DATASTREAM OPTIONS USER COMPANION

DATASTREAM OPTIONS USER COMPANION FEBRUARY 2008 1

Introduction This manual is intended for all users of the Datastream product. It focuses on the Options content within the product, conventions, data attributes available and any related documentation. In this guide we assume that the user is familiar with using the Datastream service and that you know how to log on to the system, use Navigator and Help screens and use the various applications available in the product. In addition we assume that the user understands the fundamental difference between options and other asset classes. If you are completely new to Datastream, please ask your Customer Services Executive for help with training and appropriate documentation. For general enquiries or problems concerning the Datastream service, please contact your Customer Services Executive or call the Helpline. 2

Finding Options on the Datastream Product Options codes can be found through Datastream Advance - Data Category. Under Options the User is presented with two options: Criteria Search Help Browse The Criteria Search Options takes the user directly to the Datastream Navigator. From this screen a user may search for the required future by inserting the information through one or more inputs. 3

Inputs can consist from: Name: The name of the option contract, for example, Eurodollar. Market: The country where the exchange trades for the specified future contract, for example, the Eurodollar contract from Chicago Mercantile Exchange will have its market in the United States. Type: Click the type of option contract from the selection available All (default) Please note that many bonds, short term interest rates, currencies and commodities are actually options on futures and therefore classified as such. Exchange: The name of the exchange where the options trades. Currently Navigator provides the user the markets available on the Datastream product as set of click boxes. As the options markets covered in the product expand this facility may be in the future be substituted by a list, such as the Market field. Class: The options class if known to the user. Status: Select from All (default), Active, Dead or Suspended futures contracts. 4

In the example below the word Shell has been inserted under the NAME field only. The other way to find the options codes and additional relevant information is through the Help Browse option to the help page HELP TOCD? that contains all the information relating to options. The screen below appears with the following user selection. 5

6 By clicking on 05, the user is taken to Italian options market

The information on the HELP TOCD? pages contains: The options class code mnemonic, for example, ALIT is the options class code for the stock option Alitalia. The description name of the options contract. Start Date of the first available value on the Datastream product. This is will be the start date of the options continuous series. Datatypes, these are the data attributes available on the options continuous series, for further details, see Data Attributes section. In addition HELP TOCD? contains other relevant information regarding content that is currently not available through Navigator. These include; Put/Call ratios for Germany, Austria, Netherlands and US. Volatility Indices for Belgium, France, Germany, Japan, Netherlands, Switzerland and US. The Commitments of Traders report posted weekly by the US Commodity Futures Trading Commission providing a breakdown of traders holding open interest positions. Datastream's euro solution for options for countries previously trading in original national currencies. 7

Options Mnemonic Conventions for Single Options Series Users can construct a mnemonic for single options series that enables you to display traded options on graphics or time series analysis programs by combining: CLASS + EXPIRY DATE + EXERCISE PRICE + C (call) or P (put) For example: DAX index March 2008 6000 Call = DAX03086000C Cable & Wireless April 2008 1200 Put = CABL04081200P LIFFE Short Sterling March 2008 94 Put = LIP030894P When exercise prices are not integers, fractions should not be ignored and the mnemonic should consist of the 1st fractional value or the full fraction. Hence: LIFFE Short Sterling March 2008 93.25 Put = LIP030893.2P and LIP030893.25P LIFFE Short Sterling March 2008 93.75 Put = LIP030893.7P and LIP030893.75P All mnemonics constructed in this way must contain at least 10 characters. For most options this will be the case, but there are a few exceptions. If the option has a 2 letter class and the exercise price is less than 100, you must enter a decimal point and one or two following digits to make the mnemonic up to 10 characters. For example: Ahold March 2008 7.8 Call= AH03087.8C 8

Single Options Series Data Attributes Clients can access a range of data attributes relating to futures by inserting the relevant datatype in brackets, for example, DAX03086000C(PH) will provide users the highest traded price and DAX0308600C(OXPD) will provide clients with the expiry date for the DAX index March 2008 6000 call contract. 9

Options Continuous Series Definition The continuous series are Thomson Financial's options calculated series available on the Datastream product. For each option class there is a put and a call continuous series available. Unlike individual options series, continuous series do not expire until the actual options class ceases to exist. On the continuous series there exists; Two types of implied volatilities at-the-money (interpolated between the two nearest strikes and at the money strike) using values from the nearest expiry month options. The series switches to the next available month on the first day of the expiry month. Implied volatility by weighted volume using values from the nearest expiry month options. The series switches to the next available month on the first day of the expiry month. Up to three implied volatilities at-the-money with constant maturities of 1 month (30 days), 3 months (60 days) and 6 months (180 days). The options underlying price The at-the-money strike price and the options settlement/closing price from the nearest expiry month options. The information switches to the next available month on the first day of the expiry month. The total volume and open positions for all expiry options. BP Implied Volatility At-The Money Interpolated VS 6 Month Constant Maturity 10

