OMNIEQ Credit Spread Scanner

About

OMNIEQ is a real-time credit spread scanner and screener. Throughout the market session it analyzes the options of all underlying US stocks, indicies, and ETFs to calculate the profitability of the vertical and diagonal credit spreads which they could form. It eliminates the candidates without a positive expected value or reasonable risk to reward ratio, and then ranks each spread to ensure the best opportunities are the most visible to you within the tool.

In addition, it features a historical data archive for every equity and option, symbol directory and comparison tool for every North American exchange, and option chains with end of day data for all applicable symbols.

Concept

Credit spread trading is a defined risk strategy which allows traders to collect premium up front and profit from a sideways, favorable, or slightly unfavorable movement in an underlying equity.

Trading a credit spread is akin to selling an insurance policy against the movement of an underlying in one direction.

Like an insurance underwriter, the trader takes into consideration the probability of the undesirable insurable event occurring and the maximum potential loss it could incur. For credit spreads, this event is the short leg of the spread expiring ITM and being exercised.

The premium is collected up front by the trader, the insurer, and the full amount is retained if the short leg expires OTM and the position isn't closed to take profits early.

In order to determine the amount of premium that needs to be charged for a policy to be profitable in the long term, an underwriter will calculate how often a claim will be made, and how much will need to be paid out. This calculation is based on the value of the insurable and an estimated risk derived from statistics of similar prior events.

Employing the same methodology, OMNIEQ scans the entire market and evaluates all possible combinations of each underlying's options. The credit spreads which offer a positive expected value by providing enough premium to compensate for their eventual losses are displayed.

Probability

OMNIEQ's probability of success calculation, or win rate, is equal to (1 - (trend adjustment coefficient * absolute value of the short leg's delta)). Using delta alone as a proxy for probability provides an approximation of the chance that an option will expire in the money. However, it assumes random movement in the underlying without influence from the market's trend, causing the probability to be over or underestimated depending on the option's type.

To compensate for this statistical shortcoming, OMNIEQ leverages its historical data archives. For every previously liquid and now expired option, the difference between the probability implied by delta throughout its lifetime and its moneyness at expiration is measured. The results are grouped by type and delta, and then averaged to create a trend adjustment coefficient for each.

For example:

Over the sample period from the latest calculation, 0.40 delta CALL options expired in the money on average 39.5% of the time. The 40% chance implied by the delta overestimated the actual outcomes and should have been adjusted by a coefficient of 0.988 to be a more accurate reflection of probability.

Inversely, 0.40 delta PUT options expired in the money on average 41.76% of the time. The delta underestimated the probability, and should have be adjusted by a coefficient of 1.044.

The disparity in coefficients reflects, and is determined by, the predominant trend of the market during the tested period.

Delta underestimating probability for puts and overestimating it for calls is indicative of a bearish market trend, and the opposite would indicate bullishness.

The intention of this process is to programmatically answer the question, "historically, how accurate is delta as a prediction of an option expiring in the money?"

This calculation reflects chances for the time of expiration only, and not the probability of an option touching the money at least once before expiration and possibly being exercised. It also doesn't account for the effect of possible catalytic events occurring before expiration, such as earnings reports or unexpected news.

Usage

First, select the expiration date you wish to view credit spreads for. The date with the most spreads is selected by default. For diagonal spreads, this date is the front month's expiration. Available selections vary throughout the market session per spread availability.

OMNIEQ Premium members can also select Combined to view and screen all available spreads at once, and keep track of all spreads for chosen underlyings in their Watchlist.

Below the expiration selections are the spread filters. Click a filter category to expand it and then apply as few or many constraints as you wish by entering or selecting a value. Click the Apply button after making changes to update the results, or Reset to clear all constraints.

Custom scans can be saved to and loaded from one of the 5 Presets.

To sort results by a column, click it's table header to select it and toggle between descending and ascending order.

Hovering over the relative times in the Updated column will reveal specifically when, converted to your local time, the spread was updated. Clicking will pin the time in place.

