Hence the

5 stock price can be moving all over the place but if the option's prices are keeping the AMT IV the same then the ATM IV BB widths are small. And vice versa. The ATM IV can be very high historically but if it is high and stable in time then its ATM IV BB width can be small. However, usually the opposite is true. The ATM IV BB widths grow large as the ATM IV goes to new heights and moves from the mean which the ATM IV often does quickly. The ATM IV Bollinger Band is created by computing today's 20 day moving average of the ATM IV (the mean), computing today's 20 day standard deviation of the ATM IV (the 1 standard deviation), then determining the IV Bollinger band value + 2 standard deviations above the mean and -2 standard deviations below the mean. The IV in the Bollinger Band ranker is using the day expiration period only and is not affected by your expiration selection. You can create custom ATM IV Bollinger Band using Option Ranker > Create Ranker. You can select the moving average days value to be something other than the 20 days used in Precomputed Rankings. During periods of high implied volatility movement the bands expand, and during periods of low implied volatility movement the bands shrink. Bollinger Bands are more often used with stock prices instead of with option ATM IVs, and the standard deviations (SD) are stock price SD and not ATM IV SD. As with the normal use of Bollinger Band, when a stock price crosses a Bollinger Band, the crossing is an indication the stock price may be breaking out in that direction. Within the use offered here in Platinum, an implied volatility that is near the high Bollinger band is breaking out from a period of relative low volatility to one of higher volatility. This breakout is an indication that these options may represent future selling opportunities as there is renewed interest in these options. An implied volatility that is near the low Bollinger band and is breaking out from a period of relative high volatility to one of lower volatility is an indication these options may represent future buying opportunities. Figure 5 Optionetics Platinum Bollinger IV Ranking for 7/21/00 The values under "High" are that day's 20 day 2 standard deviation value above the 20 day mean. The values under "Low" are that day's 20 day 2 standard deviation value below the 20 day mean. The "Current" value column is that day's ATM IV. The highest Bollinger Ranked stock (CERUS Corp.) has the most IV breakout from the 20 day standard deviation value and represents options with potential selling opportunities. The Bollinger table column marked "Current" is that day's ATM IV value. The Bollinger table column marked "Chg" is the percent change in that day's ATM IV value versus the prior trading day's ATM IV value. Trading with Precomputed Rankings Option Rankers > Precomputed Rankers can be used to decide how to trade an option. The basic strategy is to be a net seller of historically high IV stock options (ex: covered calls) and a net buyer of historically low IV stock options (ex; buy straddles). This is because IV has a strong

6 tendency to return to the mean. The graph below is the 2-year ATM IV plot of MSFT (Microsoft Corp.). Figure 6 Microsoft Two Year ATM IV Chart The mean IV appears to be near 40%. Between February and April of 2000, MSFT IV had climbed to above 55% but has since reverted back to the mean. During the April 2000 period, the Expensive ranker rated MSFT as having a historical high ranking. The Explosive ranker, however, did not rank MSFT as having a historical high IV because the April IVs did not come close to the two high IV spikes in late June of 99. The above MSFT chart shows why we consider the Expensive/Percentile ranker to be a better indication of historically high IV. The Optionetics Platinum site allows a user to save the precomputed stock option rankings into an online list and use these saved rankings in Find Trades II or Find Trades III (Create A Search). A user can choose a trading strategy in the Find Trades III strategy matrix that matches the ranking criteria (such as high historical IV) and search for potentially profitable trades that take advantage of the IV conditions. For more information about Find Trades II and III, click Platinum Help > Help Guide above and go to the sections on those searches. Other Precomputed Option Rankings Call Top % Inc - finds the option call prices that had the largest 1 day increase and ranks the options according to the percent increase. Call Bot % Dec - finds the option call prices that had the largest 1 day decrease and ranks the options according to the percent decrease. Put Top % Inc - finds the option put prices that had the largest 1 day increase and ranks the options according to the percent increase. Put Bot % Dec - finds the option put prices that had the largest 1 day decrease and ranks the options according to the percent decrease. Highest Volume - finds the options that had the largest 1 day total trading volume and ranks the options according to the volume. Highest Open - finds the options that had the largest 1 day total Open Interest and ranks the options according to the Option Interest. Unusually High Volume - compares todays volume with a running mean of past volumes. That day's volume as a percent of the running mean is compared percentage wise to other stocks option volume percentages. Those stocks at the top imply something has happened, or is about to happen, to the stock price. This ranking may show, for example, insider trading activity on a stock's options. The following equation is used to find unusually high volume (UHV):

7 UHV(%) = 100.0*(latest volume - average volume)/(average volume) If you click on a stock or option symbol shown in the above rankings, you will be taken to the option trade or trade finder for that stock or option. More Rankings Additional precomputed rankings are available for the latest online date. These are Expensive and Cheap rankings based on the Percentile Bin approach discussed previously. The difference is that the time period in each ranking is different. For example, if you choose the "Expensive: 1 mo ranking", the ATM IV values for the past 1 month of values are placed in bins. Those with the latest ATM IV in the top Bin are the Expensive stocks for 1 month of ATM IV data. Usually the latest ATM IV will equal the highest ATM IV shown in the Highest ATM IV column in the table. "Expensive: 2 mo ranking" uses 2 months of ATM IV data, and so on. A common practice is to use the ranking table time length corresponding to the number of days left in the option you desire to trade.