How to Use StreetSmart Edge Tools

September 15, 2011

Randy Frederick
Managing Director of Trading and Derivatives, Schwab Center for Financial Research

As an avid trader, I've found StreetSmart Edge to be an amazing platform. In the second part of this two-part series, we'll take another look at what makes this trading platform unique.

Here, we'll explore how to use these StreetSmart Edge features:

Columns & settings
Level 2 option quotes
Time & sales
Historical option price charts
Volatility charts
Ratio spreads
Position greeks
Margin by position

Columns & settings

Each trader uses different information to make his/her trading decisions. StreetSmart Edge gives you the flexibility to decide exactly which information you want to display when looking at options chains.

For example, you can choose among three different theoretical pricing models (Black-Scholes, Cox, Ross-Rubinstein or Barone-Adesi-Whaley), modify the default T-bill interest rate, and even decide which Greek calculations you want to watch. You can even pick the order in which they are displayed.

To specify what type of information you'd like displayed, go to the Options Chain screen, select the Action button in the middle of the screen, and then click on "Columns & Settings."

Manage Columns & Settings

Source: StreetSmart Edge.

Level 2 option quotes

Level 2 option quotes are real-time, streaming quotes from the nine option exchanges. Here, you'll find the bid, ask and size for a particular option on each exchange.

Quotes are arranged so the inside market (highest bid and lowest ask) is listed at the top and price tiers are color coded as shown in the table below.

Reviewing Level 2 Option Quotes

Level 2 option quotes also include not only the consolidated volume …

… but also the volume on each individual exchange.

To find out these details, click on the small arrow next to the consolidated quote on any option quote chain screen.

Time & sales

The streaming time & sales window displays how many option contracts have traded, as well as the time, price and exchange where they traded. This could be valuable information if you enter a very large order because the size of recently executed orders can give you a good indication whether or not the exchanges have been routinely filling orders that are larger than the displayed size.

Streaming Time & Sales Window

Source: StreetSmart Edge.

Based on the following color codes, you'll be able to tell if each trade occurred at, between or outside the bid and ask price:

The time & sales window also identifies orders executed as part of a multi-leg strategy, like the spread order identified by the red arrow above. Multi-leg orders always get priority over single-leg orders at the same price, even if they arrive at the exchange at a later time. Additionally, cancelled and out-of-sequence orders are often posted to the tape long after they execute.

The available option order condition codes are:

• OSEQ: Trade reported out of sequence
• AUTO: Trade was executed using the exchange auto-execution system
• SPRD: Trade was executed as part of a spread order
• BWRT: Trade was executed as part of a buy-write order
• STDL: Trade was executed as part of a straddle order
• CNCL: Trade reported was cancelled

Historical option price charts

To see a daily closing price chart like the one below, right-click on an option symbol within an option chain.

Notice how the option price is displayed as a line on top of the underlying security, so that you can see relative movement.

Option Price Charts

Symbols and market data shown are for illustrative purposes only.
Source: StreetSmart Edge.

As this chart is not interactive, you can display the data in numerical form for either nine months or the life of the option contract, whichever is greater. This information can be very useful when analyzing longer-term trends.

Historical Option Closing Prices

Source: StreetSmart Edge.

Volatility charts

StreetSmart Edge charting studies include historical volatility and implied volatility (calls, puts or an average of both). By comparing the implied volatility to the historical volatility, you can see whether the current (implied volatility) level is unusually high or low. Because implied volatility is one of many tools traders use to forecast future stock movements, this type of information may help you determine if calls, puts or both are currently priced above or below historical averages, relative to the price and volatility of the underlying security.

The chart below shows a separate study window at the bottom displaying the 20-period historical volatility (blue line) and the call/put average implied volatility (yellow line) for a period of about six months. While it's quite common for implied volatility to spike above the historical volatility just before an earnings report (red circles) it is less common for it to occur at other times (green circles). Additionally, it's possible for options to be priced somewhat low relative to the historical volatility of the stock (pink circles).

As you can see these spikes and dips are often relatively short-lived, and that can create opportunities. When implied volatilities on options are lower than normal, option prices are usually considered relatively cheap, creating potential opportunities for option buyers. When the implied volatilities are relatively high, it may create opportunities for option sellers.

