User Guide
The SaberSystem provides unique and critical information about the future price direction of stocks and options. The information is derived from market prices that reflect a stock’s characteristics. In that regard, the SaberSystem complements the existing market information and must be interpreted in that light. The interpretation is critical for trading.
The same price indicator in the SaberSystem might
have a greater or lesser indicative significance,
depending on the stock’s characteristics.
To use the SaberSystem effectively, you must use reliable input data and correctly interpret the results (coming soon).
Input Data
Price is the most critical input element. A reliable price is an executable price: a bid that you could sell at and an asked that you could buy for. Only actively traded stocks – with daily volume of hundreds of thousands to millions of shares – meet this condition. Such stocks also have the 4 actively traded options that the SaberSystem requires.
Actively traded stocks could be institutional or “in play.” Institutional stocks are widely held by mutual and pension funds with long investment horizon. They tend to be less volatile than “in play” stocks – the “hot” stocks transiently made so by day traders and sometimes hedge funds with short trading horizon. The distinction matters, as we will see. (The system provides a list.)
Prices must also be concurrent, i.e., they must correspond to the same point in time. A stock price from, say, 10:00 in the morning of the trading day and the “corresponding” options prices from the previous night’s close would produce unreliable results. The SaberSystem will alert you to bad prices and, if need be, prevent you from proceeding.
Occasionally, concurrent prices could become
inconsistent. These are arbitrage opportunities. The
system will alert you to them and point to risk
free trading strategies.
The following is the description of the input fields:
Symbol
Currently inactive. Reserved for live data feed.
When activated,
this field would take the stock symbol
and display all active options on the
stock for the givenexpiration date.
Price
Current stock price in USD in dd.cc format.
In actively traded stocks, bid/asked spread is few pennies so it
matters little whether the bid or the asked price is used. The best
practice is using the mid point of the two prices,
especially during trading hours. (The closing bid or asked might be artificially
widened. See Interpreting the Results for details.)
Interest
Annual interest rate in percentage points per year, so 4.75, for example, for 4.75%.
The default value is the yield of 1-month T-bill, currently at 4.75%. The value is updated
when the rates change. You could also override it.
The lower the interest rate, the lesser its impact on option prices. This is especially
true for short-dated options, with only a few months to expirations.
Strike 1
Fields under Strike 1 and Strike 2 pertain to the same information, only for two different strikes.
An option is uniquely defined by its type (put or call), strike price and expiration date.
Currently, the expiration date of the options in the SaberSystem must be less than 35 days or less. This
requirement limits the options to the current expiration cycle – except in the last week of the cycle when the
next cycle also falls within the 35-day range. The expiration day option will soon expand to 1 year.
-
Expiration Day:
- Self explanatory, defined by:
-
Month:
- The month the option expires. Defaults to the near expiration month. Use drop down menu to override.
- Day:
- The day option expires. The technical expiration is on the 3rd Saturday of the expiration month. In practice, that translates to the 3rd Friday of the expiration month. That is default value in the system. Use drop down menu for alternatives values or type.
- Year:
- The year the option expires. Use drop down menu for alternatives or type.
- Days to Expiration:
- Number of calendar days to the expiration. The system automatically calculates this field as the number of days between “today” and the expiration date. The system does not count the last day of expiration. So for the exchange traded option, the system will show zero day to expiration.
- Strike:
- Strike price of the option in USD in dd.cc format.
- Call:
- The call price corresponding to the strike price, in USD in dd.cc format.
- Put:
- The put price corresponding to the strike price in USD in dd.cc format.
The bid/asked spread in options could be as high as 20 cents, especially when the stock
is volatile. This is due to the 5-cent minimum tick in the options market. Starting January 2007,
the exchanges must gradually adopt a decimal system, a move that is certain to reduce the spreads.
Always make Strike 1 the at-the-money strike. This is the strike price where the difference
between the call and put price is the smallest.
Strike 2
Same as Strike 1, except that all values correspond to Strike 2.
If the stock price is more than Strike 1, then Strike 2 should be the one immediately above
the at-the-money strike. If the stock price is below the at-the-money strike,the second
strike should be the one immediately below the at-the-money strike.
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