From time to time, I get PMs asking me to explain what this all means. Lets take a couple of entries from yesterday:
05/09/2012 09:39:18 OFV = 1343.88 Sell to Open at 1347.4 Spread = 2.5
05/09/2012 10:31:31 OFV = 1355.41 Buy to Close SPX at 1355.74 Spread = 2.5
05/09/2012 11:06:54 OFV = 1359.55 Buy to Open at 1356.27 Spread = 3
05/09/2012 11:50:41 OFV = 1354.63 Sell to Close SPX at 1354.62 Spread = 2.5
So the firtst column is time and is obvious. OFV is a model based on top of a FAIR VALUE "FV" model for the SP500. If you look back in this thread, you will see "FV" figures for the SP, which stands currently around 1200 SPX. I no longer post this number since it takes years to play out. The added "O" in front of FV is there for historical reasons, in that it stands for "Optimistic". This is a model that mostly correctly accounts for the added inflationary pressures on SPX due to the FED. On top of that, the model is self-calibrating during the day.
The next column are entries and is obvious. The last value is the Spread. This is how much edge (difference) above or below SPX by OFV we need in order to enter. It is driven by the level of VIX. The biggest the spread value can take is 3, and the smallest is 1.5. So if VIX is below 20, the model needs a spread of three between OFV and SPX to enter. If the spread between SPX and OFV falls back within a certain threshold (about .5 and is hard wired in the program), the trade is closed. The spread trigger goes lower the higher VIX goes, with a VIX above 30 the spread goes to its lowest value of 1.5.
So take the first line above. That means that at 9:39:18 CT, the OFV was at 1343.88. The SPX was at 1347.40. Since VIX was >20 at that time, the Spread needs to be >= +/- 2.5 ( as the last column shows) in order to be considered edge . Well, since 1347.40 - 1343.88 >= 2.5, and OFV is below SPX, we go short. On the second line, the spread between SPX and OFV converges (to within .5), so we close the trade (for a loss
). And so on...