Options Mnemonic Conventions for Continuous Series Users can construct a mnemonic for continuous options series that enables you to display traded options on graphics or time series analysis programs by combining: CLASS + C. SERIES + C (call) or P (put) For example: BP CALL = BPC.SERIESC PHIL PUT = PHILC.SERIESP CUS CALL = CUSC.SERIESC Alternatively continuous series can also be constructed by using a seven character mnemonic; CLASS + < dots> + C (call) or P (put) For example: BP CALL = BP.C PHIL PUT = PHIL..P CUS CALL = CUS C The mnemonic must always be equal to 7 characters. 11

Options Continuous Series Data Attributes Clients can access a range of data attributes relating to futures by inserting the relevant datatype in brackets, for example, DAX03086000C(PH) will provide users the highest traded price and DAX0308600C(OXPD) will provide clients with the expiry date for the DAX index March 2008 6000 call contract. 12

Options Lists Datastream offers both options lists by class and by type/country. Options live and dead lists by class are available. For options the list mnemonic can be constructed as follows: Mnemonic LOPTXXXLC Where: L List OPT Options XXX Options class code, e.g. BARC, BP, ICI, DAX, etc. L/D Live or Dead C/P Calls or Puts The options list LOPTBARCLC displays all live Barclays call options, see below a small subset of Barclays live calls options list with datatypes: Name, Settlement Price, Implied Volatility, Delta and Expiry Date. 13

Options Lists By Type & Country Options lists are also available by country and type, hence for all German stocks call options the appropriate list is LOPTERXELC Calls Puts Description LOPTLIFFEILC LOPTLIFFEILP UK Indices LOPTMNPILC LOPTMNPILP France Indices LOPTERXILC LOPTERXILP Eurex Indices LOPTUSAILC LOPTUSAILP US Indices LOPTAEXILC LOPTAEXILP Dutch Indices LOPTOTOBILC LOPTOTOBILP Austrian Indices LOPTITALYILC LOPTITALYILP Italian Indices LOPTSWEDILC LOPTSWEDILP Swedish indices LOPTHOKOILC LOPTHOKOILP Hong Kong Indices LOPTJAPANILC LOPTJAPANILP Japanese Indices LOPTMEFFILC LOPTMEFFILP Spanish Indices LOPTERXELC LOPTERXELP German Stock Options LOPTERXEHLC LOPTERXEHLP Dutch Stock Options on Eurex LOPTERXEMLC LOPTERXEMLP Finnish Stock Options On Eurex LOPTERXEILC LOPTERXEILP Italian Stock Options on Eurex LOPTERXEFLC LOPTERXEFLP French Equity Options on Eurex LOPTERXESLC LOPTERXESLP Swiss Equity Options on Eurex LOPTERXEOLC LOPTERXEOLP Austrian Equity Options on Eurex LOPTLIFFELC LOPTLIFFELP UK Stock options LOPTMNPELC LOPTMNPELP France Stock options LOPTAEXELC LOPTAEXELP Dutch Stock Options LOPTOTOBELC LOPTOTOBELP Austrian Stock Options LOPTITALYELC LOPTITALYELP Italian Stock Options LOPTSWEDELC LOPTSWEDELP Swedish Stock Options LOPTHOKOELC LOPTHOKOELP Hong Kong Stock Options LOPTMEFFELC LOPTMEFFELP Spanish Stock Options LOPTLIFFEULC LOPTLIFFEULP UK Options on Futures LOPTERXULC LOPTERXULP Eurex Options on Futures LOPTUSAULC LOPTUSAULP US Options on Futures LOPTUSACLC LOPTUSACLP US Currency Options LOPTAEXCLC LOPTAEXCLP Dutch Currency Options 14

Constructing Volatility Indices Options traders have long used the volatility indices to help them determine market direction. More recently volatility indices have gained lot of attention and momentum, indeed VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Today it is another leading market indicator which every trader watches closely. Datastream hosts equity volatility Indices for Belgium, France, Germany, Japan, Netherlands, Switzerland and US. The computation of a volatility index is based on the assumption that the future or current trend in the market can be captured by the current level of implied volatility in the options market. In general a volatility index is calculated by taking implied volatilities from calls and puts traded on an underlying (usually weighted average implied volatilities are taken with a constant maturity of 30 days). Traders use the volatility indices as a general inverse indicator of market volatility and sentiment. The VIX is the implied volatility on the S&P 500 index option, calculated from both calls and puts that are near the money. Normally the VIX has an inverse relationship to the market, which means that a rising stock market carries less risk and a declining stock market carries more risk. Since the introduction of the VIX in 1993, other exchanges in several other countries have also launched volatility indices. An example is the VDAX index disseminated by the Deutsche Borse which calculates the implied volatility using the prices of option contracts on the German stock index DAX. Datastream s options continuous series implied volatility ATM with a constant maturity of 30 days (O1) datatype mirrors the volatility indices methodology used in the market place and the calculation is almost exact. The continuous series can be easily to mirror that of a volatility index. 15

