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On one hand I agree about calculating option prices via the BS method.
On the other hand I wonder how much of a difference does it really make.
The MM decides the B/A prices so they're going to be what they are
regardless of what the BS model says. Like you said, over price for
you, under price for me.
To avoid this guessing game, I wonder if the best method is buy/sell
deltas of one to mesh with the underlying.
What do you think?
Dominick
--- In realtraders@xxxxxxxxxxxxxxx, "Ira" <mr.ira@xxxx> wrote:
> I hope that your system includes the theoretical price of the
options and a realistic way of acquiring the numbers to be used in the
variables in option pricing. Based upon your reply you are basing
your bid/offer upon someone else's information, bid/offer. The
greatest risk outside of price movement in trading options is
volatility risk. So you had better have a handle on finding the
volatility of the underlying and being able to compare it with the
implied volatility of the options. To know whether the bids and
offers are over or under valued is imperative in trading options. One
thing to remember is that your overvalued options might be my under
valued option. It is all in the numbers used in the option pricing
variables. Good luck in your search. Ira.
> ----- Original Message -----
> From: Brendan B. Boerner
> To: realtraders@xxxxxxxxxxxxxxx
> Sent: Thursday, June 12, 2003 7:27 AM
> Subject: RE: [RT] Minimum price increment
>
>
> Ira, thanks for the explanation.
>
> I'm asking because I'm developing a system to remain on the inside
bid / offer. I want to ensure that if I raise / lower the bid / offer
that I do so in such a way the honors the minm price increment rules.
>
> Regards,
> Brendan
> -----Original Message-----
> From: Ira [mailto:mr.ira@x...]
> Sent: Thursday, June 12, 2003 9:10 AM
> To: realtraders@xxxxxxxxxxxxxxx
> Subject: Re: [RT] Minimum price increment
>
>
> The minimum bid is for market makers standing in the crowd and
has nothing to do with you, other then the increments of bid and
offer. There is also a maximum spread between bid and offer that can
be made in the crowd. If the bid is $3 then the minimum offer in the
crowd, by a market maker is $3 and $3.10. That doesn't stop you from
putting in an offer or bid at $3.00 or $3.10. If you put in your offer
at $3.10 you are competing with market makers and floor brokers that
are holding offers. It used to be, that if you tell your broker that
you want your offer in the book, that book orders were filled before
floor orders and they were filled in the order booked. What if the
bid/offer in the crowd was $3.00 at $3.50? You can put a bid or offer
anywhere in the middle in $.10 increments. Whether you would get
filled or not is another matter, but if your offer was at $3.30 it
could read $3.00 at $3.30 or a market maker could rest upon your offer
and offer at $3.20 knowing that your offer was there if the price of
the underlying starts to rise. When you cancel your offer the market
might very well go back to $3.00 at $3.50. Your offer was the market
makers stop loss.
>
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