so, nitro is using tick data that is hard to come by (historical). i am getting very close to cracking his code...
It depends what you are doing with it. When I traded in the OEX pit at the CBOE, we would trade sp100 options against sp500 futures, putting on a correlation risk called the "one, five". Simply having a program to track the change of the indexes based on underlying stock price changes would have been extremely helpful in predicting the movement of the 1/5 ratio. The specific ratio would matter a lot less, than the predicted change of the ratio. Therefore if you are predicting to within 2 points, given a 1180 index, you are doing great for this purpose. On the other hand, if you are trading baskets, it would not be precise enough.
Hmmm, Do you think this could be done outside the pit without having access to options paper flow? The OEX is dead now with liquidity transferred to the SPX options (perhaps exactly because of this sort of tracking error) as you are almost certainly aware, but let's pretend it wasn't for the sake of my question.
Well, you are suggesting using a mostly ignored market nuance to give your trading strategy a slight edge? Hmmmm...It does appear that you have the skillset to take advantage of this nuance, but there aren't any slamdunks here. The OEX early exercise risk is unique within the industry. The early exercise risk of the "flagship" OEX product plus a missing liquid futures product for hedging combined to chase the order flow from the OEX to the SPX. It is difficult to discuss without knowing your exact strategy, but here are a few tidbits: 1)Use the european style, electronicly traded sp 100 options, the XEO, rather than the American style OEX options. 2)the SP500 correlates to the sp100 at a rate of something like 98%. I have a free correlation tool on one of my websites if you'd like to run some quick numbers. 3)given market conditions, either the small(er)cap (sp500) or large cap (sp100) stocks will have a higher market beta. Therefore, the outright volatility of the SPX will always be a little off from the XEO products--typically the 500 outruns the 100, and thus the SPX vols will be higher. HOWEVER... 4)volatilty CURVES should match each other almost perfectly. Therefore, skew swaps between the products would be a potential trade to look for. As Spu's drop incrementally, MM's buy puts and sell calls, therefore market skew will flatten due to inventory, and vice versa on upmoves. Because of the intense 1/5 risk associated with the skew trades, the skew curve will fluctuate quite a bit more in the XEO than in the SPX. 5)most of the companies trading the OEX/XEO products still adjust the 1/5 ratio manually--usually its done by a guy in the pit who can "feel" the marketplace--(which is BULLSHIT). These guys will adjust either because they put on a position that they need to cover or because they watch the index ratios change on the screen. 6)The index numbers on the screen in the OEX/XEO pit are 20 SECONDS DELAYED. That's not a typo. The futures prices change in realtime because there is money at risk there, rather than just data presentation accuracy of a cash index price. Therefore the opportunity arises in measuring the change in the 1/5 ratio given moves in the underlying stocks, and acting on those changes before the 20 seconds that it takes the pit traders to respond to the screen. If MSFT tanks, it will take the 100 down faster than the 500, resulting in an opportunity for you to buy 100 puts or sell 100 calls in the XEO at a better comparative level. You may be able to buy at or just below the REAL market bid, if you are savvy. Do you feel comfortable discussing your tarding ideas? Or are they super-duper secret?
Jerkstore, Those are all very interesting comments and insights. I am not sure by your inquiry regarding my systems - generally I don't publish original research (or what I believe is original) since in my experience there is nothing to gain from it. My feeling has always been that if one believes they have something, they should throw small amounts of money at it to test in the real world, or if you are very lucky and have access to lots of tick data, test it on that historical data. If you feel there could be some symbiosis by using our respective talents and ideas, perhaps we could work something out.