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All Broad based index options (OEX SPX DJX XMI, etc.) price off of an implied
forward price. A quick dirty explanation is that if you were trading March OEX
options and the OEX were trading at 100 level. You would normally put in the
cash price of the OEX say 102.50 an interest rate, a dividend, a vol. and the
number of days to price them. THIS DOESN'T work for any cash instrument where
good price discovery exists in a forward market.
So let's say the OEX is at 102.50... to keep thing easy I'll use simple
numbers... the SPX cash is trading at 205 .. twice the level of the OEX. The
March future is trading at 209 four point premium. The four point premium in
the future translates into a two point premium in the OEX .. assumes half the
size and no tracking error ... half the size is true .. no tracking is not
always the case...in fact there is almost always tracking error, but for the
moment.
You would then price the OEX March 100 by putting in a level of 104.50 0%
interest and Dividends, then your vol. and days.
What you are in effect doing is calculating a implied forward price .. on the
floor this what we call a SPU model..pricing from the SP Futures. A quick way
to calculate the real # is to simply price your option of a formula of Strike +
Call - Put = Implied forward. So in effect if you want to capture the implied
forward being used on the floor for options pricing. Pick a strike say 700 on
the OEX add the call price and subtract the put price and viola! you get the
implied forward. To check it go price the the implied forward for the 680 685
690 695 705 , etc. and you'll see they all give you substantially the same
implied forward. The price converges to the cash OEX or DJX whichever as you
approach expiration. This is why if the cash is down and the futures are up the
calls are... this is also why if you want to make a trade off the activity in
the futures market by trading options ... YOU ARE TOO LATE. For SPX options
(both cash and futures)the implied forward is a direct pricing off of the
future.
ROBERT ROESKE wrote:
> In the past on several occasions the DROEX has stated that options are
> priced off the futures. Would he mind elaborating on this a bit? Is he
> referring to OEX options or SPX options or just sp futures options or all
> three? Since he teaches and works for the CBOE the impression is he is
> referring to OEX index options also, but no where in the popular options
> valuations models is there a futures component. There is the time,
> volatility, interest rates, strike, etc. Perhaps he is referring to pricing
> from an intraday standpoint when the models don't work too well and take a
> back seat to supply/demand or order flow factors. It would make an
> interesting study, if someone on this list who can do correlation studies on
> intraday data would take the OEX and its options and the snp futures and the
> oex options and see how the correlations compare. In the end I shold think
> that since the value of the option is linked to its underlying that the
> Index correlation would win out over the futures correlation. However when
> it comes to tracking these things intraday what is the sage advice?
>
> Confucious say when confused ask a confusing question,
> BobR
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