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>Do you really use the option's closing price published in the newspaper?
No, I was being cute. Substitute "on your quote screen" for "in the
newspaper" at your discretion.
>My understanding is that options' closing prices do not have anywhere near
>the importance that stocks or futures closing prices have.
Well, that depends whether you're trading options or not. I consider the
close important, but I define it as follows.
For futures options, the data I get shows movement in the "close" even if
the option did not trade at all..or hasn't for many days. Therefore the
"close" I get seems to reflect current supply/demand even if no trade
occured.
For stock and index options, the close is useless. But the data I get
reflects current bid/ask which is usually right on the mark.
>1. The options day trading market is much thinner, therefore the final
>options closing price may represent a single trade. That last single trade
>is often at "outlier", i.e., non-representative of the closing action.
The last trade is almost certainly an outlier, but I don't use "last trade"
as discussed above.
>2. Since there are different strike prices for options on the same
>underlying, many options with strike prices that are far away from the
>underlying's price are illiquid.
True. If a December 350 wheat call (way out of the money) is quoted at
one-eighth cent, you may have to pay double that to buy it and may not be
able to sell it at all. However, you happened to own a December 350 wheat
put (way in the money) quoted at 66 cents, you should be able to get out of
it for a cent either way. As for buying it, that might be trouble.
>
>The bottom line question: How does anyone determine the "best" option price
>to plug into Black-Scholes?
>
>
Remember, we were plugging option prices into the formula to discover
implied volatility. I generally want to discover the IV for options sort of
near the money and this method works just peachy.
>Ross Kovacs
>
>> ----------
>> From: rjb@xxxxxxxxxxxxxxxxxxx[SMTP:rjb@xxxxxxxxxxxxxxxxxxx]
>> Sent: Sunday, August 02, 1998 5:30 PM
>> To: realtraders@xxxxxxxxxxxxxx
>> Subject: Re: Day trading futures options.
>>
>> >When you run the Black Scholes model to solve for price (to determine
>> >whether the market
>> >price is over- or under-valued) the input is (for stocks) the 20 day
>> >statistical volatility.
>>
>>
>>
>> When YOU run the model, YOU may use the 20-day statistical volatility, but
>> that doesn't mean it's the only way to do it. Everyone uses a different
>> historical volatility -- that's the problem.
>>
>> But when I'm talking about solving the model, I don't mean solving for
>> price. I mean solving for volatility.
>>
>> An example will help.
>>
>> First of all, I'm going to use 200-day historical volatility of about 17%
>> for November Beans because that will provide answers closer to actual
>> prices (believe me, it will). I run the model and the theoretical prices
>> are...
>>
>> Nov 550 call 23.70
>> Nov 600 call 5.35
>> Nov 650 call 0.68
>>
>>
>> But I look in the paper and the actual closes were:
>>
>> Nov 550 call 24.50
>> Nov 600 call 7.75
>> Nov 650 call 3.00
>>
>>
>> So what gives? Is our model screwed up? Of course it is. Models don't
>> trade
>> options. People do.
>>
>> So let's adjust our model for a moment. It's inputs are strike price,
>> underlying price, time to expiration, interest rate and volatility.
>>
>> Except for volatility, all of the rest of the inputs cannot be changed.
>> The
>> ONLY variable is volatility. (Interest rate may be subject to debate but
>> it
>> has only a tiny impact on options that have short expiration periods)
>>
>> So, you ask yourself a question. What would volatility HAVE TO BE to make
>> the equations provide the answers in the newspaper. So you try different
>> volatilities until you get the right answer...the "right" answer being the
>> one in the paper. You want to find out what the market is IMPLYING that
>> the
>> volatility should be...hence the term implied volatility.
>>
>> Well, it turns out that using the prices in the paper, the volatility you
>> would need to put in the equation for soybeans to equal those prices are:
>>
>>
>> Nov 550 call 17.81%
>> Nov 600 call 19.96%
>> Nov 650 call 23.51%
>>
>> (BTW I ran 20 day historical volatility and found it at 28% -- nowhere
>> near
>> any of these levels)
>>
>>
>> These figures have absolutely nothing to do with historical volatility.
>> They are computed from the prices of the options themselves. After all,
>> what is 19.96%? Who knows? It might be the 54-day statitisical volatility
>> or the 94-day statistical volatility or none of them at all.
>>
>>
>>
>>
>>
>>
>>
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