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I use midpoint.
ROBERT ROESKE wrote:
> In coding up an indicator to plot implied forward what would we use for the
> call and put values? Midpoint between their bid and ask or the last trade
> or ??
>
> Thanks, Doc for a really clear answer,
> BobR
>
> ----- Original Message -----
> From: The DOCTOR <droex@xxxxxxxxxxxx>
> To: <bobrabcd@xxxxxxxxxxxxx>
> Cc: <realtraders@xxxxxxxxxxxxxxx>
> Sent: Monday, January 10, 2000 11:14 AM
> Subject: Re: [RT] OPTIONS - confucious
>
> > 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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