From the November 01, 2008 issue of Futures Magazine • Subscribe!

Calculating and using the CPFL

When data for OEX Index options was first offered in early 1983, the only practical means of massaging the numbers was to manually collect it from print publications. Daily statistics could be collected from the Wall Street Journal and weekly data from Barron’s. Now, however, with such programs as TradeStation’s RadarScreen, the sophisticated user can create selected arrays of call and put prices with volume. Formulas can then be applied to the collected data and automatically plotted.

For more aggressive intraday traders it also is possible to collect data on much smaller cycles like five or 15-minute time frames. The enhanced data feeds now offered on the Internet can substantially enhance the overall capabilities and effect of the CPFL on a trader’s analytical results.

While the early CPFL was plotted with a trailing 40-week moving average to achieve buy and sell crossover entry points, history has proven that the best way to use the cumulative data is as a divergence tool against an underlying index. In the case of OEX calls and puts, the resulting CPFL flow can be plotted versus the underlying OEX index. Flow lines can also be created for the S&P 500 index, the Russell 2000, or any stock, or futures contract with available options data. With electronic data collection, the use of multiple cycles (for example: five-minute, 15-minute, 60-minute, daily, and weekly time frames) can give the analyst/trader a much better feel for the inherent strength or weakness of each options cycle relative to its underlying instrument.

Once data is collected, calculating the CPFL is relatively easy. First, the volume of each call option is multiplied by its closing price. The results are summed. The procedure is then repeated for all put options. The two sums are netted (calls product minus puts product) and are then plotted via a cumulative flow line, or advance/decline line.

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