
# Option Workshop, version 18.2.1657

Dear Option Workshop users, our long-awaited update will be released today. We will update the documentation shortly, but until then, please take a look at the new features described in this post.

:::cut:::

## Telegram bot

Telegram is one of the best messengers out there. It works perfectly on all platforms and allows developers to create automation bots. In our case, we have decided to create a bot which will transmit quotes for selected instruments and parameters of selected portfolios (strategies) to users’ smartphones. At first, we thought about developing our own mobile application, but finally decided to create a bot, since it provides enough to cover all our needs.

What we wanted to achieve:

1. Give users the ability to transmit quotes of selected instruments from their Option Workshop instances to their smartphones;
2. Give users the ability to transmit their strategy parameters in the same manner;
3. Give users the ability to receive notifications on their smartphones then and instrument set up price or strategy P&L breaks limits, as defined by the user.

Below, what have we done.

### Connect the Option Workshop running instance and a Telegram account

First, you have to connect your Option Workshop and Telegram accounts, running on either a smartphone or computer. To do this, open the Bot Management Window by clicking this button ![](bot-btn.png) on the control panel to the left. In the window that appears, press **Connect to telegram**:

![Connect to telegram](connect-to-telegram.png)

Then press the **Add bot to your Telegram** button; this will open a bot page in your browser. The browser will then ask for your confirmation to launch Telegram on your system and add the bot there.

After the bot is added to your Telegram contact list, you need to link Option Workshop and the bot by giving them both the same **Access code**. To get an access code, press “Request new access code”—the code will appear on the same form:

![Access code](acceess-code.png)

In Telegram, start a chat with the bot and then press the Start button. The bot will request an access code—enter the code you were given in the prior step. Now you are all set up.

### Adding instruments and strategies to be transmitted

Now you can select instruments and strategies, which Option Workshop will then transmit to the Telegram bot. To add an instrument, select **Add to watch** menu item in the context menu of any instrument. The same goes for strategies. There are a couple images below demonstrating the process.

![](add-watch-instrument.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Adding instrument to watch list

![](add-watch-strategy-1.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Adding strategy to watch list

For instruments, you can set up a price range at the exit from which, Option Workshop will send a notification to the bot.

![Setup instrument notification](watch-setup-instrument.png)
Figure: Setup instrument notifications

Similar setup for strategies:

![Setup strategy notifications](watch-setup-strategy.png)

And this is how it looks in Telegram:

![](telegram-1.png) ![](telegram-2.png)

## Implied volatility smiles

Big changes are coming in a part of software responsible for pricing. Until now, we would build an IV curve by just taking the midmarket IV (sum of bid and offer divided by two). That was working fine for actively traded options during actively traded hours. But outside the US trading session, when spreads are big or for strikes which are far from ATM strike, there could be no orders at all, this approach would fail. We can’t figure out an IV and as a result can’t calculate theoretical price and Greeks.

What we have done in this update:

1. Added the ability to build polynomial approximation of current market IV curve on central strikes.
1. Added the ability to shift IV curve with underlying instrument price move.

The model works in the following way:

1. User selects a basis – a number of central strikes at which midmarket IV’s will be used to fit the curve. Basis might be built symmetrically around ATM strike or shifted from ATM, either up or down.
1. For strikes higher than ATM call options, IV will be taken; for lower strikes – puts IV.
1. User can fit a polynom once or make program fit it each time basis changes.
1. User can choose to make program use square root from X as a function, describing tails of the smile.

![](iv-model-settings.png)
Figure: Polynomial volatility model settings

## Market-maker ergonomic

We have made some changes in our market-maker module aimed at minimizing the risk of operational errors and increasing the user’s speed and comfort when changing parameters.
Now if you hold the Ctrl button while entering a spread value or number of contracts of some other parameter, this value will be applied to all the rows in a market maker. Also, the **Alt+Enter** combination now performs the **Apply changes** button feature.

