CBOE Index Options number of Flips (day trades): In-the-Money versus Out-of-the-Money

Part 10: Exchange Errors. In-the-Money (IM) / Out-of-the-Money (OM) Flips

Did you know that there are errors in the volume data reported by the exchange? Well, at the end of each trading day the volume is sent out with the quotation but it is revised overnight by the exchange. The exchange does its job of matching trades overnight and then contacts brokerage firms and market makers in the morning to reconcile these discrepancies before the market opens. That's when you get a call from your broker in the morning, there's a problem. But after that process of order matching is done the exchange posts the open interest for the previous day. This is the correct figure but the volume figure isn't adjusted nor is it revised. The new volume figure isn't retransmitted to vendors simply because the system isn't designed to revise historical data. So the open interest figure is the accurate figure and the revised volume figures aren't made available to data vendors.

Below is a matrix of graphs for the five index options. As mentioned in the table of contents, option data is dense and it produces a an extraordinary number of combinations. As an example, the following matrix of graphs illustrates this complexity. Each column represents one of the five indices and each row compares the open interest of the IM/OM options is various combinations.

Row 1 compares the number of exchange errors of IM calls to OM calls.
Row 2 compares the number of exchange errors of IM puts to OM puts.
Row 3 compares the number of exchange errors of OM calls to puts.
Row 4 compares the number of exchange errors of IM calls to puts.
Row 5 compares the number of exchange errors of total IM to OM options.
Row 6 compares the number of exchange errors value of puts to calls.

As you can see, the number of exchange errors is plotted, but we'll leave it you to find any correlations. These graphs were surprising in that we didn't expect the number of errors to be so high despite the fact that they represent a relatively low percentage of total trading volume. It is interesting to note that these errors do exist and that they are not discussed anywhere else on the web.

Basically, notice when IM and OM options differ and when their they have the same reaction. These responses will give you a clue as to how identify turning points in the market.

	SPX	NDX	OEX	DJX	XAU
Row 1
Row 2
Row 3
Row 4
Row 5
Row 6
Row 7