The details of the two options which comprise each credit spread, including their greeks, can be viewed by clicking the Legs expander found below each ticker.

If a ticker has multiple spreads available for a selected expiration date, only the top level sorted spread will be visible. The spreads that follow are collapsed by default and can be revealed by clicking the adjacent more expander. By default, the Spreads Per Ticker constraint found in the Spread filter is set to 10.

The current price and day's volume of the underlying is displayed below the strikes. Premium members can select underlyings to add to their watchlist by clicking the Watch toggle.

Columns

Rank: A scoring of value based on the spread's probability of success, risk to reward ratio, I.V.P., and I.V. Skew Rank's directional agreeability with the strategy.

Ticker: The symbol of the spread's underlying equity. Click to view its fundamentals summary, historical prices, and option chain.

Type: The type of credit spread, either a CALL or PUT. Both remain profitable during sideways movement in the underlying, but bearish a move will improve the position of a credit call spread, and a bullish move will improve a credit put spread's position.

(E.V.) Expected Value: The average profit retained per spread after accounting for eventual losses. Equal to (credit received * probability) - (maximum loss * (1 - probability)). This calculation assumes each trade is held through expiration without taking profits early or further hedging losses.

(Prob.) Probability: The chance of the short leg expiring OTM, resulting in the spread retaining its maximum profit. Equal to (1 - (trend adjustment coefficient * absolute value of the short leg's delta)).

Credit: The credit received and maximum possible profit of a vertical spread. Equal to (amount received from selling the short leg) - (amount paid for the hedging long leg). The full profit is retained if the short leg expires OTM.

Max. Loss: The maximum possible loss of the spread, and the amount of existing capital needed to trade it. Equal to (strike width of the legs * 100) - (credit received). Incurred if the short leg expires ITM and is exercised.

Short Strike: The strike price of the spread's short leg option.

Long Strike: The strike price of the spread's hedging long leg option.

Short Bid: The bid price of the option to be sold to create the spread's short leg.

Long Ask: The ask price of option to be bought to create the spread's long leg.

(I.V.R.) Implied Volatility Rank: The underlying's current IV relative to the highest and lowest levels over the past three calendar months..

(I.V.P.) Implied Volatility Percentile: The percentage of days over the past three calendar months where the underlying had an IV lower than the current level.

(Skew Rank) Implied Volatility Skew Rank: The underlying's current I.V. skew rank for the expiration date relative to the highest and lowest levels over the past three calendar months. This is a measure of directional sentiment derived from the respective chain's ratio of PUT to CALL I.V. (S. = Slightly, V. = Very)

(Qty.) Quantity: The number of spreads available at the displayed bid and ask prices. Equal to the smallest bid or ask lot size for the respective legs.

Updated: The time since the underlying was analyzed, representing the age of the data. Refresh the page periodically to prevent staleness.

Expiration: The MM/DD expiration date(s) of the spread's legs and the strategy, either vertical or diagonal. If diagonal, the expirations respresent the short and long legs of the spread respectively.

Position Size

Keeping the relative size of each position small is a crucial aspect of this trading strategy due to the iterative nature of statistics. The outcome of any spread isn't guaranteed, and smaller trades across more underlyings will reduce the impact of anomalies on returns compared to larger positions with less diversification.

Trade Entry

The scanner's displayed bid and ask values for a spread represent the market prices of the respective legs, and it may be possible to improve your entry position by trading them with limit orders. If trading a spread's options individually, buy the long leg before selling the short one to avoid being exposed to an unhedged position.

Trade Management

The profit and loss values for each spread are listed as maximums because positions can be closed early or hedged further. Profits from a winning trade can be locked in by purchasing back and closing the short leg, and losses can be further hedged by mirroring the trade with a spread of the opposite type.

Commissions

Since trade and contract commissions vary among brokers, the calculations for each spread do not take them into account. To factor in a commission, deduct it from the expected value and credit received, and then add it to the maximum loss.