## Fixes

Several errors were also fixed, including but not limited to:

1. Rare situation when, after CQG connection is lost and restored, user might see positions which do not actually exist on the account;
1. Positions table performance was not good enough when a strategy contained too many positions;
1. In rare conditions, market-maker module could place an order whose execution might lead to a position whose size breaks the limits set up by the user.



# Option Workshop, version 17.6.1515

In this update, we’ve added several improvements:

- Changes in the **Positions manager**:

  - Copying a strategy with all fills
  - A new **Mnns** (moneyness) column that shows the option status: in the money, at the money, out of the money
  - A new **Risks** tab. Now the tab shows only the total number of underlying contracts to be settled if in the money options expire right now.
    In the next updates, we plan to add more useful information about strategy in this tab

- Changes in the **Charts** form:

  - The ability to bind the **Charts** form with the active (selected) strategy in the **Positions manager**.
    The form will show a chart for the currently selected strategy in the Position manager
  - The ability to display the **P&L** chart taking the commission for the fills into account

- In the **Option Desk**, the bid and ask cells are now highlighted if the best bid/ask price is higher/lower than the theoretical price.
- In the new version, you can add contracts to the market maker by dragging a position or a strategy into the market maker setting form.

You can read more about these and other changes in this article.

:::cut:::

## Changes in the Position Manager

### Mnns column

In the Positions table, we’ve added an **Mnns** column (option moneyness) that shows the option state:

- `I` – in the money,
- `A` – at the money,
- `O` – out of the money.

![](MNSS.png){.thumb}
Figure: Mnns column

### Risks tab

We’ve added the **Risks** tab in the Position manager.
Now the tab displays only one parameter – the total number of underlying contracts to be settled if options in the money are expired right now.
In the future, we plan to add several strategy parameters: maximum possible profit and loss,
probabilities of profit or loss, and other useful parameters.

![](risks.png){.thumb}
Figure: Risks tab

### An alternative way to copy a strategy

Prior to this update, when copying a strategy, positions were copied as fills.
For each position in the initial strategy, a position was created in the new strategy.
Under each position, there was only one fill.
The fill price was equal to the initial position opening price, and the fill size was equal to the initial position size.
At the same time, the fills that formed the initial position were not copied.

We have added the ability to copy the strategy with all fills:

- Right-click on the strategy name and select the **Copy with fills** command in the **Create copy** submenu;
- In the Position manager, a duplicate of the strategy will be created.
  Each fill (excluding the adjustment fills) will be copied to a new strategy.

![](Copy-with-fills.png){.thumb}
Figure: Two ways to copу a strategy

For the copied fills, the `Manual` type will be set. The `Exchange ID` will be replaced.

## Strategy charts

### Binding the Charts form and active strategy in the Position manager

In the new version, you can bind the strategy charts form and the active strategy.

![](Bind_1.gif){.thumb}
Figure: Binding Chart form and Position Manager

Click the **Bind** button. Now, when switching between strategies in the Position Manager, the charts will be automatically redrawn.
The price range and zoom are saved separately for each strategy.

### P&L chart taking the commission into account

We have added the ability to display the P&L chart so that it takes the commission into account.
When you click on the **Commission** button, the chart is shifted down to the size of the commission.

![](commission.png){.thumb}
Figure: Commission button

Instructions on how to set a commission are provided in the [documentation](https://optionworkshop.net/docs/analysis/fill-manager#commission).

## Option Desk

In the Option Desk, the best bid and ask prices are now highlighted, depending on the theoretical price. Cells are highlighted if:

- the best bid price is higher than the theoretical price, or
- the best ask price is lower than the theoretical price.

![](OptionDesk-1024x320.png){.thumb}
Figure: Highlighted cells

We’ve also added the number of days until the expiration of options series to the Option Desk tab name.

## Historical chart

We’ve added the instrument code to the Historical chart tab name.

## Adding contracts to the Market maker

In the new version, you can add contracts to the market maker in an additional way:
drag a position or strategy from the Position manager and drop it into the the market maker setting form.
Thus, a position contract will be created in the form.

