I'm progressing, all too slowly, on a site that aims to show real-time numbers for options that are listed on the CBOE. Most of the instantaneous numbers are all set. Now I'm going to pay attention to some of the trends in those numbers: option price, volume, put-call ratio, open interest, and similar.

One of the sets of values I want to show for each option is MACD of price (others, too, but my question is about price).

EDIT: @Tal Fishman -- I want to show MACD because I understand that convergence/divergence of fast and slow EMA is helpful to a guy trying to decide whether or not to buy/sell an option. Am I quite wrong? SHould I abandon MACD and show something else? If so, what is that something else?

I wonder how I should calculate the EMAs that contribute to the MACD for option price:

Is it more useful, appropriate, and usual to calculate EMA based on the price of the underlying? Or on the price of the option itself?

If the question betrays my naïvté, well, so much the better: I welcome comments that tell me how I'm wrong wrong wrong!

Thanks so much!

The site is http://www.sellmycalls.com/cgi-bin/chain

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    $\begingroup$ I think it depends on what is the idea behind wanting to show MACD. BTW, the site seems not to work for me, or at least doesn't do much. $\endgroup$ – Tal Fishman Sep 19 '11 at 15:50
  • $\begingroup$ @Louis Marascio -- thanks for the edit; much better now. $\endgroup$ – Pete Wilson Sep 19 '11 at 21:05
  • $\begingroup$ @Tal Fishman -- yes, I managed to insert a bug in the server code just before I left for the day. Sorry. $\endgroup$ – Pete Wilson Sep 19 '11 at 21:19

Smoothing the underlying's price movements would decrease the volatility of the underlying, which in turn would lower the computed Black-Scholes option premium. This probably isn't the effect you want. (I also don't get the impression you're displaying fair value anyway, just the market price.) So the EMA must be applied to the option's price.

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I think concepts like MACD should typically be applied to underlying price rather than the option price. Option returns are not what Meucci calls an "invariant," and concepts such as moving averages need to be applied to (sums of) invariants. What I meant in my comment, though, is that if your users will be using options to make volatility bets, then a MACD of implied volatility could make sense, but I've never seen this.

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  • $\begingroup$ As a mere software engineer off the street, I see that I am way over my head and need to learn to swim in these confused and confusing waters. Perhaps I first have to learn the precise technical meaning of "invariant," intuitively clear in lay language but not so (as it seems to me) in this context. Thanks so much for the very interesting Meucci reference, a sea monster I'll have to wrestle with for a few days. $\endgroup$ – Pete Wilson Sep 20 '11 at 11:52
  • $\begingroup$ That may not be entirely necessary. I just use his article to back up my point about which EMA makes more sense. $\endgroup$ – Tal Fishman Sep 20 '11 at 12:03
  • $\begingroup$ Sure, sure, I understand. Still, the article is interesting and worthwhile spending time on. $\endgroup$ – Pete Wilson Sep 20 '11 at 12:33
  • $\begingroup$ Site is working today. It cured itself. Scary! sellmycalls.com/cgi-bin/chain $\endgroup$ – Pete Wilson Sep 20 '11 at 13:10

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