Model Navigator

Price/Risk Analytics uses current market data along with interest and dividend values to calculate implied volatilities and option model prices. Use the Model Navigator to modify pricing assumptions and recalculate the model price.

Option model computation requires market data for both the option and its underlying. In the case of index options, the market data for the futures reference contract is also required.

To Open the Model Navigator

1. For Mosaic - Click the New Window button in the top left corner and search for Model Navigator

   For Classic TWS - Click the Analytical Tools button across the top of the page and select Model Navigator

2. Add the Model column to any watchlist by right clicking a column and selecting Customize Layout

   

3. Under Available columns on the right hand side, type or select Models and press Add

   

4. Press Apply and OK.

   If you open the Model Navigator from the OptionTrader, it is automatically populated with all loaded option chains.

5. Once you have added the Model column, reopen the Model Navigator window and you will see the current option positions populating.

   

To Display Model or Imp Vol fields on a Quote Monitor

1. Hold your mouse over a Market Data column to display the “+” icon, and click on it to show the column picklist.

2. Expand the Options category and select the Imp. Vol and/or Model fields.

The Imp Vol and Model fields display on the page, and all options contracts on the page now require a model calculation and will appear in the Model Navigator Contract Description pane. The implied volatility calculation is non-linear and may not converge for low vega options. In such cases, the Model Navigator will not provide an implied volatility estimate.

The Model Navigator window comprises three main sections: the Contract Description Pane which shows all available options in an expandable tree, the Volatility Model Pane which displays the volatility curve plots, and the Volatility Curve Table table which lists associated strike prices and implied volatilities.

The left pane shows all available options grouped by ultimate underlying, which can be sorted alphabetically or based on option count order using the Sorting command on the Settings menu. Select the checkbox next to an Last Trading Day to create a volatility model. All volatility models on an underlying appear in the same sub-pane. Each underlying has a unique pane of volatility model(s).

Use the Settings menu to elect not to merge the FUT subtree with the option, and see the whole FOP structure.

To include contracts in the Model Navigator

1. Use the OptionTrader and download a set of option chains

2. Open the IBKR Risk NavigatorSM, or

   Add the contracts to your trading page with the Imp Vol. and/or Model fields displayed.

   

   1 - Underlying Asset

   2 - Check expiries to create Volatility Models. Multiple volatility models on a single underlying are shown in the same pane.

   3 - Time to expiration

   4 - Forward Value Dividend

   5 - Annual Interest Rate

   6 - Available options on the underlying. Click the "+" to view all options. Expand the expiries to view details. Check an expiry to display it's Volatility Model.

Volatility Models are displayed for all checked contracts in the center pane of the Model Navigator. The Volatility Model pane includes:

• Price Offset - optional. Offset the price of the underlying for selected options, by an absolute value or a percent of the current price.

• Volatility Curve Plot - Shows the volatility profile as a function of the strike price. You can manually edit a plot by right-clicking and choosing Edit.

• The horizontal axis is the strike price, the vertical axis is the volatility.

• Risk Navigator calculates the implied volatility for each option in a class.

• The blue and red dots show implied volatility derived from the market data for calls and puts, respectively. Dark blue/dark red indicates a half quote call/put (either just the bid or just the ask).

• Volatility knots calculated from the option bid/ask include a representational “error bar” to indicate the error range of the calculation. This range is specified numerically in the mouse-over help, for example “+/- 0.008.” If the volatility is not calculated using bid/ask (for example, a half quote call/put) the error range is not displayed.

• If there is no bid/no ask, the volatility is calculated from the previous closing price indicated by an open circle.

• The average or close implied volatilities are fitted to a parabola, vs. the strike price. The fit is weighted by the vega of each option, which means that the curve is constrained to be closest to the implied volatilities for the options that have the most vega, i.e. whose option price changes the most per unit change in the option's volatility.

• To see details for a given implied volatility point, hold your mouse cursor over the point. The system will display the option right, strike price implied volatility and error range.

The volatility curve table reflects the data in the plot. To add IV (Manual) entries, use the Edit menu to select the profile to edit, or right-click in a plot and select Edit. Both the volatility plot and table become editable. In the Manual column, double-click the implied volatility at a strike price and enter a new value.

You may select the Last Trading Day from the drop-down list, if you have multiple contracts selected for display. Data in the table reflects the selected contract.

By default, the Model Navigator’s sophisticated option model calculation engine uses the values in the plot along with the calculated interest rate, dividends, underlying price and other parameters, to calculate the Model price. If you prefer to calculate the model price using the pricing assumptions reflected in an edited plot, you must apply the changes to your plot and leave it in Edit mode. Any expiry that has a volatility curve plot in Edit mode will use this profile in the calculation of the Model price and Implied Volatility.

You can also modify the Interest Rates and Dividend Schedule, and specify that these modified pricing assumptions be used in the Model Price calculations.

You can modify the interest rate by entering values in the Manual column of the Interest Rate Navigator.

To Open the Interest Rate Navigator

1. From the top-level Edit menu, select Interest Rate.

   

2. There are two interest rate columns, Forward Rate (Auto) and Forward Rate (Manual). The Auto column displays the U.S. default rate. The Manual column initially displays the U.S. rate (rather than an empty field), but the value is editable.