![](MM-1024x393.png){.thumb}
Figure: Adding contracts to the Market maker

## Fixed

- The delta hedger hangs.
- Incorrect work of the delta hedger in discrete mode.
- The price of the underlying asset was not updated on the graph IV.
- The interface hangs.
- Incorrect functioning of **Ctrl + Tab** hotkeys.
- Volatility values were not imported into Option Workshop when the CSV file was opened in MS Excel.



# Bear Call Spread

## Strategy name and alternative names

**Bear Call Spread**. An alternative name is **Credit Call Spread**.

## Main characteristics

Bearish position.
It is a vertical spread involving an equal number of long and short calls on the same underlying asset and with the same expiration date.
It is a credit spread, which means you receive money to put on the position.
The strategy profits as long as the price of the underlying security remains below the breakeven point.

## Options used in the combination

Sell to open one at-the-money (ATM) call and **simultaneously** buy to open one out-of-the money (OTM) call.
The strike price of the short call is below that of the long call.
The advantage of this spread is that it benefits from time decay and provides an immediate inflow of cash.
The maximum gain and loss on the spread are very limited and well defined.

:::cut:::

## Risk profile

![](vbcs_exp-pnl-1024x576.png){.thumb}
Figure: Fig. 1, P&L Chart: The X axis is price and Y axis is profit/loss. The range of the Y axis is plus or minus the distance between the two strikes. The domain of the X axis is centered on the strike price of the short call.

**Maximum profit**
: The net credit received when you put on the spread.

**Maximum loss**
: The maximum loss occurs when the price of the underlying security hits
or rises above the strike price of the long call.
It is equal to the difference between the long and short strikes minus the net credit received.

**Breakeven point**
: At expiration, the breakeven point is the strike price of the short call plus the net credit.

**Key points**
: On a profit/loss chart (see above) where the X axis is price and the Y axis is profit/loss,
the value of the spread is a minimum at or above the long call’s strike price.
The spread is composed of three connected line segments.
The leftmost segment is horizontal from zero to the strike price of the short call.
The middle segment is a negatively sloped diagonal line starting at the strike price of the short call
and continuing until the strike price of the long call.
The rightmost segment is a horizontal line beginning at the strike price of the long call
and continuing to the right.
The breakeven point is the X-intercept.

## Preconditions to open this spread

You would put on a Bear Call Spread if you feel that the underlying asset’s price will remain stagnant
or decline through expiration, and wanted to profit if your prediction is correct.
The spread is more conservative than a naked short call, because the long call limits the maximum loss.
However, the long call reduces the net credit received compared to simply shorting the call.

## Greeks

![](greeks-1024x576.png){.thumb}
Figure: Fig. 2, Greeks

### Delta

An option’s probable price movement in relation to the price movement of the underlying stock.
The value ranges from `0` to `1` for a long call and `-1` to `0` for a short call where 0 means the option price is not affected by the stock price,
and 1 means the option prices moves penny for penny in lockstep with the underlying’s price.
Delta of whole spread thus ranges from a negative value to `0`.
While the overall spread is considered neutral, it is negative when the underlying price rises toward the short strike
and reaches a minimum at the average strike price.
As the underlying’s price continues to rise above the average strike, delta increases until it final returns to its maximum value of `0`.
In other words, the delta curve is symmetrical around the average strike price.

### Vega

Vega is the effect of the underlying stock’s volatility on the option’s price.
For example, a vega of `0.3` means that an option’s price will rise by 30 cents for each point increase
in the underlying stock’s implied volatility. For a Bear Call Spread, you want vega to drop after putting on the spread,
because you’d like the price of the underlying asset to remain stable. Vega is zero when the underlying’s price
is well below the short strike, and becomes increasingly negative until the underlying’s price approaches the short strike price.
Vega reverses and increases as the underlying’s price continues to rise, crossing the X axis (`vega = 0`)
at the average strike and continuing to rise until hitting a maximum somewhat beyond the long call’s strike price.
It then reverses direction again and approaches zero as the underlying’s price continues to rise.