The formula is simple: (Options continuous series CALL + Options continuous series PUT)/2*100 We suggest for indices to use a 30 day constant maturity datatype (O1) The reason why the Datastream chart displays the volatility slightly lower is due to the fact that the Datastream calculations takes into account the at-the-money implied volatility interpolated between one strike above and one below the underlying price. Many volatility indices will take into account a number of out-of the money options which naturally have a higher volatility. 16

Below displays Datastream s volatility index (in green) calculated from the options continuous series versus the DAX New & Old volatility indices. We can compare the index volatility versus individual stocks, for example below is DAX versus Commerzbank CBK and Deutsche Bank DBK with a 90 day constant maturity from Feb 2007 Jan 2008. 17

Below are Datastream s stock volatility indices based on the options continuous series implied volatilities. It shows the volatility of four major banks traded at EuronextLiffe Royal Bank of Scotland - RBS HSBC HBOS Llyods TSB LLOY Barclays - BARC We can see how Lloyds Bank over the last six moths has a lower volatility and its share price has faired less worse than some of its peers during the sub-prime crisis. Share Price rebased 18

Constructing Put/Call Ratios Put/Call ratios are calculations based on total trading volumes of calls and puts. Put/Call ratios can be calculated for use in time series analysis programs by using the following formula:- CLASS + C.SERIESP(VM) / CLASS + C.SERESC(VM) For example: DAX Index option Put/Call ratio = DAXC.SERIESP(VM)/DAXC.SERIESC(VM) FTSE 100 Index option Put/Call ratio = LSXC.SERIESP(VM)/LSXC.SERIESC(VM) To calculate Call/Put ratios simply reverse the equation: For example: DAX Index option Call/Put ratio = DAXC.SERIESC(VM)/DAXC.SERIESP(VM) 19

Implied Volatility Calculations at Datastream In February 2000, Datastream enhanced the options models and provided new options sensitivities to the existing options coverage. This enhancement has been produced in partnership with MB Risk Management (MBRM) using their world famous UNIVOPT Universal Options Add In software which is regarded by many dealers and risk managers as the industry standard option pricing and risk management system. The following models are used for the following type asset: Option instrument Model Style Equities Black & Scholes European Equities Cox-Rubinstein Binomial American Indices Black & Scholes European Indices Cox-Rubinstein Binomial American Futures Black European Futures Cox-Rubinstein Binomial American Forex Garman-Kolhagen European Forex Cox-Rubinstein Binomial American Bonds Black & Scholes European Bonds Binomial American 3 month interest rate Black European future 3 month interest rate future Binomial American The Black, Black-Scholes and Garman-Kolhagen models are variants of the same analytical model. The Black uniquely assumes no net drift in the instrument price. The Cox-Rubinstein Binomial builds a distribution of the instrument price using a binomial tree. American Options are then evaluated by working backwards through the binomial tree where at every node a check is made as to whether early exercise is optimal. The type of model used depends on the instrument type and option style (American early exercise is possible, European exercise at expiry date only). To give you an indication of styles the our present coverage is as follows : All Equity options are American All Index options are European (apart from LSX FTSE100) All bond options are American All forex options are American Options on futures are mixed but mainly European The new options sensitivities are Delta, Gamma, Theta and Vega (Kappa) better known as the Greeks are derived by model using the implied volatility value. 20

Implied Volatility Rules There are basically two calculation rules that may override the initial results produced by the various models : The first rule is Option/Vega rule. Rule 1 - states that the option price/vega is less than 0.00001 then implied volatility will not be calculated based on inputs provided. Instead the nearest option series implied volatility is substituted in its place. This rule only impacts very deep inthe-money or well out-of the money options. The rule has been put in place because the impact of implied volatility on the options price is non-existent and more theoretically at this stage more than one implied volatility result can be correct. The equity option AIR (F:AIR) closed on the 07/02/08 with a price of 89.62 euros. The implied volatility for SEP08 expiry 50, 60 and 64 calls have been substituted by the SEP08 70 call implied volatility value. Had this substitution not taken place the SEP08 50, 60 and 64 calls would have been calculated with an estimated implied volatility of 0.07. Thus the same or almost identical fair value results would be produced if the implied value was 0.07 or 0.2992. In terms of numbers this rule will substitute between <1.00% of the total options series coverage. 21