Using Volatility Charts

Source: StreetSmart Edge.

Ratio spreads

There are two main types of ratio spreads: 1x2 Ratio Spreads and 1x2 Ratio Backspreads. Both types of spreads involving call options are typically used when you are bullish, but they differ by your degree of bullishness. Ratio call backspreads are more bullish than ratio call spreads.

Similarly, both types of spreads involving put options are typically used when you are bearish, but they too differ by your degree of bearishness. Ratio put backspreads are more bearish than ratio put spreads.

Here's their basic structure:

• Ratio call spread: Long one call at a lower strike, short two calls at a higher strike. In other words, it's comprised of one debit call spread and one naked (uncovered) call option.
• Ratio put spread: Long one put at a higher strike, short two puts at a lower strike. In other words, it's comprised of one debit put spread and one naked put option.
• Ratio call backspread: Short one call at a lower strike, long two calls at a higher strike. In other words, it's comprised of one credit call spread and one long call option.
• Ratio put backspread: Short one put at a higher strike, long two puts at a lower strike. In other words, it's comprised of one credit put spread and one long put option.

All of these types of spreads can be entered in the trading window from the ratio spread screen, and like many of the other option trading screens, (as shown below) once you select the spread you're interested in, the max gain, break even and max loss are automatically calculated for you.

Ratio Spread Screen

Stock and option symbols and price and volume data are shown for illustrative purposes only.
Source: StreetSmart Edge

Position greeks

StreetSmart Edge allows you to look at aggregate greek valuations, sorted by underlying security. This is sometimes referred to as position greeks, and you can activate these columns on the Positions tab of your Account Details window.

Stock and option symbols and price and volume data are shown for illustrative purposes only.
Source: StreetSmart Edge.

As an option trader it is sometimes helpful to think of a stock position as an option with a delta of 1.00 and a gamma, theta, vega and rho of 0.00; meaning it always moves dollar for dollar with itself, and it is not directly affected by time decay, volatility or interest rates. Call options, by contrast, usually have a delta somewhere between 0.00 and 1.00 (unless they are very deep in-the-money and/or very close to expiration) and their valuations are affected by the amount they are in or out-of-the money, time decay, changes in implied volatility and even interest rates to a small degree.

It's possible to view the net greek values for a strategy such as a covered call, and determine how much the value of your net position (long stock/short call) will affect your account, as any of these variables change. As shown in the red box in the covered call example above, with a 1.00 delta, you can see that the 100 share stock position would increase the value of the account by $100 if the stock increases in price by $1.00 per share. However, since the covered (short) call position is in-the-money by $2.99 it has a relatively high delta (.89) and therefore decreases the value of the account by $89.58. As a result the estimated net increase to the account for the next $1.00 increase in the price of UHH is only $10.42. Similarly, as shown in the blue box, theta shows that at the moment, the account would theoretically gain about $2.08 in value as expiration approaches, if all other factors remain unchanged.

Margin by position

Margin by position, a new feature released in July 2011, will help you see how your uncovered (naked) and multi-leg option strategies are being paired, as well as the margin requirement (if any) of those paired strategies. Like position greeks, this feature can be activated in the Positions tab of the Account Details window. If a strategy has a margin requirement, as in the GOOG strangle (a type of straddle) example below (blue box), the position will state the strategy and the margin requirement. If a strategy has no requirement as in the JNJ debit spread example (red box) or the F buy/write example below (green box), the position will simply state the strategy. Note that when a covered call is in the money, it reduces (pegs) the amount that can be borrowed against the underlying stock. That amount will also be reflected as in the F example below.

Margin by Position Example

Stock and option symbols and price and volume data are shown for illustrative purposes only.
Source: StreetSmart Edge.

Even for complex strategies where some of the contracts are part of a multi-leg strategy and some are not, as in the KO ratio spread example below (pink box), it is easy to see how your positions are paired up and the margin requirement of that position.

Ratio Spread Example

Stock and option symbols and price and volume data are shown for illustrative purposes only.
Source: StreetSmart Edge.

To learn more about StreetSmart Edge, please login to Schwab.com and select Trade > Trading Tools.

I hope you find this information about StreetSmart Edge helpful and it encourages you to give it a try. For more information please contact a Schwab Trading Specialist at 800-435-9050.

Good luck and good trading.