### Theta

The time decay of an option’s price as the expiration date approaches.
At the close of expiration day, an option’s theta is `0`. Theta is lower for long expiration periods,
which means the option loses time value more slowly than it would for short expiration periods.
A longer expiration period increases the chance that the spread will expire in the money.
Theta for a Bear Call Spread is positive (which means the short spread doesn’t lose value over time)
until the underlying’s price rises to a point between the two strike prices.
At that point, theta becomes negative, because there is less chance that underlying’s price will return to the short strike price.

### Gamma

This is the rate of change of delta – the responsiveness of the position to the underlying’s price movement.
In a Bear Call Spread, gamma is negative below the average strike price, which means delta will decrease in the direction of the stock move.
Gamma is positive above the average strike, and a further upmove by the underlying asset increases delta.
If the underlying moves far above the average strike, gamma re-approaches zero.

## Dynamic illustrations

![](vbcs_time.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Fig. 3, Time decay animation: Describing physics of the spread’s price as time expires.

![](vbcs_vola.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}

Fig. 4, Volatility dependency animation: Describing physics of the spread’s price when implied volatility rises or falls.

## Position example on current market conditions

Assume the share price of XYZ stock is `$100.00`.
Sell to open one XYZ 100-strike call with 60 days until expiration and simultaneously buy to open one XYZ 105-strike call
with the same expiration for a net credit of `$1.27`. Neglect commissions.

**Net Credit**
: `$1.27`. You receive `$127`, which is escrowed in your margin account.

**Maximum profit**
: `$127`

**Maximum loss**
: `100 x ($100 – $105 + $1.27) = -$373`

**Breakeven point**
: `$100 + $1.27 = $101.27`

## How to manage position

You are bearish on the underlying asset and would like the underlying’s price to remain stable or decline.
Here are a few things to do if the underlying’s price moves.

### Weak upward move

If the underlying security weakly moves above the short call’s strike price but you remain bearish,
you could close out the spread and replace it with a long put or long straddle to take advantage of a drop in the underlying’s price.

### Strong upward move in underlying stock price

If the underlying security moves above the breakeven point and you are afraid it will continue to rise,
you can convert the Bear Call Spread into a Short Call Ladder Spread by buying one or more OTM calls at increasingly higher strike prices.

### Strong downward move in underlying stock price that you expect to continue

You could sell to close the long call and recoup a little of the premium.
This would transform the position to a naked short call with unlimited risk.

## Variation

The Bear Call Spread has a negative risk/reward ratio, meaning you can lose more money than you can gain.
If you are long-term bearish on the underlying asset and want a better risk/reward ratio, you could put on a Deep ITM Bear Call Spread,
in which both the short and long calls are deeply in the money. Because the value of deep ITM options are due mostly to intrinsic
rather than time value, a surprise upward move in the underlying’s price would have very little effect
on the price difference between the short and long calls. Thus, upside risk is minimal.
Conversely, the net credit on a Deep ITM Bear Call Spread should be close to the difference
between the two strikes, since time value is relatively small.
You can structure a Deep ITM Bear Call Spread such that the risk/reward ratio approaches `1:9`.

## Summary

A Bear Call Spread limits your gains and losses in well-defined ways.
The standard Bear Call Spread has an unattractive risk/reward ratio, but you can improve the ratio by using deep ITM calls.
A further risk with a Bear Call Spread is that you are in danger of being assigned whenever the underlying’s price is above the short strike price.
If you are assigned, you must deliver the underlying asset at the strike price, which will cut into your profit or cause you a loss.
Even though you’ve covered the short call with a long call, you still must establish a long position for at least one day so that you can deliver it.
If that occurs, the long call won’t help you unless the underlying’s price rises above the long strike,
since the long call’s strike price is the maximum price you’ll have to pay for the underlying asset.



