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An option, a spread or a sophisticated position each have a theoretical
value based upon the information that is put into the formula for the variables.
My theoretical value for an option may be different then another
traders. I may use an interest rate of 6.5% and he could be using
5% or 7%. I could be using the volatility of the underlying on a
15 day basis and he could be inputting the volatility at the time of expiration
or he could be using the annual volatility. So, many people trading can
all be trading at what they believe is the theoretical value of an option
and each one would have a different price. That theoretical value
is the price you should purchase or sell an option for. In options
if the price of the option is overvalued, usually the bull or bear spread
will be close enough to theoretical value to reduce the risk of a volatility
loss. The brokers always tell you that if you buy you pay the ask
and if you sell you get the bid. That is not always true. Look
at spreads as bid/bid or offer/offer. Then put in your bid at the
lessor of those prices. I have traded options as a market maker
for my own account and as an upstairs trader for my own account.
I have always determined what I would buy or sell an option or spread for.
If I couldn't do it at my price I would go elsewhere. It is your
money, your market and your risk and you should control your own destiny,
not some broker on the phone. I hope that this answers some of your
questions. Ira
John Manasco wrote:
One last question
Ira, and I do thank you for your time. You compared the theoretical value
to the actual value. When I buy the straddle I usually pay the ask price
so why don't you compare the theoretical value to the ask price? Do you
hope to get filled at the "price" in the price column? Regards John
Manasco
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----- Original Message -----
<div
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Ira Tunik
To: realtraders@xxxxxxxxxxx
Sent: Friday, November 17, 2000 9:12
AM
Subject: Re: AW: [RT] Market ESZ0
It all depends on the size you are dealing with. You can consider
$30 a dinner for one and buy the straddle as a one lot. If you are
dealing in size then it starts to add up. a 10 lot is $300 and a
100 lot is $3000. At what level do you consider it real money?
In options you need every edge that you can get. When I was a market
maker I knew traders that would trade large size for that type of an edge.
They would do size for an 1/8 edge, $12.50. The thing is a trader
will sell you the straddle for that edge and then trade out of both sides
or put on other spreads using the legs of the straddle to pocket that edge.
John Manasco wrote:
So in your example the theoretical value
of the straddle is 10.096 and the actual value is 10.126, a difference
of .30. Is this a significant enough difference to assume the straddle
is overvalued? The value seems small and I often wonder if it's just noise
or if my data is not as accurate enough to make a decision. Thanks
for your insight. John Manasco
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----- Original Message -----
<div
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Ira Tunik
To: realtraders@xxxxxxxxxxx
Sent: Friday, November 17, 2000 8:32
AM
Subject: Re: AW: [RT] Market ESZ0
John Manasco wrote:
Ira,
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