Rule 2: If the software cannot calculate implied volatility due to missing options price then the implied volatility from the nearest option series will be substituted and used to calculated the remainder of the options sensitivities. Since one of the key inputs of any model calculation is the price of the option then without it no implied volatility can be calculated. In certain extreme cases there may be no options activity: no bids, ask, trades or the Exchange may not calculate a settlement prices (as in the case of Philadelphia SE). In the example below no prices were issued by Exchange for Japanese Yen/US Dollar contract for very deep in the money options, denoted by NA on the MP field below. In such cases the last available implied volatility will be substituted providing sensible values for fair values and the remainder of the Greeks. This rule was crucial back in 2000 as over 40% of options series on a daily basis may have NOT been priced by an Exchange. Currently over 90% of all Exchanges covered at Datastream now provide settlement prices for all options series even those that are illiquid and with no open interest. This rule by in large has been made redundant by changes in Exchange pricing but some Exchanges may still continue with this policy. The impact of these rules is that a flat skew curve will appear at very deep in the money and well out of the money options. 22

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Options Volatility Smiles, Skews and Surfaces Datastream now offers the following Advance for Office options volatility samples to illustrate how the different Datastream content sets can be used in a range of different workflows. Available through http://extranet.datastream.com/ The following excel samples are available: Options Volatility Smile/Skew: Displays a chart of implied volatility on an option with the same expiration but different strikes. Allows users to change option class, expiry month and chart displays. Options Volatility Time Skew: Displays a chart on volatility for both call and puts where options with the same strike but with a different number of days remaining until expiration Options Volatility Surfaces: Displays a matrix and a chart of implied volatility surface for all the call or put options on a particular underlying stock price. The volatility surface data are widely used in the construction of options strategies as it allows traders to find expensive and cheap options today within any one expiration or within different expirations. Traders can then accordingly create any kind of spreads and combinations with the desired parameters. 24

Volatility Smiles/Skews The relationship between strike price and implied volatility is known as "volatility smile". The following chart shows implied volatility for options with the same expiration but different strikes for DAX. The volatility smile shows that deep out-themoney and deep in-the-money options are priced by the market higher than theoretically forecasted by the formulas based on the lognormal distribution. As a general rule, the lowest point of the volatility smile tends to correspond to the ATM strike, but this is not always the case. Often the lowest point can be found to the right of the ATMs, that is the upside "calls" relative to the ATMs. Implied volatility often tends to be higher for out-themoney (OTM) and in-the-money (ITM) options compared to at-the-money, in this case OTM and ITM options represent increased risk on potentially very large movements in the underlying; to compensate for this risk, they tend to be priced higher. This phenomena is known as a volatility smile. Sometimes Implied Volatility for OTM and ITM options is lower than for ATM. There is a natural bias in the markets for institutions to "write" upside calls against large long positions they hold in the underlyings as a way to increase returns. The market adjusts by shifting the lowest point of the smile to the right side to compensate for these "natural" sellers of options. If plotted independently, the put smile would have the same low point because at each strike the put and call, in combination with the stock, can be arbitraged against each other and thus they are adjusted accordingly. 25

Often, the shape of the volatility smile for options on shares or an index is called a "volatility smirk", because of its ascending line. The example below shows BMW April 2008 expiry with an underlying price of 38.42. The volatility smirk shows that deep in-the-money calls and deep out-the-money puts cost more than theoretically forecasted, while deep out-the-money calls and deep in-the-money puts cost less. This type of shape of the volatility smile reveals that options sellers believe it is much more likely to suffer losses from selling out-the-money puts than out-the money calls. 26

Time Skew Chart The Time Skew provides the trader with a sense of how volatility is trading in different months for the stocks being tracked so that you can quickly identify and try to take advantage of any disparity. Below displays the DAX index option with the th strike price if 7200 on the 7 Feb 2008, when it is underlying closed at 27

Volatility Surface The term structure of volatility refers to how implied volatility differs for related options with different maturities. An implied volatility surface is a 3-D plot that combines as a volatility smile and term structure of volatility into a consolidated view of all options of an underlier. The AFO sample provides clients with a 3D surface whereby the implied volatility is plotted against maturity and strike price. The maturity introduced consists of constant maturities of 30, 60, 90 up to 360 days of intervals of 30 days (12 arrays of constant maturities). The strike prices are represented through options deltas, again an array of constant deltas have been produced ranging from 5, 10, 15 up to 95 deltas with 5 delta intervals(19 arrays of options deltas). The AFO sample produces a matrix of up to a maximum of 228 data points. 28

3D Volatility Surface of DAX Call options for 08 th Feb 2008. 29

The example below displays the stock Marks & Spencer volatility surface results for 08 th Feb 2008. Please note that in some cases the full array cannot be calculated hence an interpolation calculation is used to populate the missing arrays. The cells highlighted in yellow contains the interpolated values. Please note: The put deltas are simply altered from deltas to +ve deltas when displayed on both matrix and surface chart. 30

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