Release fix, 17.4.1457
======================

We’ve released a small update, which includes only two bug-fixes:

* The program sometimes hangs when user try to change position price through the **Set price** button;
* The program ignores the first line of a CSV file with volatility curve.

:::cut:::


# Option Workshop, version 16.12.1307

In our new version, we have changed the principle of pricing models setting.
Now the model is defined as a pair of a computation model (Black, Black-Scholes or Cox-Ross-Rubinstein) and volatility model.
You can create multiple models for each series of options and customize them in different ways.

In the volatility model settings, you can specify custom volatility values.
Also, we have added a user-defined model line on volatility skew built from custom values in the pricing model settings.

Also, there are a few small changes in the positions table, technical support form, etc.

:::cut:::

## Pricing models

In the new version, you can create different pricing models for each option series. The model consists of two parts:

- a computation model (Black, Black-Scholes, Cox-Ross-Rubinstein).
- volatility skew model.

![](pricing_settings.png){.thumb}
Figure: Pricing model setting

These models can be combined and you can set different parameters for each of them.

![](base_model.png){.thumb}
Figure: Base models

Available volatility models:

- Provided by data source – volatility values are provided by data source. The model is not available for editing;
- Define manually – user can set custom volatility for each strike;
- Import from CSV file – the values of volatility are taken from a CSV file.

![](pricing_settings_vola.png){.thumb}
Figure: Volatility model setting

In the upcoming updates, we will add models that can approximate volatility values around ATM strikes.

## Volatility skew

On the volatility skew, we have added an additional model curve that’s built from custom values configured in pricing model settings.
The skew is shown by a dashed line.

![](skew2.png){.thumb}
Figure: Volatility skew

## Positions manager

We have improved the positions table performance.
Also, Option Workshop can now display fills and positions on instruments that have already expired.

## Option desk

Now you can select your option series from the drop-down list.

![](OptionDesk-1024x467.png){.thumb}
Figure: Option desk

## Technical support

The checkboxes **Include screenshot** and **Include log file** on the Contact support form are unchecked by default.

![](support.png){.thumb}
Figure: Contact support form

## Instruments

We have added an **Option Series** submenu into the option context menu with the following commands:

- Option desk;
- Volatility skew;
- Pricing model;
- Spread desk.

![](Option-series.png){.thumb}
Figure: Option Series

## Fixed

- A crash during shutdown;
- An incorrect display of license expiration notification;
- An issue when renaming of strategy doesn’t affect a name of opened tabs.



# Option Workshop, version 16.11.1252

The main change of the new version is an ability to customize the line styles for the volatility skew: model lines and markers.
Also we continue to improve the functionality of Option Workshop and fix some bugs.

:::cut:::

## Volatility skew

In the new version you can customize the volatility skew: select the color, thickness, line style (solid, dashed, dotted, etc.)
and the size of the orders price markers. The last set parameters will be applied to the new chart.

![](skew.png){.thumb}
Figure: Volatility skew

## Strategy charts

Now when you change your what-if scenario selection the strategy chart’s zoom settings are not reset.

## Data copying

We have improved Option Workshop’s ability to copy tables to the clipboard.

We have unified the way that tables are copied to the clipboard. Also tables are inserted from the clipboard to Excel
with the original formatting of decimal numbers preserved.

## Licensing

We have added a reminder of your license expiry.
This notification appears once a day for a week before the expiration of the license.

![](licenseexpiration.png){.thumb}
Figure: Licensing

## What we have fixed

- Error when opening the column selection window for the first time in a session.
- Crash when starting Option Workshop.
- Error in the Orders manager interface.
- Error with displaying a notification from the transport.
- Item duplication in the strategy chart settings window.
- Improved Spead Desk’s performance on ATM strike change.
- Issue when shifting “excluded from the calculations” positions.
- Incorrect update of a what-if scenario list when renaming a scenario.
- Fixed chart axes dragging behavior.
- Errors with Interactive Brokers.



