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Ira,
I don't know what you mean by "that ...".
The interest rate decision is probably the least subjective decision
in option pricing. All other decisions require greater subjectivity
and present greater variances of choice.
All of the variables do not define risk. They help define your edge.
Risk is defined by your debit or the maximum amount that could be lost.
Otherwise risk is unlimited.
Neal
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Ira wrote:
that is one of the reasons that option pricing is so subjective. What interest rate do you use? Broker loan rate, Fed. funds rate, 90 day CD rate or some other return on invested capital. There are numerous variables in finding the theoretical value of an option. The only point that I am making is that with all of these variables the only thing that can be defined is risk.
Your answer to volatility could very well be right for you today, I found that it wasn't during my years as a market maker. People use Black-Sholes model for stocks and Cox-Ross for futures and index options. A different model is used for European style options and American style options. They have a reason for doing that. As long as the implied volatility of the option is at, or below the volatility I show for the underlying I am willing to risk my dollars on an option strategy for the particular condition I am looking at. Under those conditions I feel that delta, gamma and theta will be close to what they actually should be. I am also willing to take on the volatility risk associated with the position if the strategy doesn't already provide for it.
Once again it is the individual trader that makes his/her own trading rules and lives or dies by them. Being dogmatic in ones opinion is not right or productive so I always consider someone else's opinion has merit and I look into it.
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