To Edit Interest Rates

1. Select the Manual radio button to make the column of manual rates editable.

2. Double-click a rate in the Manual column and enter a new rate.

3. Click Apply to save your changes.

To have the model calculations use your manual value, ensure that the Manual radio button is selected.

• To change the number of dates/rates displayed, right-click in the table and select Add new to create a blank editable row at the top of the table, or Remove Selected to delete the selected row.

• To globally apply an offset value or percent to all manual entries, enter an offset amount in the Interest Rate Offset field, and select the Percent or Absolute value radio button.

• The option model is calculated using the interest rate you define by selecting the Auto or Manual radio buttons.

• The annual percentage rate is a simple time deposit rate using the bank year calendar (360 days/year).

• The system converts the interest rate table to a set of exponential interest rates that apply on a spot-to-date basis for each expiry in a class. This is displayed as the IR value in the Contract Description Pane when you expand an expiry.

• The interest rate table applies across all option classes. When you change the interest rate in one option class, the change is applied to all option classes.

In addition to letting you manually set the dividend schedule, the Dividend Schedule Navigator also provides an automatic "best guess" dividend payment schedule based on historical data for that asset.

To Open the Dividend Schedule Navigator

1. From the top-level Edit menu, select Dividend Schedule.

   

2. There are two dividend, Dividend (Auto) and Dividend (Manual). The Auto column displays the "best guess" dividend payment schedule based on historical data. The Manual column shows the same values (rather than an empty column), but the value is editable.

To Edit Dividends

1. Select the Manual radio button to make the manual column editable.

2. Double-click a dividend in the Manual column and enter a new value.

3. Click Apply to save your changes.

   • To change the number of dividends displayed, right-click in the table and select Add new to create a blank editable row at the top of the table, or Remove Selected to delete the selected row.

   • To globally apply an offset value or percent to all manual entries, enter an offset amount in the Dividend Offset field, and select the Percent or Absolute value radio button.

   • The option model is calculated using the dividend schedule you specify by selecting the Auto or Manual radio buttons.

Adjust the underlying yield so that the stock lending rate is reflected in the model calculation using the Lending Yield table. You will be able to edit the yield for any underlyings for which you have an option displayed on the Quote Monitor. You must also have the Model and/or Imp Vol field displayed on the Quote Monitor to see entries in the Model Navigator.

To Open the Dividend Schedule Navigator

1. From the Analytical Tools menu, select Model Navigator.

2. Within the navigator, select the Dividend tab.

   

3. The white Lending Yield fields are editable, and changes to the yield are reflected in the left page Yield field.

To Edit the Lending Yield

1. Set the time in days when the rate will begin to decrease linearly with time.

2. Set the rate in basis points.

3. Set the time in days when the rate will decrease to zero.

4. Click Apply to incorporate the edited lending yield in the model calculation.

Edit mode allows you to create a new volatility curve plot for an expiry using a new set of volatility knots. You can use this edited plot to calculate model prices and implied volatilities in TWS, and save your model to use in comparison to Model Navigator-calculated plots.

By default, the Model Navigator’s sophisticated option model calculation engine uses the values in the plot along with the calculated interest rate, dividends, underlying price and other parameters, to calculate the Model price. If you prefer to calculate the model price using the pricing assumptions reflected in an edited plot, you must apply the changes to your plot and leave it in Edit mode. Any expiry that has a volatility curve plot in Edit mode will use this profile in the calculation of the Model price and Implied Volatility.

To Edit a Volatility Curve Plot

1. Right-click a volatility curve plot and select Edit (Manual).

   

2. Edit mode displays a series of brown volatility knots along the bottom of the plot. Grab and move these knots up and down to create a volatility profile that you think more accurately represents the implied volatility data. Applied changes to the plot are reflected in the Manual column of the expiry’s Volatility Curve table.

   • To see the values for the manual volatility curve reflected in the Volatility Curve table, be sure that you have selected the expiry whose plot you are editing from the expiry dropdown list at the top of the table.

   • The table and plot work in both directions. You can modify the implied volatility of a knot in the plot by changing the corresponding value in the table.

   • You can add and delete brown volatility knots in edit mode. To add a knot, point to where you would like to add it and double-click. To delete a knot, select it and double-click.

   • Click Refit from the right-click menu to refit the manual volatility knots to the calculated volatility curve.

   Compare volatility changes by saving and viewing historical profiles from using the Model History command.

To Save a Model

1. From the right-click menu, select Save Model.

   

2. Click Exit Edit to close editing mode.

3. The model is saved using the current date and time.

To Display a Model

1. From the right-click menu within a plot, select Model History.

   

2. Choose the historical model based on the date/time name.

3. Select Show.

4. The saved model displays as a grey curve inside the real-time colored plot. You can also display saved models under the Expiry in the left Contract Description pane.

Model prices are displayed in color on the trading screen to help you see at a glance where they fall in relation to the bid and ask prices. The color bar below shows the range within which model prices may fall. Model price colors update with the underlying last price.

You must have the Model field displayed on your trading page to see the model price.

To Show a Field in TWS

Hold your mouse over any field until the "+" and "x" icons appear. Click the "+ " to display the list of available fields. Note that if you hover your mouse over an order field, all available order fields are displayed. If you hover over a market data field, all available market date fields are displayed.

Note: Implied volatilities (in the Imp. Vol column) are always displayed in either pink or white. If either the Model or Imp Vol(%) values are displayed in white, it means the model hasn't calculated any prices or implied volatilities.