# Implied volatility calculation

Today we’re going to talk about how we calculate volatility in Option Workshop, and what our plans are to improve this part of the functionality.

Option Workshop [is integrated with several data sources](http://optionworkshop.net/docs/page/integration),
which provides market data for options and their underlyings.
They all are different, with a different API, different architecture, but they all have one thing
in common – they don’t provide current implied volatility value for options.
This means we have to figure it out on our side, inside the Option Workshop pricing mechanism.

:::cut:::

## Available data

We have several option contract parameters which we can utilize to figure out implied volatility (IV) These are:

- Last trade price or settlement;
- Best bid price;
- Best offer price.

Also we utilize the last price of an underlying contract or asset.

## The problem

First, let’s formulate a basic approach and then consider its limitations and ways to handle them.

The IV of an option contract can be calculated as the IV of its midmarket price – a half of a sum of the best bid and best offer prices.

The approach is clear and easy. But it works only if the following conditions are true:

- There are both bid and offer for an option;
- The spread between the bid and the offer isn’t too wide;
- A midmarket price is higher than an option’s intrinsic value.

These conditions seem simple, but actually they are far away from always to true.
If we take a look at an option, which is deep in or out of the money, then any of these condition might be violated.

![](6xzncti.png)
Figure: RUT Option desk

![](u2vnytp.png)
Figure: Calculation in Excel

Let’s consider a Russell 2000 July series.
The current futures price is 1159.66, the best orders for the 960 (deep in the money) call are 200.5/197.4.
The midmarket price is 198.95, while the intrinsic value of a 960 call is 199.66,
that means the “market” is below the option payoff function at expiration.

![](intrisic-value-150x150.png)
Figure: Option theoretical price

![](rect10485-150x150.png)

Look at the figure titled **Option price, payoff function and best orders**.
The orange line is the call option’s intrinsic value.
The black line – it’s current theoretical price.
The red and green dots are the best ask and bid, and the blue one is half the sum of the red and green – the midmarket price.
Normally, for actively traded options that are near the money, all dots must be above the orange line
and in some relation with black line: ideally, if the model and the market fit each other,
then the black line will be between the red and green dots.

![](6pqki2q-150x150.png)
Figure: Possible spreads

Figure Possible spreads illustrates six scenarios of how the best orders may appear in an order book.

Case 1 is clear and simple. The spread between orders is tight and its center can be treated as a fair market price.
You can buy and sell with a small price difference, so it means that the fair price is somewhere in between.

Cases 2, 3 and 4 are the same in common.
Spreads between the bid and offer are too wide and despite the fact that the market price is somewhere
within this spread, it’s impossible to figure out its value.
In other words we can’t use the half sum of the best orders as a representative value of the price.

Cases 5 and 6 are the worst. Because they are lacking either a bid or an offer, there can be no midmarket at all.

## How we handle it now

Right now we do it not in a way in which we want and going to do soon.
At the moment we only apply some empirics to pull off an adequate value from the prices we have.

If the spread is too wide or doesn’t exist we take the last price or settlements, if the datasource provides it.

If the spread is tight but its mean is below the option’s intrinsic value, then we take the last and add 0.1% to it.

This all is a compromise and we’re currently working on making something completely different.

## What users will get soon

![](ye6qrgv.png)
Figure: IV approximation

We are working now on developing a logic of IV curve approximation.
It means that based on the strikes, which are liquid enough and where the spreads are tight, we will build up a curve for the whole strikes grid.
It’s not an easy thing, there are a lot of assumptions and mathematics.
But when this functionality will be rolled out, users will get good enough default volatility curves
and the ability to manipulate it with model parameters.

We hope you will enjoy it.


Blog #iv

Option Workshop, version 18.2.1657

Option Workshop, version 17.6.1515

Bear Call Spread

Release fix, 17.4.1457

Option Workshop, version 16.12.1307

Option Workshop, version 16.11.1252

Implied volatility calculation

Last thing