Guy Cohen, the author of several books on options and CEO of FlagTrader.com, has developed a new indicator—OVI (Options Volatility Indicator)—for stock traders. The indicator is proprietary, so naturally The Insider Edge: How to Follow the Insiders for Windfall Profits (Wiley, 2012) is in large part a marketing tool. There are, however, two upsides for those who are cheap. First, readers who go to the website linked to the book can view Cohen’s top twelve OVI charts for free. Second, even though mighty few readers will have the extensive data base necessary to reverse engineer the indicator, the principle behind the indicator is relatively straightforward. Imaginative traders may be able to figure out ways to implement it, in what would have to be a dumbed-down form, with readily available data. Of course, those who are truly enchanted can sign up for Cohen’s subscription services. They seem to be reasonably priced, although I can’t pass judgment on their value.
The OVI is an oscillator that moves between -1 and +1 in accordance with the buying and selling of stock options at multiple but not all strikes and some but not all expirations. “[N]ot all of the options for one stock are going to be relevant to the sentiment of investors toward the stock in question, so the art is to know which options are relevant for each stock. This is part of the secret sauce.” (p. 59) The oscillator has three components: option volume, open interest, and implied volatility. It is “closely correlated with medium-term trending price-action as it tends to be roughly in line with the major trend of the markets. The OVI is especially useful in sideways markets where it can often indicate the most probable direction of the breakout.” (p. 64) It is, Cohen claims, a leading indicator.
The OVI is best used with “the most important chart patterns in the stock market: flags and channel breakouts.” (p. 109) Cohen discusses these patterns at some length, explaining among other things how to avoid market manipulation by placing entry orders “away from the herd of amateurs.” (p. 133)
Cohen offers the reader a trading plan, complete with stops and profit targets, that incorporates chart patterns and his OVI indicator. In the final analysis, however, he is selling his software services. I wish him well.